Trading Strategy of high risk stop loss

[london_lad]

I am very new to trading and have been trying out a trading strategy recently with success on demo account. I wanted to check with experienced people here to see if I have got it completely from the wrong end.

I know that as a principle, we have to limit our risks and maximise our profits. However, consider this example:

I have £10,000 as my trading capital balance.

FTSE is on 4250. Last time FTSE was on 4000 was mid April-ish, and within that time-range the maximum up has been 4500 in early June.

I dont have very good knowledge of technical indicators ( I am learning though ), but I see based on the news (eg, worldbank report) and the movement on the graph that it has gone too UP quite a lot or Down quite a lot. Then I make (one) of the following moves:

Long at 4250 contract value £2 p/p with s/l at 4000 and limit at 4500
Short at 4250 contract value £2 p/p with s/l at 4500 and limit at 4000

This way my loss is limited to £500 for which the price hasn't moved that much in past 2 and a half month (if Long) or in past 1 month (if Short), and if it does, I am prepared to lose £500. At the same time, my limit will not be reached for the same reason, but I can close my positions at any gain levels I am pleased with if I dont see the trend getting stronger - ideally 50% of original limits (ie, 250/2). Also, while monitoring my P&L, as soon as it moves in blue territory, I can manually change my stop loss at a profit of £30 or £50 plus range.

In summary, what I am trying to say is that you bet less per pip, but leave yourself a large range stop loss (which market is unlikely to cross) and you make money in the "in-between" noise.

Am I gone crazy?

 

[advfntrader]

you could end up being 100's down for weeks on end....what I mean is there is no guarentee that your position will run into profit

 

[london_lad]

True. How about, if I am prepared for that? specially in a short position, whereby I will continue to recieve interest from my broker as well?

 

[Shakone]

I can close my positions at any gain levels I am pleased with if I dont see the trend getting stronger - ideally 50% of original limits (ie, 250/2). Also, while monitoring my P&L, as soon as it moves in blue territory, I can manually change my stop loss at a profit of £30 or £50 plus range.

This sounds pretty dangerous to me. Lets just take an example with made up results. Say you take 10 trades like this. Suppose you're even a good judge of direction and it only hits your stop loss 3 out of 10 times. The other 7 times the following will probably happen. 4 of those 7 you will move into profit of about £70-100, and as you said you will move your stop to lock in £30-50. You will then get stopped out for £30-50. Another 2 times you will see the trend weakening (or at least you might think so, and you will take profit around £200-250. Finally, maybe the last of your 7 winners you will hold onto it and get around £500.

Now these are all made up results, but also quite possible. Add up your losses and compare to your gains. And that is if you are good at judging the direction :|

The fact that you're willing to move your stop loss to £30-50 or take profits at £250, yet hold onto a loser until it gets to £500 means that you are letting your losers run. and cutting your winners short. The opposite of what you should be doing.

 

[Faisal_Danka]

If the probability of 4250 to move 25 pips up or down for long or short strategy respectively, against 500 pips up or down is more than 20/1, then it may work (with modest gains). However, you need to be correct more than 20 times (based on your trailing stop loss at 25ish) to be profitable. Sounds like, draconian-contrarian (to fundamentals of Trading Risk Management) strategy to me.

 

[london_lad]

Let me explain myself a bit more. I am suggesting that it is equivalent to buying CFD's without stop loss for over a period of time (only paying the intra-day interest for long or recieving in short positions). However, to cushion myself against a loss greater than my whole life's earning. I am keeping to my max ability to lose, which in this case is £500.

Any movement beyond the spread of my opening position within 250 pips which in cases of index, is whole number is something that I can realise profits on.

What exactly is wrong with this approach. I am very thankful for your comments, but I guess not completely satisfied.

 

[Technically Fundamental]

What will you do in times of low volatility?

 

[Masquerade]

I don't get this, what are you trying to achieve? Going long and short at the same time from the same point? Sounds like a waste of time to me.

 

[london_lad]

There is always intra-day volitility that is more than the spread being offered in either direction.

Masquerade: Please read my post again, I said LONG or SHORT. not both at the same time.

 

[jiggly]

I am very new to trading and have been trying out a trading strategy recently with success on demo account. I wanted to check with experienced people here to see if I have got it completely from the wrong end.

I know that as a principle, we have to limit our risks and maximise our profits. However, consider this example:

I have £10,000 as my trading capital balance.

FTSE is on 4250. Last time FTSE was on 4000 was mid April-ish, and within that time-range the maximum up has been 4500 in early June.

I dont have very good knowledge of technical indicators ( I am learning though ), but I see based on the news (eg, worldbank report) and the movement on the graph that it has gone too UP quite a lot or Down quite a lot. Then I make (one) of the following moves:

Long at 4250 contract value £2 p/p with s/l at 4000 and limit at 4500
Short at 4250 contract value £2 p/p with s/l at 4500 and limit at 4000

you are limiting both your losses and your gains, in this example, on a trade which may have a 50:50 chance of success for a risk vs reward of 1:1.

This way my loss is limited to £500 for which the price hasn't moved that much in past 2 and a half month (if Long) or in past 1 month (if Short), and if it does, I am prepared to lose £500. At the same time, my limit will not be reached for the same reason, but I can close my positions at any gain levels I am pleased with if I dont see the trend getting stronger - ideally 50% of original limits (ie, 250/2). Also, while monitoring my P&L, as soon as it moves in blue territory, I can manually change my stop loss at a profit of £30 or £50 plus range.

not good, even worse than a risk to reward of 1:1, you are not maximising your gains, or limiting your losses

In summary, what I am trying to say is that you bet less per pip, but leave yourself a large range stop loss (which market is unlikely to cross) and you make money in the "in-between" noise.

inverse your thinking, you want to bet more by carefully selecting an area to enter the market which has a better probability of moving further in your favour. giving you much more when things move in your favour, compared to when they dont. as a rough example, given from what you have mentioned above. buying the FTSE when it comes close to 4000 with a smaller stop in the anticipation that it might get to 4500, or short at 4500 and cover at 4000.


Am I gone crazy?

highlighted in bold, but if you are making money doing this as you say, then continue..

 

[jiggly]

True. How about, if I am prepared for that? specially in a short position, whereby I will continue to recieve interest from my broker as well?

focus you attention on accuracy, that way you will be in a much better position from the beginning to maximise your winners and limit your losses.

but trading(risk) £500 over a month period for a return of £30-50, is not worth either the Risk vs Reward and your time value for money is exceptionally poor.

I have not really found the interest paid to be worth much in comparison to the equity gain, and even if you made a loss, your interest yeild will not offset much of your losses.

 

[london_lad]

Jiggly,

I understand your point. So far I have made money on demo account and to keep myself in check, I have never let my margin requirement increase more than 5k and my losses within £500.

Now look at this. How many times does the FTSE go 500 either way from any starting point? VS how many times does it go either way from any starting point for more than 4 points? The 4 points being my spread provided by the broker.

Keeping above in mind, my strategy is to profit any moves above 4 points when they are in blue and wait out on the ones which are in red. If I wait too long, the max damage is £500.

I agree, I am having trouble explaining my viewpoint. Plus interest comment was to suggest that any overnight positions will in the longer run be offsetted between long and short positiong (meaning long interest paid being offsetted against short interest recieved).

 

[jiggly]

Jiggly,

I understand your point. So far I have made money on demo account and to keep myself in check, I have never let my margin requirement increase more than 5k and my losses within £500.

Now look at this. How many times does the FTSE go 500 either way from any starting point? VS how many times does it go either way from any starting point for more than 4 points? The 4 points being my spread provided by the broker.

the latter has a much higher probaility than the former, that is the only thing i can say about that

Keeping above in mind, my strategy is to profit any moves above 4 points when they are in blue and wait out on the ones which are in red. If I wait too long, the max damage is £500.

when do you decide that 'any moves above 4 points' is good enough to profit, so if it goes 20 points will you cut it, if it goes 30 will you cut it, when do you decide that enough is enough and it is time to get out? if you are risking 500 to make 50, whatever way you try to justify it, you will end up a loser, you are picking up pennies in front of a steamroller.

I agree, I am having trouble explaining my viewpoint. Plus interest comment was to suggest that any overnight positions will in the longer run be offsetted between long and short positiong (meaning long interest paid being offsetted against short interest recieved).

I think, you dont have a clear trading plan, or a good enough reason to enter or exit your trades, perhaps I am wrong and you may shed more light on this.

your approach seems scatter gun.

 

[london_lad]

let me give this a go for few days on demo and I will post my trades here. Re your view on how I am risking 500 to make 50. If you account for the probability for 500 s/l to reach vs 50 to reach up or down, then perhaps the risk reward ratio balances or tilts more towards reward.

 

[jiggly]

let me give this a go for few days on demo and I will post my trades here. Re your view on how I am risking 500 to make 50. If you account for the probability for 500 s/l to reach vs 50 to reach up or down, then perhaps the risk reward ratio balances or tilts more towards reward.

I can see what you are trying to say,

but although the probability of reaching 50 vs your SL of 500 may be far greater, in this instance you will need to be right 19 times out of 20 to make 50 pips!!!!! and that is not even taking into consideration where on the chart you think this will happen.

by all means, demo and experiment, it is all part of learning. you wont know what to do until you have figured out everything that you shouldnt do.

maybe this will work for you and suits your style, but you can do a lot better, I am sure.

 

[london_lad]

Jiggly, I appreciate your point and agree with the probability that you and Faisal have mentioned. Have a look at the chart for past 15 days or so, I have seen the 20 to 50 points movement a lot more than 20 times compared to one 500 block move. Thats why in theory i think this could work.

Please note that I really appreciate all this challenge, and I think I am probably wrong, but just not convinced. Here is my first trade on this strategy:

25JUN09, CFD Wall Street Cash ($2 Mini Contract), Short at -5 contracts, Open 8318, Close 8311, PnL 70.00 (this is in dollars, currency of underlying index).

I have another open position, which is:

25JUN09, CFD FTSE 100 Cash (#2 Mini Contract), No Expiry, Long at +1.00, Open 4272.30, Current4238.80, Deposit 120.00, PnL -67.00.. Stop loss on this one Stop (Not guaranteed) 4022.30 (which is £500 risk at max).

 

[london_lad]

Just closed my second trade (in which, max I reached for a potential loss of 150. But my stop was at 500 so safe.

This is the result:

25JUN09, CFD FTSE 100 Cash (#2 Mini Contract), Long at +1 contract, Open 4272.30, Close 4281.30, P&L 18.00

In addition, after currency conversion and short term interest. I am left with:
£42.8 ($70 after conversion) and £18 (bad entry, but not so bad after all).

total £60ish pounds made today, and maximum movement within both indices today has been within 200 pips.

So noise is within 40% within my threshold of having a loss, which I am willing to lose with this simple strategy.

 

[Technically Fundamental]

Can I ask why you bother with a stop if its 500 away?

 

[london_lad]

In the unlikely event that market goes crazy, I dont suffer more than what i am willing to lose.

If I had a trade like that, and held on to it when FTSE was in 6000 range, imagine my loss even on the mini contract, somewhere above 4k.

 

[london_lad]

If I lose 500, it is my calculated risk. If I make positive more than 10 or 15 times on the wind/noise (whatever you want to call it), it covers one loss event for me. How can I lose my house, when I said its at £500, when i clarified the comment by Aronmalins.

My demo account has just been suspended today. It expired its 2 weeks period. Anyone know of a demo provider for CFD on indices?

Also, can anyone try this methodology on your demos? to see how it works for them. I have a feeling it wont work for commodities due to the extreme price volatility.