The Three Keys

[stevespray]

Firewalker....

Again I feel that the ‘concept’ is being missed by you. This is tricky as I don’t want to sound rude!

What you seem to be doing is rigidly connecting “that the market is showing me that I am wrong” (ie the price moving to your stop level) with the need to immediately exit your trade. Think about that for a moment? I would challenge whether those two ‘events’ need to be tied in such a manner? Can you see how your ‘reaction’ is 100% tied to price? If the price touches your stop you exit at that price – a 100% reaction to price. What is to stop you saying something along the lines of the following, “Ah, the market has shown that I am now wrong about this trade and I must now look for an opportunity to exit this trade”. You see how now your reaction, in terms of the status of your position, is not 100% fixed? Your reaction is not now rigidly tied directly to the price.

You also question my comments about stops being ‘panic’. Do not take this entirely literally. Again ‘panic’ is not an absolute; it is of course highly subjective. My concept is merely to suggest that a stop takes you out of the market with respect of only one thing – PRICE! This reaction is a form of ‘panic’ if you consider it very carefully.

The placement of the stop is irrelevant in the overall concept. If we start measuring the extremes of market movement from the moment that a trade is opened then the only place where a fixed stop can get triggered is at the local extreme of price movement with respect to the opening time of the trade. At the exact moment the stop gets triggered the price has never been further away by definition otherwise the stop would have been triggered previously. This means that you are always exiting trades at the worst possible price in terms of price expressed since the moment that your trade was opened.

I acknowledge that this needs a fair bit of chewing over but the substance of what I am trying to say is I feel very valid.

Wishes,
Steve.

 

[BSD]

Steve, what you're doing is premised on the same origin that long / short the same currency at the same time comes from...

A wish to eliminate or at least minimize losses from trading while still turning a profit.

The first just doesn't work at all, and your solution is based on far too much woulda-coulda-shoulda, if price goes against me by X, and if it then retraces offering me a better exit, then I'll get out having saved myself Y, which totally ignores the question of why on earth you should want to exit a trade in the minus at all if it shows potential again to become a profit, etc etc.

Trying to negate the correlation between risk / reward is a pipe dream as old as man, but that is really all it is.

If what you propose works you shouldn't have any problems achieving great returns with minimal drawdowns.

Proof of the pudding lies in the eating.

Are those the returns you achieve ?

 

[stevespray]

Steve, what you're doing is premised on the same origin that long / short the same currency at the same time comes from...

A wish to eliminate or at least minimize losses from trading while still turning a profit.

The first just doesn't work at all, and your solution is based on far too much woulda-coulda-shoulda, if price goes against me by X, and if it then retraces offering me a better exit, then I'll get out having saved myself Y, which totally ignores the question of why on earth you should want to exit a trade in the minus at all if it shows potential again to become a profit, etc etc.

Trying to negate the correlation between risk / reward is a pipe dream as old as man, but that is really all it is.

If what you propose works you shouldn't have any problems achieving great returns with minimal drawdowns.

Proof of the pudding lies in the eating.

Are those the returns you achieve ?

Sorry Marcus, I’m going to have to disagree with most of that.

The currency demonstration was not a premise to any kind of trading system. It was purely to promote a theory that there is a better method to exit trades rather than the use of rigid stop loss.
If you are long and short at the same time then you are flat – no arguments from me on that score I can assure you.
Your post completely bypasses the concept and your approach is to ‘categorise’ and then ‘pigeon hole’ which makes a reply from me quite tricky.
Your line, “why on earth you should want to exit a trade in the minus at all if it shows potential again to become a profit”, sums up well why you are not grasping anything which is written. The amount of profit in the trade or indeed your judgement on whether the trade may again become profitable are irrelevant to the concept. Your statement instead demonstrates why people lose money with alarming regularity. You are allowing pure price movement to control how you view your trade – the price moves against you a certain amount and you must close it (ie a stop) and then, assuming that you followed the first part of my loosely suggested concept and didn’t stop out purely based on price, you alter your mindset on your trade simply because it is now not losing as badly as it was a few minutes earlier – suddenly the loser has become a potential winner again!

The reason that you would exit a trade in the minus, but on a retrace, is to ensure that you are exiting at a price which is back towards ‘true value’ in the overall scheme.

Have you read the whole thread or just scrolled back a page or two?

LM’s initial observations are valid in my opinion regarding trades moving quickly in our predicted direction. There is a reason why this is so and why this situation occurs. If the situation is detected then it can be traded profitably.

As for my own trading – I would have to say that it has improved considerably since my ‘eureka moment’ outlined in a previous post. It is however still very much ‘work in progress’ and hence my contributions to this interesting thread.

Steve.

 

[firewalker99]

Interesting debate - can I use traffic lights :whistling

Your entry triggers and gives you a green light

The price goes against you to the extent (pre-determined) that you get an amber light warning that the trade looks like a wrong 'un but that's not certain yet. It's reasonable at this stage to decide to exit but to watch the action closely to take advantage of a better price if it arises.

The price continues against you to the extent (pre-determined) that you get a red light where you must exit, it's certainly a wrong 'un and no further questions to be asked.

good trading

jon

Good attempt to represent Steve's point of view with the traffic lights.

All the same, I have to disagree on the concept itself. There should be no amber lights in trading. Whether the trade "looks" wrong or not, should be irrelevant. If it is in fact wrong, a well-placed stop should get you out in time.

If your decision for getting out will be dependent on what "looks" bad in real time, then most likely you'll be ending up very frustrated when price eventually continues in the right direction after you pulled the stop. And yes you might feel relieved when it doesn't and you get out with a smaller loss then you had foreseen.

But all this is based on emotion and not exactly part of a solid plan. You shouldn't have to ask yourself "should I stay in or should I stop myself out?" Trading without a predetermined stop level (be it mental or hard, but not both) is turning yourself over to the market without assuming responsibility for a trade. Relying on ad-hoc decisions is the exact opposite of trading with a carefully constructed plan.

Suppose your have an entry which "looks like okay but not certain yet". Would you commit to taking the trade? Unless you are gambling, you should not. Why should it be any different with stops? If you intend on using them, at least use them as they are meant to be used, otherwise there's little point in using them at all.

 

[BSD]

Steve, what you are on about just doesn't work, nor is it necessary, nor does it have anything at all to do with profitable trading, your approach is nothing at all except an attempt to minimize the psychological hurt of losses on your well-being, same like the simultaneously long / short same instrument model that share many of the woulda-coulda-shoulda arguments that this approach necessitates.

Here is why your idea does not, cannot, work:

You go long at 100, your (mental) SL is at 90.

Price goes to 90, then retraces to 95.

You exit at 95, believing that you've minimized your loss.

Price then goes up to 120, meaning you closed out a good trade for no reason.

Even if price doesn't go back up again, your smaller than expected (this example) vs larger than expected stop losses (see scenario 2) - will simply average themselves out over time.

Others that just exit at their initial stop loss however have far less hassle, and far less risk, in the many cases when trades will just keep going against you.

Scenario 2.

You go long at 100, (mental) SL again at 90.

Price goes all the way to 80 without retracing.

What do you do then ?

At some point you'll have to exit, and markets can go against you far longer than your ability to participate without receiving a margin call.

I really do not know why people always insist on going chasing after the holy grail rather than accepting that trading is just a probability game, and that stop losses are nothing else than a means that allows you stay in the game, while simultaneously providing you with a great opportunity factor, ie close out a losing trade when price has gone against you sufficiently to indicate that per your method this trade is a loser, and just move on to the next opportunity.

Trading is simple.

 

[Trader333]

I admit that I have not read all of this thread so if what I ask has already been discussed then I will have caught up in a couple of days of reading. Has there been any discussion on scaling out of positions and position sizing relative to the market volatility ? The reason I ask is that this has been discussed on the TT thread and is a key factor for ensuring consistency of profits and reduction of losses. Doing this is also closely linked with being able to determine a type of fair value and the measuring of extremes when the market reaches them.


Paul

 

[stevespray]

This really has nothing to do with ‘Holy Grail’ – Interesting that you should choose those words.

You clearly have a structured way of thinking which does not allow you entertain anything other than what you have already decided is true. You draw comfort from stops because they are 100% mechanical in operation – this appeals to your ‘think structure’. So be it.

In your post you lay your ideas out as if they are truths or matters of fact when they are not.

Please explain to me how people consistently lose money?

You set out two scenarios and state the two methods of stop loss “will simply average themselves out over time” – on this point you will need to provide evidence to convince me. You see this is a conclusion which you have jumped to without bothering to look any further. Because you think that I must be wrong then.

Steve.

 

[dbphoenix]

I admit that I have not read all of this thread so if what I ask has already been discussed then I will have caught up in a couple of days of reading. Has there been any discussion on scaling out of positions and position sizing relative to the market volatility ? The reason I ask is that this has been discussed on the TT thread and is a key factor for ensuring consistency of profits and reduction of losses. Doing this is also closely linked with being able to determine a type of fair value and the measuring of extremes when the market reaches them.


Paul

I brought it up as an alternative to the all-in-hope-I'm-right tactic, but there was no discussion. You may have better luck

 

[dbphoenix]

Please explain to me how people consistently lose money?

A particular favorite is (a) making bad entries and (b) not cutting losses.

 

[stevespray]

Steve, what you're doing is premised on the same origin that long / short the same currency at the same time comes from...

A wish to eliminate or at least minimize losses from trading while still turning a profit.

The first just doesn't work at all, and your solution is based on far too much woulda-coulda-shoulda, if price goes against me by X, and if it then retraces offering me a better exit, then I'll get out having saved myself Y, which totally ignores the question of why on earth you should want to exit a trade in the minus at all if it shows potential again to become a profit, etc etc.

Trying to negate the correlation between risk / reward is a pipe dream as old as man, but that is really all it is.

If what you propose works you shouldn't have any problems achieving great returns with minimal drawdowns.

Proof of the pudding lies in the eating.

Are those the returns you achieve ?

I brought it up as an alternative to the all-in-hope-I'm-right tactic, but there was no discussion. You may have better luck

There is no such "all in hope" tactic - LM's entry was to be proved by the markets straight away.

Paul - LM's original ideas are on the first page or so. It's an easy read there. No complicated entry tactics Im afraid. Pure suck it and see. The overall concept is pretty good I feel.

Steve.

 

[barjon]

Good attempt to represent Steve's point of view with the traffic lights.

All the same, I have to disagree on the concept itself. There should be no amber lights in trading. Whether the trade "looks" wrong or not, should be irrelevant. If it is in fact wrong, a well-placed stop should get you out in time.

If your decision for getting out will be dependent on what "looks" bad in real time, then most likely you'll be ending up very frustrated when price eventually continues in the right direction after you pulled the stop. And yes you might feel relieved when it doesn't and you get out with a smaller loss then you had foreseen.

But all this is based on emotion and not exactly part of a solid plan. You shouldn't have to ask yourself "should I stay in or should I stop myself out?" Trading without a predetermined stop level (be it mental or hard, but not both) is turning yourself over to the market without assuming responsibility for a trade. Relying on ad-hoc decisions is the exact opposite of trading with a carefully constructed plan.

Suppose your have an entry which "looks like okay but not certain yet". Would you commit to taking the trade? Unless you are gambling, you should not. Why should it be any different with stops? If you intend on using them, at least use them as they are meant to be used, otherwise there's little point in using them at all.

fire

oh, but it can be part of a carefully constructed plan and and encompasses the understanding that little in the market is black and white in the sense that "this is certainly right" or "this is certainly wrong".

For example, I make my trading decisions on eod data. However, I know from my trading statistics that if there is no follow through on my entry bar my chances of it being a successful trade are significantly reduced (the amber light if you wish) even though the price may still rest above my stop loss (the red one ) . This leads me to move to intraday action and make an exit decision via that data whether or not I'm in profit or loss.

good trading

jon

 

[BSD]

Err, Steve, don't get me wrong, and believe me, I'm no one to shy away from an altercation, but I just really have absolutely no interest in a brainfarting competition that is completely and totally pointless.

This isn't based on any discernible logic but just wishful and, at that, erroneous thinking whose sole purpose is evading hurt from taking losses.

Think there was a guy here calles Socrates who enjoyed that sort of stuff, circular discussions as an end in themself.

If you want to kid yourself into believing that you are re-inventing wheels by all means do so.

The only reason I trade is to make money, and you can make more money than one could ever spend by being "wrong" 70% of the time, if you let your winners run to the point that they average out at three times the size of your losers.

Matter of fact in New Market Wizards Bill Lipshutz was "right" only 20 to 30% of the time, and was one of the biggest earners ever in his bank.

Alternatively, and just as validly, if you want to be right more often you can very easily do that with a system that is right say 70, 80% of the time, and where winners are smaller than losers.

What you can't escape is an absolute necesitty of cutting your losses, without facing the danger as per your idea that they may run away from you if you do not honour hard stops.

That's all trading is, a game based on the same probabilities that drive casinos or insurance companies, it's not about being right, it's about making money.

That's all it is. Make a trade, define where it's wrong per your system and cut your loss, go on to the next opportunity, ride your winner, take your profit, and go back to step one, repeating all of that over and over.

Boring and simple.

Good luck though in your trading career !

 

[dbphoenix]

There is no such "all in hope" tactic - LM's entry was to be proved by the markets straight away.

Actually, I was referring to yours. If your entry is not proved right away, you wait and hope that it reverts back toward the desired direction in order to cut what is already a loss.

 

[stevespray]

Actually, I was referring to yours. If your entry is not proved right away, you wait and hope that it reverts back toward the desired direction in order to cut what is already a loss.

No, just to clarify, I'm all for the method as LM set out.

My initial comments were to do with possible exit strat where I suggested closing the position in the same manner if you would if you were setting a stop loss - ie price extreme in the trades context.

Hope this clears that up.

Steve.

 

[firewalker99]

fire
oh, but it can be part of a carefully constructed plan and and encompasses the understanding that little in the market is black and white in the sense that "this is certainly right" or "this is certainly wrong".

This is exactly why your plan should be black and white instead of filled with grey options that lead to doubt. The market might not be so clear all the time, but your plan should. Doubt leads to fear, fear leads to anger, yadayada... yoda? :cheesy:

For example, I make my trading decisions on eod data. However, I know from my trading statistics that if there is no follow through on my entry bar my chances of it being a successful trade are significantly reduced (the amber light if you wish) even though the price may still rest above my stop loss (the red one ) . This leads me to move to intraday action and make an exit decision via that data whether or not I'm in profit or loss.

That is already much more of a plan Jon, one with step by step instructions. If situation X does not materialize, then Y. It's not the same as waiting for a position that's in a loss to revert back to your breakeven point or somewhere around that. In fact, your strategy is more like a time stop: if nothing happens in x minutes or hours, then I get out, regardless of what the market does.

 

[dbphoenix]

No, just to clarify, I'm all for the method as LM set out.

My initial comments were to do with possible exit strat where I suggested closing the position in the same manner if you would if you were setting a stop loss - ie price extreme in the trades context.

Hope this clears that up.

Steve.

Though I haven't read every post, LM seems not to rely as much on hope as you do, which is why I posted the clarification. However, if LM is as hopeful as you are, my comments are directed to you both.

 

[stevespray]

That is already much more of a plan Jon, one with step by step instructions. If situation X does not materialize, then Y. It's not the same as waiting for a position that's in a loss to revert back to your breakeven point or somewhere around that. In fact, your strategy is more like a time stop: if nothing happens in x minutes or hours, then I get out, regardless of what the market does.

Agreed - A far better way of trading is one where more than simple price is telling you what might be happening.

 

[firewalker99]

Agreed - A far better way of trading is one where more than simple price is telling you what might be happening.

Err... you might have misinterpreted my comment. I was just commenting on barjon's style. I wouldn't exactly call price "simple" and I wouldn't exactly say you need anything else than that to tell you what is happening.

 

[DaxDestroyer]

Err, Steve, don't get me wrong, and believe me, I'm no one to shy away from an altercation, but I just really have absolutely no interest in a brainfarting competition that is completely and totally pointless.

This isn't based on any discernible logic but just wishful and, at that, erroneous thinking whose sole purpose is evading hurt from taking losses.

Think there was a guy here calles Socrates who enjoyed that sort of stuff, circular discussions as an end in themself.

If you want to kid yourself into believing that you are re-inventing wheels by all means do so.

The only reason I trade is to make money, and you can make more money than one could ever spend by being "wrong" 70% of the time, if you let your winners run to the point that they average out at three times the size of your losers.

Matter of fact in New Market Wizards Bill Lipshutz was "right" only 20 to 30% of the time, and was one of the biggest earners ever in his bank.

Alternatively, and just as validly, if you want to be right more often you can very easily do that with a system that is right say 70, 80% of the time, and where winners are smaller than losers.

What you can't escape is an absolute necesitty of cutting your losses, without facing the danger as per your idea that they may run away from you if you do not honour hard stops.

That's all trading is, a game based on the same probabilities that drive casinos or insurance companies, it's not about being right, it's about making money.

That's all it is. Make a trade, define where it's wrong per your system and cut your loss, go on to the next opportunity, ride your winner, take your profit, and go back to step one, repeating all of that over and over.

Boring and simple.

Good luck though in your trading career !

I think and I hope as well that after reading through the thread, I know, what you both are talking about.

First, I think Markus is 100% right on the subject, BUT I understand Steve's consideration. This might even work out for his special way of trading and it might work on OBVIOUS stoploss levels, where many traders get triggered.

My experience tells me still, that it makes no sense at all to work in today's markets with mental stops as you go mental as you don't get your fills

I try to have my stops OFF levels, everybody uses. No highs, no lows, no trendlines aso.
My stops are calculated, taking ATRs on a smaller timeframe or as a percentage from my target.

This is why I don't have the obvious stoprunning and reversing at the points, where I stop. On the other hand, I sometimes even profit from the stops of others as I can put in stop reverse orders. (happened to me in the Dax today).

What do you guys think?

As I am close to dash off for the weekend, Have a nice one and take care!

Cheers Carlos

 

[BSD]

Carlos, you could definitely have another career in diplomacy if you get bored with trading is what I say

Good post again with very good points, and I totally agree, ATR stops are some of the best options available, as are placing stops away from too obvious points.

Steve, just one last post from me here before I leave this thread for good - or at least this subject matter at hand here -, I recognize that you've invested a lot of "ink" in writing up your ideas here on this thread, and once one has done sthg like that it's only understandable that ego kicks in, and that one wants to defend what one has come up with.

Once ego takes over it's not about what makes sense or what doesn't any more, once ego kicks in it's only about defending ones brain child at all costs.

We are all pretty much the same in that regard.

We'd all - including me -, be far more successful without ego interfering on a regular basis.

That said, one thing I'd like you to take a look at is this here:

Random Equity Curve Simulator of a trading system.

Play around with that, trying different combinations of win/loss ratios and hit rate, and you'll see how really really easy it is to come up with net profitable systems based off of those components alone, and how completely automatic and fearless the mandatory taking of losses becomes in the big scheme of things.

Don''t think of the individual trade, view the individual trade as no more than a totally inconsequential single event pretty irrelevant to your long term edge.

Btw, you can have a highly profitable system already that's based off of simple random entries provided you add a trend filter, ie when trend is up random entries only long, vice versa for shorts, that's profitable already with a stop loss of 3 ATR's, and take profits of 4 ATR's, I remember some backtest that Linda Raschke did on that from 1995 to 2005 on 22 futures market, 100 runs per market, all profitable.

Not selling that as a holy grail, just to show that really simple ideas that can be improved on can form the basis of all one will ever need to achieve ones dreams.

That's it from me on this, I'm outta here.

Have a great weekend Carlos, Steve and all others here, and great trading next week