Need advice on risk/reward!

[GeneTrash 10]

Hey Everyone,

 

So far I have been paper trading for 2 months. I am using Ninja Trader and a DTN.IQ feed to simulate live trading as best as possible. I am trying to make every mistake I can before I go live. My trades last anywhere from 1 min to a couple hours and I flatten everything before close. I trade 1 YM contract and am slowly creating system rules to compliment my strengths, but I am having trouble in a couple areas.

 

I realize in the recent markets, stops have to be wider as fake outs are a lot more common. Per trade I have been risking a maximum of 0.5%. (10 ticks with 1 contract). Is this a lot to risk per trade for short term trades? I find on my best days I will make 3-8 trades average. Initially this worked fine but lately I am getting faked out a lot. This problem directly affects my next issue.

 

My target daily profit is around 1.5% of my account (10K account) or $150 at this point. As my account increases and I become a better trader this dollar amount will scale up and I will trade more contracts. My problem is in regard to the maximum daily allowable loss limit. How much should I risk? Obviously I wouldn’t want to risk over 1.5% or I will be doomed to failure, but if I risk 1% that really only gives me 2 bad trades and I am done! If I get faked out twice in the early going it’s hard to sit back and watch for the rest of the day. Risking 2-3% would give me more breathing room as far as the number of losses I can take but realistically I don’t think I can make 5-6% reward consistently. ($500-600 with 1 YM contract!)

 

Any advice would be great. I am hoping to start some back testing in the next couple of weeks which I believe will help.

 

Gene.

[brownsfan019 17]

Gene,

You find yourself in a common dilemma of a new futures trader with a small account. In my opinion, there's not much you can do here. You either need to set a daily loss and profit target or not. Days when you are cooking, you'll want to trade all day. Days when you are not, you'll be happy for the loss in place.

 

It's hard to say when to stop on a $10k account trading the YM. I would suggest you need to gear yourself up for some large account swings b/c with a goal of a 1.5% return per day, you have some work cut out for you trading 1 contract.

 

Now, the other side of the coin is that if you want to make $150/day on the YM, you can trade 1 contract going for 30 pts or 2 contracts going for 15 or 3 going for 10, etc. etc. The point being that I think it's MUCH easier to get 10 points on 3 contracts vs. 30 pts on one. Just some food for thought. I realize you are 'risking' more in theory, but one could argue that you are actually risking more by trying to get 30 pts from 1 contract.

[jim2000 10]

I think alot of it depends on what you are comfortable with. I don't think 10 ticks is too much to risk but personally I'm not that precise on my entries yet, so I need more wiggle room for the trade to work. I have seen others post that their stops are a couple ticks but maybe they are getting good precise entries.

 

I might suggest trying different amounts to see what works best with your setups. You know it doesn't do any good to get stopped out on every trade.

 

I actually use 2 different entries and a different stop for each one. One is more precise with a tighter stop and the other is less precise with a somewhat wider stop.

[GeneTrash 10]

Very true in regards to the multiple contracts. I spent one month paper trading 3 contracts, letting one contract run and taking profits with two. I had much better results with a lot less stress. If I am understanding the initial leverage requirements of the YM correctly, I could technically trade 3 contracts with a $10K account?? The risk of a margin call would be higher but I am not too concerned since I always have a hard stop in place when I make trades. As well each bad trade would be 1.5% loss to the account but like you say the difficulty difference between 30 points with 1 contract and 10 with 3 would be worth allowing that risk imo.

 

Thanks for your help brownsfan.

[torero 10]

Don't forget that when you're trading real money, you have to watch yourself and your mental state. It doesn't seem relevant now but it will when you put down 3 contracts vs 1 contract on the line. These #s and calculations don't amount to a hill of beans if you can't manage to follow through with your intention to follow your plan. Being down $100 vs $300 on a single trade will put you in perspective quickly. Can you afford to go the next few losses with 3 contracts? Are you mentally tough enough to watch your profit/loss #s fluctuate? I say stay with 1 contract and see how you head and heart feels and takes it. Then move it up. It's about executing the plan with discipline that counts.

[jim2000 10]

This is just a thought and you are probably already aware of it, but it really does work...If you can let the winners run by continually managing and adjusting your stop, you won't care if you get stopped out 5 times for 10 ticks each if you get that 1 trade that goes 100 or more ticks.

[Hlm 10]

To give specific suggestions about stops I would need to know more about you strategy and how consistent it is. Ten ticks on the YM is usually not considered a lot to risk. However, it depends on your setup.

 

But from my experience these may help:

 

First...your daily stop should be something you can get back in a timely matter. For me, this is about 1.5 days worth of earnings. You will be amazed how much better you trade the next day knowing there is a good chance you will be back to even or green at the end of the day. This works much better than being faced with the psychological aspect of trading more aggressively trying to make up for days if not weeks of earnings too fast.

 

Second...not having a hard daily target might help a lot with figuring out your daily stop. Try having a soft target where at that point you move up your daily stop. Give yourself the chance to continue being in "sync" with the market. When you start trading multiple contracts this might be a point where you drop down in size. You can also be EXTRA picky at this point knowing that it's no big deal if you don't take another trade. Many of my biggest winners have been in the last two hours of trading (time squeeze).

 

Third...figure out when you statistically trade the worse and don't trade it. For many people this is during lunchtime when volume is low.

 

Fourth...I follow the rule that if I have three stops in a row I stop, push back, and take a short break. I will then come back and review the reasons why I got stopped out. Obviously something is going terribly wrong be it psychological or just a market that isn't in sync with my strategy. If this is in the morning I may or may not trade the afternoon. If this happens in the afternoon I am done. In trading there is no room for revenge. The market doesn't care and will destroy you without skipping a beat.

 

Fifth...try to find a good combination of targets and trailing stops. There is usually no reason to take a losing trade when the target is missed by a few ticks. Many times at worse a breakeven can be achieved. Also, when trading with one contract you can still have more than one target. The first target could be an area where when reached you start a tight trailing stop. Many times this is very useful when S/R areas are in close in proximity.

[GeneTrash 10]

That's for all the great feedback guys. I posted a prior message earlier but It didn't seem to show up. Definitely some good stuff to mull over.

[dandxg 10]

This is a good subject that is overlooked by many. It's hard to comment in detail without knowing more and I am no expert. It appears you are a discretionary trader. My rule is if you have 3 losing trades in a row you must stop. Reason being you are not in touch with the market. Tues and Wed a 10 tick stop would get blown through easy. I had to pass on a lot of setups in ER2 that required a stop 2 times what I comfortable using. Oh well, that's life and there will be many more. I forget you said it, but it goes like this, ameuters look at reward and pros consider risk.

 

From an R to R perspective I feel you need to be going for a tleast 2-1 reward to risk with a stop trailed to break even that you need to determine. As you become a better trader you get more intuitive and you may see a reversal coming and over ride that 2-1 and grab 10 ticks instead of waiting for 20. But your new and discipline will make or break you. I know a few traders that are willing to take many small loses and when they win get 4-1 R to R, but their win rate is below 50%. Look up positive expectancy on google, it what really matters.

[timokrates 10]

To give specific suggestions about stops I would need to know more about you strategy and how consistent it is. Ten ticks on the YM is usually not considered a lot to risk. However, it depends on your setup.

 

But from my experience these may help:

 

First...your daily stop should be something you can get back in a timely matter. For me, this is about 1.5 days worth of earnings. You will be amazed how much better you trade the next day knowing there is a good chance you will be back to even or green at the end of the day. This works much better than being faced with the psychological aspect of trading more aggressively trying to make up for days if not weeks of earnings too fast.

 

Second...not having a hard daily target might help a lot with figuring out your daily stop. Try having a soft target where at that point you move up your daily stop. Give yourself the chance to continue being in "sync" with the market. When you start trading multiple contracts this might be a point where you drop down in size. You can also be EXTRA picky at this point knowing that it's no big deal if you don't take another trade. Many of my biggest winners have been in the last two hours of trading (time squeeze).

 

Third...figure out when you statistically trade the worse and don't trade it. For many people this is during lunchtime when volume is low.

 

Fourth...I follow the rule that if I have three stops in a row I stop, push back, and take a short break. I will then come back and review the reasons why I got stopped out. Obviously something is going terribly wrong be it psychological or just a market that isn't in sync with my strategy. If this is in the morning I may or may not trade the afternoon. If this happens in the afternoon I am done. In trading there is no room for revenge. The market doesn't care and will destroy you without skipping a beat.

 

Fifth...try to find a good combination of targets and trailing stops. There is usually no reason to take a losing trade when the target is missed by a few ticks. Many times at worse a breakeven can be achieved. Also, when trading with one contract you can still have more than one target. The first target could be an area where when reached you start a tight trailing stop. Many times this is very useful when S/R areas are in close in proximity.

 

Great post, thanks HLM!

 

What would you call a high probability setup?

 

Confluence of S/R (even on different timeframes) with the trend?

[GeneTrash 10]

"Amateurs look at reward and pros consider risk." Now that is a big wakeup for me haha. :crap: My mindset is definitely geared towards reward first. I am glad I was introduced to this quote early.

 

I like the idea of taking a break after 3 bad trades and analyzing why they failed. I think it will make we work at observing the market instead of just calling it quits and coming back the next day.

 

I have also started to read the CBOT report on Market Profile and am realizing that my issue probably isn't as much my stops as it is my entry points. As I get better, my trade success hopefully will depend less on where my stop is and more on a good entry and a overall positive indication (volume, price, S/R etc.)

 

Thanks again for the help guys. I think I've learned more in a day from this post than in weeks by myself. :doh:

[Hlm 10]

What would you call a high probability setup?

 

Confluence of S/R (even on different timeframes) with the trend?

 

A high probability setup is one in which the combination of win rate AND risk/reward give you a positive expectancy. Just like dandxg said, someone with a ninety-nine perfect win rate can still lose overall if the risk/reward is too great.

 

For me, a highly positive expectancy trade is one where you enter on the turn of a pullback around S/R in the direction of the larger trend. In other words just a simple continuation trade. This type of trade allows you to place a relatively tight stop (usually last swing high or above S/R) while having multiple levels of momentum on your side. Usually there is enough momentum that you can safely take a breakeven or a smaller stop if the trade fails. It is even a greater plus if the S/R areas are based off Market Profile.

 

How you determine the setup depends on the individual. Some use higher timeframe candlesticks or internals for the larger trend while others just use moving averages and oscillators. Also, many use tick charts below their setup timeframe to time their entries more precise.

 

Hopefully that answered your question.

Edited January 25, 2008 by Hlm
spelling

[torero 10]

For me, a highly positive expectancy trade is one where you enter on the turn of a pullback around S/R in the direction of the larger trend. In other words just a simple continuation trade. This type of trade allows you to place a relatively tight stop (usually last swing high or above S/R) while having multiple levels of momentum on your side. Usually there is enough momentum that you can safely take a breakeven or a smaller stop if the trade fails.

 

This is exactly how I play my setups. Those small stops are the best risks you take without losing your nerve or shirt. Once it goes my way, I usually add more at the 2nd pullback. This is the sweetest spot you can get from a trade.