Calculations for trading range, stops, % losers

[JumpOff]

I'm looking into trading and as a newbie, I'm still chasing the question of why people jump into trading before they understand the game and how most manage to lose their stake pretty quickly.

So here is what I think I know about these variables for newbies (pros will have different numbers) When I write "you" below I mean "we / us / me / I":

As a newbie, on your best winners, you may be able to get 1/2 of the Range of Motion for that period.
I call this RoM/2

Each trade requires an ante, just like a poker hand(spread + stop)
The Ante will be bigger in a volatile market, -you'll need a slightly wider stop to avoid being stopped out by normal fluctuations.
I call this MAX(spread+minimum stop, spread + RoM * 0.12)

You will probably lose at least 2 out of 3 when you start, because even when you are "right" about recognizing and reacting to the trend, or the reversal, or whatever you use to enter, as a newbie, your timing isn't going to be very good. You'll anticipate, or hesitate, or you might be looking at the wrong time frame for that instrument, etc...

For an example of the Forex EUR/USD from a retail broker, I chose a spread of 3 pips and a minimum stop of 6.

So Here is the formula I used:
=(RoM/2) - #ofLosers*MAX(3+6,3+RoM*0.12)

range of motion (pips): ___ fill in theblank
Losers for each winner: ___ fill in the blank

Now here is how I worked it out for some sample trading ranges. I'm sure that in actual trading, the fixed stop scenario would have more losers, - but this is interesting, just a preliminary look The value after the $sign is the number of pips of profit for 3 trades(2 losers, 1 winner in this case):

range of motion (pips): 20
Losers for each winner 2
$(8) stop as a % of RoM (w/6 pip min)
$(8) fixed stop at 6 pips off


range of motion (pips): 30
Losers for each winner 2
$(3) stop as a % of RoM (w/6 pip min)
$(3) fixed stop at 6 pips off


range of motion (pips): 40
Losers for each winner 2
$2 stop as a % of RoM (w/6 pip min)
$2 fixed stop at 6 pips off


range of motion (pips): 50
Losers for each winner 2
$7 stop as a % of RoM (w/6 pip min)
$7 fixed stop at 6 pips off


range of motion (pips): 60
Losers for each winner 2
$10 stop as a % of RoM (w/6 pip min)
$12 fixed stop at 6 pips off


range of motion (pips): 70
Losers for each winner 2
$12 stop as a % of RoM (w/6 pip min)
$17 fixed stop at 6 pips off


range of motion (pips): 80
Losers for each winner 2
$15 stop as a % of RoM (w/6 pip min)
$22 fixed stop at 6 pips off


range of motion (pips): 90
Losers for each winner 2
$17 stop as a % of RoM (w/6 pip min)
$27 fixed stop at 6 pips off

Bottom line advice to myself, if the channel isn't 60 pips wide, stay out! This is pretty fun way to play around with a what if? What if my ratios to winners:losers was different, what if it took a stop that was 20% of the channel to avoid normal fluctuations? Well your mileage may vary, but this was an interesting exercise for me.

Even with a ration of one loser per one winner, it still required a Range of 30+ points to be worth looking at.....

If any of you Pros see an error in my thinking, I'd be grateful if you would point it out...

JO

 

[TheBramble]

Very interesting post JO.

Can you clarify a couple of things for me?

When you talk about "that period" I'm guessing you mean 'the period you're choosing to trade' e.g. 5min, hourly, EOD etc, but you might mean 'the period of time you 'expect' the trade to ne open'. I'm not clear.

The other term is 'Range of Motion' - is that your 'anticipated' or 'expected' range of play for the duration of your open position or something else?

If it is an expectation of 'active play' how are you estimating it?

 

[JumpOff]

When you talk about "that period" I'm guessing you mean 'the period you're choosing to trade' e.g. 5min, hourly, EOD etc, but you might mean 'the period of time you 'expect' the trade to ne open'. I'm not clear.

Well the reason I didn't make it clear, is that I'm a little confused about it myself. It is helpful for me to look at a chart with bollinger band indicators (I like the ones that are available in the cms-forex.com visual trader platform.) The price rarely goes outside the outside band, and if it does, it doesn't stay there for long before moving back towards the center. The larger time frames (daily chart) give me an idea of what's possible, the maximum move I could expect on any given day, the overall trend and velocity. I need to be aware of the larger trend, even though my puny stake and money management plan may dictate that I manage the position from the shorter chart.

Looking at the shorter time frames might lead to an expectation that there is not enough Range of Motion to bother trading, while the longer charts might indicate that this is middle of a long slow turn and it would be a great time to get in... What to do? What to do?

As a newbie, I struggle with this - I've been in non trading situations where the variables all made sense, in effect "I knew what was coming." I was able to act without emotion. See this long tedious post if you are interested:
http://www.trade2win.com/boards/showpost.php?p=122279&postcount=968
It wasn't clairvoyance or any "woo-woo" thing, it was just that 9 of the 10 possible outcomes were really unlikely. If I'm playing golf against Tiger, and he's on the green- 2 foot from the pin in 3, and I'm in the sand in 4, I "know what's coming." There will be a Range of possibilties, but it would be a great time to bet if you could get anyone else to take the other side.

So It seems to me that successful trading is about understanding the variables , and only trading when there is some limitation on the possible outcomes. (like a blackjack player counting cards). The problem I see is that most of the TA variables are lagging indicators. The longer the chart period, the more they lag. The action is now (on the tick chart or level II screen), the other charts are just history.

So this thread is about trying to understand the variables of :
Range,
stop size as a percent of range,
risk/reward ratio...

Thanks for the screen real estate.
JO

 

[TheBramble]

Yeah, I'd already read your JftB post - and very interesting too.

As you've noticed, most indicators are lagging (what else could they be?). Only the current price & volume gives you any real sense of what IS happening.

Couple that with your innate good fortune in being able to determine the most probable of all possible future events and I think you'll be doing OK.

Drop the indicators. Forget the variables. Look at what's happening...

If that doesn't work better than what you're already doing, you can go back to where you are now and start again from there.

 

[JumpOff]

I've been looking into this a little more and would like to amend my earlier posts. Clearly, the minimum ante in the FOREX is much higher than I posted in my opening slavo. I'm changing my minimum stop to about 25 pips. I've think I've also got a clearer idea about what I meant by Range of motion in my own mind. It is the expected range of movement before encountering resistance or support. (AKA: unless there is something that indicates a change in the direction, this trend will probably get to here in the next couple of days ...)

So If I plug in 3 losers at 25 pips, then the expected range of motion must be at least 200 pips in order to make this worth my time. What I'm after is some way to stay out of low probability trades.
JO

 

[JumpOff]

Another Day in Which I end up in the hole...

OK - I'm back to my original calculations. Yesterday I widened my stops to 25 and had several trades that were stopped out, then just a couple of ticks later took off in the direction of my original trades. But when I run the numbers, widening the stops just doesn't pan out. It just puts more pressure on. My confidence was so bruised by losing the wider stop that I got all emotional and just sat on the sidelines, watching "my" trade go big without me...

Keeping a really tight stop enforces the mental discipline to say, "that's all for this trade." And to take a short moment on the sidelines to meditate about why the trade didn't go in the speed and direction I assumed it would. Then it's time to get ready to take a position again. If the market is moving, it is either going in the direction of the first trade, and I'll look for a little pullback to get in again, or if it's moving strongly against my original position, then I need to just go with the flow and make a note to analyze why my map didn't fit the territory at a quieter moment..

Mostly, my "bad" trades (and believe me at this stage they are almost all bad!), are the result of anticipating a turn (or resolution of a pullback), that usually goes ahead and manifests itself after I've been stopped out.

Keeping a small tight stop, leaves me cash and confidence to try again. And I'm finding the really good winners seem to take off directly without sagging toward the stop at the beginning.

Your mileage may vary.
JO

 

[TheBramble]

Keeping a small tight stop, leaves me cash and confidence to try again. And I'm finding the really good winners seem to take off directly without sagging toward the stop at the beginning.

Works for me too.

Your mileage may vary.

Which was definitely the case when I posted something similar. It really does seem to be one of the most highly related personal trading style and risk averseness issues amongst traders. And of course, there's no right, one-size-fits-all answer. Whatever works for one, works. It's all tied in with the overall approach.

 

[Galactic25]

From post #1: Why people jump into trading before they understand the game: you either learn trading by education (ex: trading schools, coaches, mentors, floor traders) or you learn by trading on your own through experience. You won’t lose a lot of money if you learn by experience if you are cautious about your trading (ex: staying away from the inside market, trading smaller sizes, and only placing limit orders).
I think in JumpOff’s post #1, he has analysis paralysis. It’s a condition that leads to indecision, confusion, and lack of confidence. You don’t need mathematical formulas like that to trade, you shouldn’t even worry about the forex spread or any spread on stocks or futures. Buy at the bid and sell at the ask (which is wholesale) with limit orders and you won’t pay the spread (which is retail). Range of motion: most of the time, you have no clue what a range of motion is going to be. Trade off floor trader’s pivot #’s and inflection points and you don’t worry about range of motion. “You’ll probably lose 2 out of 3 when you start”: Don’t worry about losing or being right on a trade; it doesn’t matter. If you’re wrong, your stop will get you out. Just make sure you aren’t losing a significant amount of money on a trade. Having mental control over your position is more important than anything. “Wrong time frame”: look at 1-min charts for everything and 2 and 3-min. for confirmation. I only use 1-min. charts for everything.

In response to post #3: ‘If you are using the term “range of motion,” looking at a shorter time frame such as 1-min. might lead to an expectation that there isn’t enough Range of motion’: well, if you’re getting this idea (narrow trading range) from looking at a 1-min. chart then you are in congestion and you are looking for a breakout to the upside or downside on the 1-min. Almost 100% of the time you do not want to take a trade in congestion.

Great idea TheBramble on post #4: Drop the indicators and read the action that’s going on now on candlestick 1-min charts, level 2 and volume. CCI is supposed to be a leading indicator. I’ve not figured out how it helps me with trading, so I don’t use it, but a lot of people do, check out woodiescciclub.com

Post #5: To stay out of low probability trades: trade off of floor trader’s #’s. Don’t worry about range of motion and know what your willing to risk on a trade, place a stop immediately after executing a trade, make each stop individual to each trade (this is part of knowing your control over the position), and place your stop in a hidden area – a place that isn’t likely to be hit and keep it as tight as possible.

Post # 6: Never widen your stops from an initial set stop on a trade; if you have a stop set, there’s a reason for it there, you can only control yourself in the market, you can’t control the market, and don’t let the market control you (make you move your stop) If your stop gets hit, get out there. Set your stops in relation to dollar amounts, not pips. Say I’m only losing $50 max. on trades.

I don’t think you should start out trading Forex. You should start with stocks. They are easier to learn and get a feel for, they have less leverage. Once you get a good feel for stocks, then you can move on to Forex. Forex can get very complicated especially for beginners.

Post #6: direction you assumed it would: learn how to read the market and you’ll know the right side of the market to be on at all times, not all times are good for taking a trade though. Tight stop: very good!
Major major problem: anticipating a trade…that’s why you say they’re bad trades. Never anticipate a trade. Anticipation is the most dangerous quality to have as a trader. Anticipate what’s going on, kind of build up to what you’re going to do, and then ONLY with confirmation do you take a trade. “Anticipate a turn”: How do you recognize this: strength in a market appears on down bars, so a down bar with the next bar up (bar) is stopping volume. This doesn’t always indicate a change in trend, you have to wait for confirmation. And by the way, weakness in a market always appears on up bars.

Jumpoff Jo, you asked me about margin/risk management. Well you’re talking about Forex on all your posts and forex is like futures. You can put up a small amount of money to control a very large position. My advice is to start out very small. Probably $2,000 total position size or less with no margin. You won’t have large losses and you will be able to see the next trading day. You don’t have the experience to trade anything larger than that and you need to start out small to get the experience you need, such as being able to have mental control over your position, being able to execute orders fast, knowing how to calculate stops on each trade fast, knowing how to manage your risk, you’ll build a strategy, and you’ll know when and how to execute trades. If you start out big, you’ll get spooked when you lose $1,000 or more on a trade very quickly. I think you should start out with trading stocks rather than forex. Stocks are a lot simpler. You can start out using margin with stocks, but don’t start too big, don’t have position sizes over 100 shares and trade stocks around $35 or less. You can increase you position sizes and use margin only when you have 100% control over your position, you have a feel for what’s going on, and you’re making money with smaller positions.

 

[JumpOff]

Thanks for your reply, It's great to get advice from someone who's done it. There are a couple of things I don't understand in your post. How can I buy and the bid and sell at the ask using a limit order. I *am* a retail customer. I only have about $5K to play with (an amount that wouldn't hurt me if I lost it ), so I don't expect to get wholesale pricing. I do want the best direct access platform that is available to a small trader.

I've ruled out the forex spot market, because the retail brokers seem to be bucket shops, not true brokers. I was attracted to it at first because it seems very active and they allow you to trade 0.1 contract sizes. That's just $1 per pip of movement and seemed in line with my account size. I figured I could lose a lot of trades while learning and still have plenty of money left. But a 3 pip spread and a minumum allowable stop of 9 pips, gets you pretty far in the hole before you start - (not in terms of money, but in terms of pips).

You say I should start with stocks. I think there is a rule that says if I have less than $10K in my account I can not be a pattern day trader. I'd rather not be in the market overnight, and if several of my first trades are wrong and I have a tight stop, then I "fit the pattern."

After reading about different styles of trading and considering my own personality, I have figured out that I am most interested in finding a market where I can use a scalping style. Lots of small trades, minimal losses, lots of experience learning how to use a trading platform, taking the losses, and looking for the next setup. I only have about 4 hours to trade per day, and those hours are not always contiguous. What I am after is a way to learn how to read a chart and a level II or depth screen, make trades, and still have money left at the end of the initial learning period. I don't expect to profitable during this period - but I am after a maximum training experience.

So what fits all these criteria? Maybe some kind of mini futures contract, with a discount broker and a good platform. And of course I want to be able to paper trade or demo the platform for a week or two before I have to put up any funds.

JO

 

[Galactic25]

Hey Jo, well buying at the bid and selling at the ask is more like a saying. What you do is when you want to buy and you’re confident that the thing is going to move in your direction, then place a limit order at the bid. Eventually, sometimes not though, the ask will become the bid and your order will be hit. If you do a market order, you will always be paying the spread. I only do market orders in certain situations, but my default is to never use market orders and only limit orders. It’s a good idea to stay away from Forex spot. Forex is confusing enough and then if you somehow manage to take delivery, then you’ll be seriously screwed by possibly having to put up millions of dollars. Stocks are a lot better. NASD rule is that you can’t be a pattern day trader unless you have $25,000 in your account at all times. That amount also gives you 4:1 buying power, so $100,000. My experience, it is best to start out small first and get a strong feel and absolute control over your positions before you move up to more money. So you shouldn’t start out daytrading. You should do more watching the real time data and real time charts (screen time) than actually trading. If you do daytrade with less than $25,000, don’t worry about the rule, I have daytraded for a long time with less than $25,000 and my broker and NASD hasn’t said anything and my account hasn’t been flagged. But I called my broker and had questions and then they noticed that and said you need to stop that. But I didn’t and nothing happened. I think if they do do something, they will just close your account, but I’m not sure; I don’t think they would take you to jail. One trader told me to not to worry about that because all that would happen is they close my account with that broker and I can just open an account with another broker’s firm. I think the penalty for the broker for clients that do that is like $10 mill., but I’m not sure about that either. There’s an article in the Oct. ’04 SFO about new NASD rules for smaller traders. When you daytrade you shouldn’t be in the market overnight. Another reason that’s good is because if you are using margin, you don’t pay interest on that unless you hold it overnight. So intraday trading on margin is free broker money.
If you are starting out with Forex, then I think you should paper trade the same sizes that you would with real money and focus on your stops and managing your risk. OANDA.com has a good papertrading thing, they have a good platform, and free real time data. You said you have about 4 hrs. to trade per day. You should never have an open position when you are away from your computer. That’s very dangerous. I don’t know how much knowledge you have of Forex. If you don’t have that much then you should just papertrade until you know what’s going on. E-mini’s are good too, but you have to pay for the data and the platform. With forex you usually don’t have to pay for real time data or the platform. E-mini: s&P,dow,nasdaq,russell2000,mid-cap, are very liquid and volatile. Margin’s for e-mini S&P are $4,000/contract, I think mini dow is $5,000/contract. But if $5,000 is all you have and let’s so you get to $4,999 on your first trade, you can’t trade a mini dow contract until you bring it back up. If you go into starting to trade e-mini’s, you definitely want to papertrade first, tradeinside.net has a really good free simulator with real time futures data. Also, you want to know what’s going on in the market, what’s actually happening, so you should get a 3-month TradeGuider RT lease (get this if you want to trade stocks too). They are supposed to get it to read Forex tick volume in the future, but you’ll have to talk to them about that. It’s definitely worth the money for the lease and the datafeeds (either esignal or realtick). Once you learn the methodology you might not need the software after the 3 months. It’s tradeguider.com E-mini’s and futures in general are a lot harder to trade and learn than stocks. Stocks are simple and they typically don’t move as fast or as big as the eminis.