Fine Tuning A Method.

[daveylibra]

Hello Forum,

Firstly I must say thanks, you guys have been a great help so far.
I am trying to spread bet shares and have a method that seems to be helping me pick shares that are going to fall. I am looking at FTSE, NASDAQ & NYSE shares that trade on high volume.
I am looking at the daily timeframe. The shares do, most of the time, fall the next day, but of course I cannot predict by how much. (Or if they will fall then rise.) I am not sure how to place my stop loss, and take profit. I have been putting SL at the high of the end of day bar, but this is prob. too tight.
I have been thinking maybe using Average True Range? Parabolic SAR? The latter is actually not always the right way up!
Also thinking of opening 2 positions, taking any profit on 1st at end of 1st day, (or perhaps place a tight TP ) moving 2nd to break even and hoping it will run. But this doubles the risk on shares that hit SL.

I guess these are problems that hit all spread-betting share traders so any thoughts please? Cheers guys.

 

[EnlightenedJoe]

They are rewarded every time they hit your stop. So they will hit your stop no matter where you place it.

 

[forker]

Not if you use stealth orders

 

[HolyGrail]

The tightness of your stop loss will influence your win rate and also how much you will win when right. Assuming, say 1% of a trading account is risked per trade, using a tight stop will enable a greater trade size (£/p) – hence a larger value when right, although you may be right less often.

Many successful traders advise that the stop should be placed at a level which suggests your reason was wrong – in your case, looking to short stocks then that would be a little in excess of the most recent swing high.

I’ve never found any real logic of the use of an ATR stop convincing – other than say a 2xATR stop should normally ensure a losing trade would take a minimum of 2 periods.

There is not a universal “correct” answer – what proves most successful is dependent upon your method and even then it could change as market conditions change.

Another element to consider is the particular instrument traded. Particularly important if using tight stops is to look at the typical opening spread – some less liquid stocks have very wide spreads at the open which can often take out tight stops when just looking at the chart of the mid price would suggest that the stop would not be hit.

 

[daveylibra]

Thanks guys-

EnlightenedJoe, surely we can check their charts against other charts. I'm using IG, and trusting/hoping that the charts are correct!

Forker, could you tell me what stealth orders are please?

HolyGrail, yes I am trying to consider only small spread/liquid stocks. I've noticed changing the settings from mid price to ask price can change the look of the chart a lot!
I still like my 2 positions idea- but worried about the risk:reward ratio.

 

[EnlightenedJoe]

The charts are correct. Stops are hit in correct charts all the time. It's quite normal.

 

[forker]

You can get software to automate trade management. These platforms allow you to mask your orders, stops, targets.

 

[EnlightenedJoe]

Since they have educated you on where to place stops, they will still hit them even if the stops are just-in-time types.

None of these simple tricks will work.

 

[forker]

Since they have educated you on where to place stops, they will still hit them even if the stops are just-in-time types.

None of these simple tricks will work.

If you going through a spread betting broker, where they are the market, then yes. If you still think such things take place elsewhere then you smoking some rough green. A broker, not a bucket shop, uses many liquidity providers which compete for business. If one provider thought it was a good idea to spike prices then they would receive no business. The only time things can get out of touch is during news events where I am sure they can get away with cheeky prices.

 

[EnlightenedJoe]

If you going through a spread betting broker, where they are the market, then yes. If you still think such things take place elsewhere then you smoking some rough green. A broker, not a bucket shop, uses many liquidity providers which compete for business. If one provider thought it was a good idea to spike prices then they would receive no business. The only time things can get out of touch is during news events where I am sure they can get away with cheeky prices.

Why do they need to spike the price ? They can just move it there and move it back later. All the providers will be squabbling over the stop orders. It's free money.

 

[forker]

You really don't understand how markets work, do you.

 

[EnlightenedJoe]

I do. It fills orders, stop orders included.

 

[daveylibra]

We are getting into negative thinking here - lets think positive!
Lets assume -
1) There are some traders (even spread betters) who are successful. Not the majority, but some.
2) They all have a good method of predicting which way price of a share will go, at least short term.
3) They have good money management. They all use a SL of some sort.

That's where this discussion comes in. If we can crack 2 and 3, we are there.

 

[EnlightenedJoe]

I can tell from first hand that positive thinking will definitely work. If you believe you are right and that the market can't hurt you then a stop is not necessary. In that case the question of the stop becomes non-existent.

 

[IFeelFree]

Have you considered doing backtesting to determine optimal stop placement? In other words, try different stop placements (most recent swing high, average-true-range, whatever) on historical data and see how it would have affected your profits. Of course, paper trading is not the same as live trading (for example, others may run your stops in live trading), but at least it can give you some indication of what stop levels might be best for your strategy.

 

[daveylibra]

Trader Risk
Market makers are fully aware of any stop losses that you place with your broker and can force a whipsaw in the price, bumping you out of your position and then running the price right back up again. If you like the stock, you can always buy it back.

The above is a copy and paste from Investopedia.com. Amazing! But this only applies to the big traders, right? Then again, their stops might be at similar places to mine?

So what would make a 'market maker' do this? A few very large trades with similar stops that they want to catch out? I mean, if they whipsaw a price, some traders on the other side would hit a good take profit, so there must be a big imbalance of trades at this point in time for it to be worth it. Is this correct?

 

[IFeelFree]

Stop losses are usually only necessary if you're taking an unhedged directional trade, no? Don't sophisticated traders use hedges (such as out-of-the money options) to protect against large adverse price changes?

I don't use stops. I trade a cointegrated portfolio, so it has both long and short positions which is a kind of hedge. The key is not to use too much leverage so your position doesn't blow up if the market moves against you.

 

[EnlightenedJoe]

So what would make a 'market maker' do this?

Free money. Also people will blame their own bad stop or bad psychology for the loss. The MM/Bank/whoever has nothing to lose but gets free lunch/dinner money.

People on the right side of the spike will no more take profit than you would. They will be going for more profit until it disappears and turns into a loss. That's when their clever stops will "save" them. They'd feel good even though they have been taken for a ride.

 

[daveylibra]

Enlightened Joe - Best thing to do maybe is to have a definite take profit line. People on the right side would surely profit if, say, they had 1:1 profit:loss ratio, not trying for the bigger and bigger profits.

I Feel Free - Is there an easier way to backtest rather than to trawl through loads of charts? And I am just trying to spread bet large shares. I am not using a cointegrated portfolio, but I am interested to know how it would work.

And to all - People do say that, in the 80s, it was quite easy to make money, look at Richard Dennis & the turtle traders. People were not scared of MM, stop hunting and all the rest. But then people say that it was different then, that markets were trending more. I am not sure where Dennis' downfall was not sticking to his system or whatever. But if we look for shares that have been trending a long time, I dunno, min 3 months, would that help us?