Rethinking Scalping Concepts

[daedalus 10]

I have been on a journey to rethink and re-examine everything i've "learned" about trading. So much of my career has focused on getting 10-100 pip swings out of the markets, keeping optimum risk:reward setups in my arsenal, hold for gold, all of that. And if i'm honest I can't really say i'm living the life I thought I would be when I started out 5 years ago.

 

Now granted we all think (even if we don't want to admit it) that we'll figure this thing out in a couple months and the Ferrari will be in the new mansions garage by Christmas. I'm under no illusion that its that easy - however I do think there are a few concepts I instantly threw out of my trading ideas, and it is those concepts I want to talk about.

 

I apologize in advance for the length of this post, hopefully there will be something constructive in it for us all.

 

I guess what i'm rethinking is the idea and the application of scalping.

 

I stumbled onto a thread on babypips today and this was a snipped of the post I found intriguing:

 

I trade around 6 - 10 hours a week, A typical week would be +3 +6 +8 +2 maybe, or even +2 +1 +3 +1 +7, very very very occasionally a +1 -3 +5 +3 +4 +3, trade that on high leverage and compound the profits, you don't have to get stressed, you don't have to analyse and it makes one heck of a good return. It has been known to get 18 PIPS or so now and again, I just take the rest of the week off.

 

Screenshot - This is how I set up my trading station and have a buy and sell window open by the side.

 

 

And the money Management - See how effective getting a few pips are long term - That's the BIG PICTURE!

 

 

It's a little trickier than it first seems, but once you get the hang of it, you don't have to do any hard thinking, you don't have to spend much time trading, you hardly ever get a loosing trade, basically you just practice it until you hardly get any and then go live.

 

Basically this guys "edge" was to take small profits out of the market and just add size. Not swinging for big gains, but simply taking signals that were there and taking what the market offered, be it 1 tick or 10. I think there is a bit of contrarian genius at work here.

 

Now its usually at this point where someone jumps in and says "BUT WAIT!!! YOUR NOT RISKING 10 PIPS TO GET 890!!! THIS WON'T WORK!!!". In fact, I never said it but thats what I have been thinking while I read every scalping thread on trading forums. What i'm coming to terms with is that a scalping edge isn't defined by risk : reward - its defined by expectancy.

 

And therefore, you can't apply to same typical constructs we try to beat into trader with our typical "cut losers short and let runners work" and "you need to a minmum of a risk 1 to get 3 profile to be a successful trader". The point is, if you're scalping your edge is expectancy of returns, not the size of those returns.

 

This one little light clicked on in my head and got me thinking...

 

Now the guy who posted that initial quote of his results and compounding i'm pretty sure is legit... Another guy who uses a similar philosophy is the loved and hated Avery also known as TheRumpledOne and his Never Lose Again threads that lets be honest, have been posted on every trading forum under the sun and threads have typically gone to hell quickly due to a combination of stated success, thread title, the typical bantering about risk: reward, and avery's very combative personality.

 

But all of that aside - I think hes legit and is making serious money. I mean the guy got his group of disciples to meet in Monaco for the F1 grand prix this year.... I don't care which way you slice it that city is one of the most expensive in the world and the most expensive time of the year there is for the F1 race. Somehow I don't think he footed the bill from his donational indicator payments.

 

REGARDLESS - his edge again is quite explicitly not one of risk:reward, but simply of taking whats offered, an edge of expectancy.

 

Last week I was contacted by a firm about a trading related job only to find out it was a person selling MT4 operated black box systems (more or less). Now unlike the heavily advertised systems you have all googled at one time or another this lady had put this together herself and was very blatant in telling me exactly how the system was pulling in 1000-3000 pips a month (running on 4-5 pairs simultaneously 24/7). I've always thought these things were bullshit (and a lot of them are just that) but we got into talking and she put it to me point blank as I asked more and more about the mechanics in the system - she used wide stops and aimed for smaller profits (300-400 pip stops, and 40-50 pip targets).

 

Now even I will admit I think thats a bit on the heavy side of getting R:R... but the point is this... the equity curve of these systems slopes upward and thats because their exploiting expectancy, and not risk:reward. And quite frankly I think it probably works.

 

Everyone says to be a contrarian in the markets right? We are all supposed to run against the pack, yet we all go into the markets trying to exploit the same pre-conceived notion of risk:reward being the holy grail regardless of your entry signal and we all know that 90-99% of traders lose money right... so whats preventing us to taking a step back and supposing there might be a relation between the two figures? Failure and trying to trade to optimal risk : reward?

 

Maybe the contrarian view here has nothing to do with market analysis, but the edge we try and exploit... expectancy rather than risk & reward.

 

All those billions being made on black box systems and quantitative systems used by all the new trading firms - I don't know whats in them but i'll tell you what I suspect is. I suspect their edge is 1. data speed and execution, and 2. expectancy. I doubt those orders beating all of us into the markets taking advantage of the smallest pricing inequalities are doing so in a way that risks 1 and gains 2. Rather i'd wager they are built to exploit the areas where something is guaranteed almost every time.

 

Think of how a casino is run... yes its run on odds, but those odds aren't 1:2 or 1:10... casinos make consistent money because they have expectancy. yes there is going to be outlier outcomes that hurt the bottom line when someone hits a jackpot, but 9x's out of 10 they are taking your money from you each and every time and its got nothing to do with risk:reward - its got everything to do with expectancy.

 

So what do you guys think? Is it bullshit? Is there potential here? Lets dig into it.

 

Personally I started looking at charts today for a new kind of edge, not one where I could risk 20 pips and get 40, but one where I could reasonably expect to get a couple pips each and every time. Frankly I know what my results have been trying to do things the 'correct' way. I'm still not rolling in it. So i'm throwing that out for now and trying to look at things from a completely different standpoint.

 

If nothing else its exciting and thought provoking and to be honest I haven't been excited about trading for a long long time.

 

Cheers!

[MidKnight 12]

Hi daedalus,

 

This is a very heartfelt discussion for me - where do I begin in talking about your post as there is much I would like to talk about....

 

Let me start by saying I think the whole concept of risk and reward is total BS. I mean, it is something that can be analyzed and examined on PAST trade data but even then it means very little without some other stats to support it. So often you see people talking about their R/R before they put a trade on but we just don't know what will happen, so why bother. When we are entering trades, most of us wait and observe the market before we decide to jump in, the same should be done for exits rather than make up some big number to give a 10:1 reward so one can feel good about the trade prospect and put the trade on. I'm not meaning to insult anyone that does that. I just think that exits should be evaluated and assessed as meticulously as entries are - that is, as the market is unfolding we should be taking action and having a plan based on this new market information rather than a rigid exit set minutes ago if scalping or days ago if swing trading. Use the most current information available within ones timeframe.

 

Expectancy or, even using average trade is the way to go. About 2-3 years ago I was actively scalping the Hang Seng Futures and really doing well because the volatility was high. My approach was highly discretionary and it sounds very similar to the sort of thing you are talking about here. I would use wide wide stops and I'd also scale-in up to 5 times. Maybe once or twice a month I would catch a huge winner, but for the most part the avg trade was 39 points. This was counter-momentum trading and sometimes I'd read it wrong and eat it on all 5 entries as that HSI can really rip sometimes! The win rate was high and I had a handful of losing days a month with the avg losing day canceling out the avg winning day. Life was good. And then the volatility collapsed and I started to struggle with this approach. Maybe in part because I was not adapting to smaller targets and also in part because my entry feel was largely based on high chart emotion that had seemed to disappear overnight

 

As you say above, just take what the market offers - well that, my friend, is often not so easy for me to see in real-time But I understand what you are trying to convey I think. I also think an approach like this really excels with a scale-in approach (adding to losers some people call it) of which I like to scale-in with a fixed percent so that the size is growing on each successive entry and thus greatly pulling the average entry closer. I'll probably cop some flak for posting this, but this is how I like to use a scale-in approach. Perfection is not required and not possible in an imperfect market.

 

I personally find it easier on my mentality to go for swings larger than a couple of pips just because all that type of trading is too fast for me. How you described that girls system (maybe call this 'swing scalping') is the sort of thing that appeals to me and warrants some more examination on my part.

 

So after all my long-winded response, no sir, I do not think it's BS. Lets dig into it!

 

With kind regards,

MK

[Marko23 10]

...

So what do you guys think? Is it bullshit? Is there potential here? Lets dig into it....

 

Of cause NOT, the casino aspect is quite right.

Detailed answer will follow, too busy now.

 

Please take a look at "Trading in the Zone" from MD.

[SIUYA 11]

yes - such methods certainly work. But I think you have to be aware that there are still many of the same issues attached that have to be taken into consideration.

These are just food for thought......

- you still need to cut your losses. If you dont have small losses to cut, does it get harder to cut larger ones, once you start doubling down... for some the answer is yes. Also as the point is not so much cutting losses, but cutting blowouts, you will need a bigger bank for this type of trading, as you will have some rather big blowouts.

- as you are basing it on expectancy - you need to make sure you have a consistent method of taking quick profits. Now this will mean that you will constantly kick yourself when you take profits early and it keeps running...this may not wok for every personality.

- entries are still important. the expectancy relies on this, otherwise, you may be constantly sitting on a lot of losses early on....this can be difficult to stomach. Also are you likely to be trying to still then chase the holy grail?

- Why does this necessarily have to be contrarian? I would suggest a better short term one looks to get on the trends still and allow quick profits. Or do many traders want to be right as a primary consideration - being that they want to pick tops and bottoms?

- consistent profitability gives a great method to simply increase from 1 to 2 to 4 to 8 contracts to massively and quickly increase absolute profitability. But are people willing to up their scale this quickly. Some traders will thrive on this - many blow up, when they go too hard too quickly - or when they massively increase their size and have a big loss and dont cut it.... other traders find it hard to increase the size.

 

Ultimately it still boils down to the personality of the trader, as many of the issues will remain the same.

(As an extra note, many market making firms, hedge funds, and prop houses use this method..... lots of small wins, increasing the risk for good traders, and then increasing the markets traded, the number of traders employed etc; Rather than trying to catch big trends to make more in absolute dollar amounts. Some of these traders doing this have an overall risk manager ensuring they stop them selves out and dont get too cocky and large....via risk controls and unemployment!)

Edited August 3, 2010 by SIUYA

[uexkuell 10]

But all of that aside - I think hes legit.

 

Why?

 

The guy is putting up a subscription service.

He is recommending a specific broker.

Some people help him underscore the importance of choosing exactly the broker recommended.

Professional homepage that is directed exclusively towards selling.

 

... and many other points that should raise suspicion.

 

 

I don't say it is impossible but surely rather not very probable that it is possible to go for single pips.

On the other hand for a broker clients trying to use such a system would be a blessing.

[Kiwi 16]

Actually hes going for small stops as well, 2 points and win sizes 1-10 times that size.

 

His method looks reasonably solid and he actually says enough for you to figure it out. You're basically looking at a bunch of moderately correlated pairs and if you have watched the UK opening you know you get these nice periods where for several minutes you get smooth movement. He's just waiting till he gets agreement from the other three and pipping from GU. It should work quite well as long as (as he suggests) you can be patient enough to wait for smooth movement and correlations to show up.

[daedalus 10]

As i've been digging into this more and more i've come up with a entry trigger that seems to be >90% for at least a 2 tick move (from the fill price) sometimes much more, sometimes thats it.

 

My Thoughts/Concerns thus far:

 

- As far as the risk side of it, i'm still not talking about risking 100 pips to get 2, but i'm more of the mind of trying to risk 8-10 to get 2-4 ticks. So not devastating when a loss occurs, but a drawdown certainly. Whatever I end up on its going to have to be heavily supported with backtested data.

 

- The other thing I have to consider is commissions, and thus markets traded. If you're scalping for 2 ticks on the YM/NQ thats great, but then thats 10 bucks BEFORE commissions. After your ~4ish dollar commissions, 40% of your profit is gone. That's kind of hard to swallow. But if that 2 ticks is on the 6E/J/S then your profit is around 20.00 after commissions and it only eats up 20%. Obviously the 10.00/pairs are somewhere just below this. But this is certainly an issue.

 

- Timeframe is important. Obviously the larger timeframes have the same moves as the smaller ones but typically a bigger % moves of that reaction point can be expected. So I think its going to be very crucial (and supported with data) on which markets and timeframes you're trying to exploit these concepts. Go to small and the average move on the break won't be enough to get your couple of ticks, go to large and the risk you'll need to avoid being whipsawed out will be too large to keep things reasonable.

 

Just a few things I have been considering.

 

Thank you to everyone for their input and posts thus far. Everything has been excellent!!! Very constructive and thought provoking and its really helping me look at all the angles. Much appreciated!

[SIUYA 11]

its likely to be a trade off between - the number of ticks you can capture v the number off opportunities provided.

Are you better waiting for a low occurrence trade with with R:R or lots of trades.

But wait...is not this the issue with every style, hence why many go for less trades with a higher R:R? Damn these circular arguments confusing me.:crap:

 

What about a simple random test if you are prepared to scale in?

buy or sell risking 10ticks (say the average expected range on a day is 100 ticks), on every stop, cut and reverse and increase the position? Once in some profit, take it.

Or only go one way (determined by some trend filter) and increase the size each time?

(have not done any testing on this, but could be interesting.)

[daedalus 10]

So I started digging into a little testing... and before we start lets get it out of the way... these results come from an obviously small sample of data. To be statistically significant these numbers would have to play out over 100's of trades at the least. But for the sake of discussion lets assume these numbers were to hold. What can we tell from them?

 

 

These were the results from the last week (all the historical data OEC provides) in 1 market (the 6AU0) on two different timeframes, the 125 tick, and the 250 tick. The triggers for the trades are systematic so there is no discretion involved in whether a signal fired and the entries use a buy/sell stop so the exact price of the fill is known for this data series (assuming no slippage which i'm not going to try and model - yes it can happen, yes it will happen, but a tick or two here or there either positive or negative should negate itself in the long run).

 

I tracked the total length of the initial impulse move until it retraced to entry or reversed and monitored the amount of backfill (stop level) required to get the most out of the move. The "Max Real Profit Fill" tracks the furthest the move went minus 1 tick to guarantee a fill at a given level. (ie. if I went long at 90.66 and it went to a high of 90.70, 90.69 was the highest point I could have gotten a fill to exit the position, thus a number of 3 would be put in this column).

 

The rest of the results are fairly straightforward. What I found interesting was the profit factors... even though the 2 pip exits had a nearly 100.00 profit deficit to the 3 pip results, the profit factor was substantially higher due in no small part to the significantly higher win rate.

 

But keep in mind that those numbers aren't exactly reflective of the results... 3 pips don't really have a 80% win rate, they still have a 93% win rate (only 1 trade flat out failed), but the 2 pip gained trades would turn into par's and not losses.

 

So what do you guys take away from this data (mathematically insignificant as it is)? I personally feel that the 3 pip profits might actually be a bit better even though the profit factors are smaller. I think in a larger data series the win rates between those two levels would even out a bit more especially when you consider the actual win/loss compared to the win+par/loss outcomes.

 

Anywho... interested to hear what you all think.

 

Cheers!

[MidKnight 12]

Ya know....if commissions are such a high percentage, you may be better off with a non commission FOREX broker than the futures. Typically AUD/USD spreads are in the 1-1.5 pip area.

 

Regarding your spreadsheet. As you can see here, PF is maybe not the best way to assess a method juts because we can see that the 2 pip target has the best PF but doesn't make the best money. Trade frequency, average trade, and win % give a decent well rounded picture of how the method does. If we examine those based on the data you have shown; the slightly lower win % with the significantly higher average trade on the 3 pip target versus the 2 pip target looks like the best choice. Targets bigger than 3 pip sacrifice too much win % for a smaller gain in average trade.

 

I don't know how you are choosing to enter, but if you are entering with momentum then slippage could be significantly more than is assumed and with such a small target it could really skew your test data. In part, than is why I like the idea of what that girl you mentioned was doing. Taking the slightly bigger bites reduce the effects of a couple pips slippage.

 

I've started my own investigation with 'swing scalping' and if I find anything worth posting then I will do so.

 

With kind regards,

MK

[BlowFish 10]

Just wondered whether you are considering slippage? On 50 or 100 pip moves a pip or two is no big deal however with more scalp like approaches it can knock what initially appears quite promising into marginal or worse territory. It really makes testing on any non live data tricky as it can have such a drastic impact.

[daedalus 10]

I am to a certain extent but i've traded these type of setups enough live that I know it will happen but honestly its a fairly rare occurrence for the areas i'm getting in at. But yea, it has to factor into these results and its something i'm very aware of.

 

The other thing though is that I get positive slippage roughly about the same amount I get negative slippage... getting filled at my price when the market doesn't move beyond it, etc... So I think overall the effects will negate themselves somewhat.

 

The other idea I was kind of playing around with is rather than take the breakout fill, since most of these moves retrace a couple pips waiting for a better fill maybe a tick or two below the breakout level for the fill which could reduce risk (keep same stop level just change fill price) and increase reward.

 

However, this would negate the moves that simply blast through those levels and turn them into pars rather than gains. But its something worth considering all the same.

Edited August 4, 2010 by daedalus

[clmacdougall 11]

Think long and hard about it daedalus. Already tried this concept out, it ruins you psychologically. Had 30 winning trades straight than got nailed on the 31st. It's a pain that's hard to forget. It takes a strange kind of dude to risk like crazy for small profits and then get nailed for a huge loss and keep on stickin to that same plan. Good luck man.

[daedalus 10]

Can I ask what your typical win was and what your typical loss was? Obviously R:R comes into play but I think with a bit of compromise the logic could work.

 

The strategy i'm thinking of using would have a loss negate roughly 2 wins... certainly not 30.

[clmacdougall 11]

I did some extensive work on trendlines and used Demarks TD lines as my setup. I applied it to trading Corn futures and the ES. It, like many other trading methods, slants towards predictability instead of probability.

Eventually, as you might find with whatever system you should choose to follow, your stop has to grow in order for your method to "succeed" . This, to me anyways, is a massive warning sign that your method is out of step with market truth.

I can't remember what my r-r ratio was, but I know now that anything that slants more in the direction of your stop than your target is a waste of time. Just stop, take a breath like you've said you did in your initial post on this thread and try to look at the markets in a new and fresh way. Don't go for that high risk stuff man, it'll defeat you mentally.

[thalestrader 14]

This may be the best new thread at TL in many many moons - Good work, daedalus.

 

If I may interject a few of my own thoughts in response to the discussion thus far (and I have not yet read every line of every post, so if I make a redundant point, I apologize in advance to he who beat me to it). At any rate, here it goes:

 

I too went through a period of "if I can only get a couple two three ticks yada yada yada ..."

I cannot say it can't be done, but I can say that for me, it was beyond difficult - I cannot trade well for those objectives, and it was a losing proposition for me. I have found that whether I am day trading or swing trading, I am at my best when I am trading for a significant movement that is sustained in terms of extent (but not always in terms of time). As I get older, whatever the time frame, I find myself always trying to trade less but to take more when I do trade. Again, that's me, and you should continue your own exploration, and I will be interested to read what you and Midk find.

 

I conceive of RR in terms of where S/R is in relation to my entry. Yes, MidK, S/R is history, but markets, like humans, have memory, and quite often (more often than not) that history has meaning and relevance to the present. Does the market always swing neatly from S/R and back again? No, and that my friend, is what a stop loss is for. While I am no scalper, I have often said that for me, every trade starts as a scalp. That simply means that if price does not soon confirm my trade, I'm out. But I am always trading for something larger than a few ticks, though often that is all I get.

 

As far as expectancy goes, it seems to me that it would be easier to develop a system, method, approach etc. that has positive expectancy if you do so in connection with considerations of R/R. Ignore RR considerations at your peril. I hardly think they are as immaterial as Midk believes them to be, and in fact, I have found them to be quite useful when day trading.

 

A good start to a good thread, daedalus. I hope you keep it going.

 

Best Wishes,

 

Thales

[MidKnight 12]

....I conceive of RR in terms of where S/R is in relation to my entry. Yes, MidK, S/R is history, but markets, like humans, have memory, and quite often (more often than not) that history has meaning and relevance to the present. ...

 

Hiya Thales,

 

I wasn't sure if you read my first post fully just because it looks like you may be implying that I was talking down the importance of S/R....If that somehow came through, then it couldn't be further from the truth as S/R has been paramount in my trading for at least the last 3-4 years and continues to be today.

 

Now my comments about R/R are maybe not so nice I guess why I bring it up is I know a guy that is basically position trading currencies on an EOD basis and he comes up with these 10:1 R/R scenarios for his trade ideas which to me has virtually no relevance. Most people seem to do this when talk about R/R. I can do the same with my trading here and say that trade XYZ is good because it has a 10:1 R/R. My point is I can make up a big reward value that has no reality behind it other than a divine projection about the future. It's hard enough to get it right with just long, short, or sidelines let alone getting it right how far it will go - hehe. It's meaningless to quote on its own - that is all I was getting at. I find it a useful stat based on past trade log data when used in conjunction with other stats, but on its own, as we often see it touted in books I see little value to it.

 

I'm a huge fan of your every trade starts a scalp idea, but because of my timezone it makes it difficult to implement without going completely into a graveyard shift. I also lack the skills to execute this consistently, unfortunately -- but I continue to work on it

 

With kind regards,

MK

[daedalus 10]

Thanks for all the positive input gentleman.

 

I have been playing around with all sorts of things, doing more backtesting, and coming up with some ideas and shooting others down.

 

One of the things that I came back to this week was a thread started by edabreu on here. Its here: http://www.traderslaboratory.com/forums/f229/my-trading-method-6848.html if you need to check it out (and I highly recommend it!). But the thing that has stuck with me is a quote from his blog...

 

"Once you accept the fact that intraday trading is about statistical probability of the immediate future, and accept the fact that the immediate is often just the next price bar, then all trading becomes a focus on making money. If you can concentrate on just making money each time you enter a trade, and make your decisions focused on capitol preservation, then all decisions become easy." -Ed Abreu

 

I think this quote kind of captures the essence of what i'm trying to exploit here or at least challenge. I've put so much time and effort into trying to predict where the market is going to move to in broad terms that maybe i've missed the point... that what I should focus on is the immediate future because thats where our best edge lies.

 

And maybe this "scalp" method is actually a full fledged method in disguise if more contracts were added and traded in a edabreau fashion of locking in the quick initial profit and then letting the other half ride for big gains.

 

Anyway, this probably isn't that coherent as i'm fairly deep into a bottle of kumquat liquor my friend brought me back from greece but hopefully you'll see where i'm going... focusing on what we can predict about that next bar or two and then letting things fall where they may.

 

Cheers!

[SIUYA 11]

Daedalus - "focusing on what we can predict about that next bar or two"....

 

If you believe that markets are basically fractal (without getting into debates about it) then really intraday (or smaller time frame) trading is really just larger time frame trading in fast forward.

Given this invariably by dropping down your time frames (or range bars) then you will naturally scalp. (and then the commission, slippage and spread will become a larger component of a unsuccessful or successful system)

However if you approach the scalping from the point of view of trying to capture the bigger moves but then be prepared to drop down the time frames to improve the entry and exits, then are you scalping, or are you just managing the position you want based on the larger time frame via micro managing? - problem here is that then you may miss the move, you may have lots of small losses to pay for when a bigger move occurs, mentally it may require more focus.... same old issues.

 

Point is if you are scalping it would appear you should then ignore everything else except the next bar or two. I would suggest then, while many scalpers look to fade markets, and look to go both ways and capture all a market has to give, that a better approach is to look to always go the same way - the one way each time. (an approach TRO mentions) You will still then have ample opportunities, the focus is not confused and unbiased, the rules simple.

[clmacdougall 11]

Great post Siuya!

 

I think differently concerning the fractal nature of markets than you do but I really enjoyed your post. I've read Mandelbrot and enjoyed his book. Intraday price movement outside of news releases can be fractal, but somehow the greater time/volume frame involved in a price bar the less trustworthy are the results stemming from it's development. That's just my opinion and I'm open to change. Thanks again for your post, good advice for sure.

[Ciao 10]

hello

I am new on this forum and as a daytrader/scalper I had to come to this thread first

just realizes that this forum it is for professional trader I am afraid I could be in the wrong place..... beside as I am Italian my English it is worse then my trading.....

 

I haven't yet read all the posts (will take me too long but I slowly will do it)

 

after many years of trading and losing then losing less and making more and keep on working and improved it .... I now have acquired my own type of strategy simple and to the point....

 

Plan-Strategy

Discipline

Psychology

those are my main "tools" .... but I will not tedious you any longer and maybe I am not in the right thread to elaborate further .... so I will stop here for now and go and get familiar with this forum and read some posts (gee I am a slow reader!!! lol)

 

take care

[TheDude 10]

Think long and hard about it daedalus. Already tried this concept out, it ruins you psychologically. Had 30 winning trades straight than got nailed on the 31st. It's a pain that's hard to forget. It takes a strange kind of dude to risk like crazy for small profits and then get nailed for a huge loss and keep on stickin to that same plan. Good luck man.

 

Reminds me of those who think selling naked options is a one way ticket on the gravy train. pinching premium until the inevitable steam roller comes along....

[SIUYA 11]

something that has been going round in my head - its one of those things that probably has a simple answer but I am stuck in one of those loops.

If you have a system that is 80-90% accurate, then shouldn't the stop loss be quite small? Probably as you are taking small gains without the opportunity of letting them turn into a loss.

Otherwise, is it only 80-90% accurate because you let any losses become quite large until they reverse and then become profits?

 

A similar question was raised once before, whereby it as asked.... which is better.

The risk of losing $100 3 times, or risking $300 just once......

While mathematics may show out based on expectancy, reality, R:R, etc; etc; I would imagine the real answer may be just in the gut feel and 'comfort' level of the risk taker.

 

So I guess you need to really look at why its accuracy is so high - what is the expected drawdown before a profit? Will you get stopped out prior to making a profit? are averages a good measure to look at, or absolute maximums..... as they say you biggest drawdown has yet to come.

 

(I also agree with you Dude - writing options works really well if you approach it from an insurance point of view - using a broad, diverse and conservative portfolio - looking to scalp small gains to build a pot large enough that will not get wiped out by large one of hits. This is extremely hard to do from an individual trading point of view. Directional trading using options is a different approach, and then, why would you sell out of the moneys - a favourite for the steamroller victims.)

[Kiwi 16]

Siuya,

 

You need to consider that some entry/worst case stop setups are well suited to a high win rate.

 

On the other hand a different one might be well suited to getting into a long run but have a low win rate.

 

There is no better. There is only profit and probability. And personal fit.

[daedalus 10]

So taking into account all we have discussed i've been moving forward with a method using range bars (6R) and doing some testing seeing the types of stops needed and different targets.

 

First things first, 1 or 2 ticks just can't quite cut the mustard. You really just can't overcome commissions in the currencies (higher than e-mini's) and you have to hit extremely high win rates >90% to be somewhat sustainable.

 

So my testing has been going on in the currency futures using a 6 range bar chart. This example is from the 6A. It assumes an 8 tick hard stop, 4 tick initial targets and then, inspired by the edabreau material adding on a 2nd contract to allow for "runners" to occur. Then its just coming down to optimizing that runner value and how to manage it. For right now I just threw out a slew of take profit targets rather than looking to chart patterns for exits as that introduces a level of interpretation to the managment. Its interesting to see how the > the targets slashes the expectancy and how those results play off one another.

 

 

What I find interesting is that you're honestly better off taking a higher expectancy result that gives you less profit (4 ticks) than going for a 5-8 tick target on the 2nd half that doesn't hit nearly as often (a 15-30% decrease!). This changes when you start taking BIG profits on the 2nd half.

 

That being said... this method is profitable even on 1 contract assuming an inverse risk : reward of 2 : 1. Maybe we aren't as all insane to consider this as we thought.

 

I will tell you this... i've never been good at holding for gold. I've always felt my personality and my trade plan were at odds. The major reason i'm pursuing this at least a bit further is because I feel this type of trading (quick in and out) really meshes with my personality. All the guru's say that you need to trade in a way that suits you... I think its worth a shot.

 

I'm great at sticking to my trade plan and executing it to a T, but the plan i've been executing has always been at odds with my emotions and I think there is something to be said for that.

 

Anyway, without too much more rambling i'm going to run these kind of expectancy tests on all the pairs and see what comes up.

 

Cheers!