Futures Traders, How Do You Limit Losses?

[SpearPointTrader 10]

Hello all!

I have been trying a new system recently. One of it's prime tenants is to only trade when you have the picture perfect set up in order to minimize the number of losing trades that you have.

 

The idea is to trade to always win (or at least 80% of the time) by waiting for massive momentum and taking small fast jumps in and out of the market when the power and direction are just too strong to lose on.

 

The method has a lot of small wins, of less than $100.00, with an occasional medium to large win.

 

All trades are for the day only. It does not hold over night.

 

This seems to be in opposition to other methods i have seen where the idea is to expect lots of losses and draw downs, but to keep them smaller than your wins. Draw downs and losses are something I have never been comfortable with. I seem to like the smaller wins, but more wins philosophy.

 

So, in my quest to further this concept, I was wondering what everyone does to minimize the number of losing trades?

[SIUYA 11]

So, in my quest to further this concept, I was wondering what everyone does to minimize the number of losing trades?

 

to be honest, while it feels good to have less losers and lower drawdowns, a lot will depend on how big your account is, how big you wish to grow it, how much time you have, how much patience and concentration, or computer knowledge and power you have and what you are trying to achieve.

By staying short term and going for many small gains, you are effectively entering the world of the high frequency trader......yes you can make money, but how big can you grow this without computing limitations, or how tied to a computer do you wish to be.

There is no right and wrong - so long as you understand the limitation/expectations of each system and where you want to get to.

So in answer to your question....as more of a trend follower myself....I dont focus so much on limiting the number of losing trades but more on maximizing the winners, and trying to minimise the damage the losers do (note its not their number, but their magnitude).

In your quest I think if you are playing for momentum, then you should have a very quick move to BE, a time based stop and realise the intensity and frustrations this style can have....then it is all fine. Your focus is on great entries and protecting that.

[TheNegotiator 13]

To answer the question, planning and discipline.

 

I can see some issues with the strategy you mention. Firstly, you need a quick connection. If the market is moving fast and you only are looking for small profits, if you are seeing a lagged market you'll either not get a fill using limit order(unless you don't want one) or using market orders you'll be in at a very different price (and momentum) to where you'd made the decision in your mind. Secondly, there is the chance that you read a big move as strong momentum. If that happens, you might get in at the extremity of the move just as a strong reversal happens.

 

It's like Siuya says. It's effectively HFT. I used to do it but it is stressful and the competition is just way faster than I am these days(competition = largely computers located next to the exchange).

[SpearPointTrader 10]

I seem to get fairly good fills, so there is no problem there.

 

The system I am using uses the Bollinger Bands, and the 3 main moving averages, or more correctly the relationship between the two, to determine entries, and exits. When the set up is there, it's pretty easy to make fast profitable trades. However, it's not the only method.

 

I used to trade break outs of major congestion and violations of major support, resistance and trend lines using the Williams%R as a guide for my exits.

 

Although I have seen good gains from the wins, half of them were losses. I had stop issues when I did that. It seems of I pt my stops far enough back to allow enough recovery room to catch the winners, then then loser were too big and I would be doing little more than breaking even. If i put them closer, many would be wins became losers, and I lost money.

 

So, I am thinking to myself, that there has to be a way to limit the number of losers, and keep the ones I do have small, yet still keep the winners.

[SIUYA 11]

So, I am thinking to myself, that there has to be a way to limit the number of losers, and keep the ones I do have small, yet still keep the winners.

 

Isn't this the holy grail.

As everything in trading is really a trade off between what you can have and what you cant have, another solution that might suit you is to have more trades, that break even BUT an extra step that allows you to get back onto trades.

eg; you move your stop to BE quickly, if its stopped out, you need another entry solution to reenter....you broker may like you (so find the cheapest most reliable one around), but if it makes you money then it is all good.

 

This trade off between the number of trades that are losers and winners should be a trade off between the amount lost or gained.

In simple terms.....

eg; In FX - If I had a system that lost 99 times in a 100 but my AVERAGE loss was only 1-2 ticks, then I know I only need 1 trade to trend and for me to run that trade to make money......look at any long term FX chart and tell me - how many of them stay in a 100-200 tick range.

[steve46 12]

The subject is complex and can be approached in a number of ways. For intraday traders one assumes they have a risk management protocol in place otherwise why trade a system?

 

Generally risk can be managed by position size, by stoploss placement and by managing proximity to risk events (managing the timing of trade entry in relation to economic reports, earnings reports and unanticipated events (usually "pending" or "breaking news" that causes markets to move). Finally one can manage risk by chosing entries that would be likely to benefit from anticipated economic or news events.

 

As an example if one were to believe that markets would move positively on news of a solution or agreement to the current Euro problems, you would orient your entries to the long side in advance of meetings or announcements. This is more "macro" in terms of approach but thats the general idea.

 

On the micro side, one may prefer to trade a system that produces a high percentage of entries that move favorably and then require confirmation. If you don't see that confirmation you exit either with a small win, a scratch or a small loss. I am using that approach now and the downside is that you have lots of little wins and losses to deal with (therefore you have to have patience and a good commision rate). For those who cannot find that type of edge, you may want to experiment with a scale in process that limits your initial loss if the trade goes against you right away.

[enochbenjamin 10]

to limit losses - DON"T TRADE. if you insist on trading then you must learn to embrace your losses as lessons and part of the game. you will not last if you cannot accept that losing is going to occur (unless you are a US bank).

[bonchi07 10]

Hello all!

I have been trying a new system recently. One of it's prime tenants is to only trade when you have the picture perfect set up in order to minimize the number of losing trades that you have.

 

The idea is to trade to always win (or at least 80% of the time) by waiting for massive momentum and taking small fast jumps in and out of the market when the power and direction are just too strong to lose on.

 

The method has a lot of small wins, of less than $100.00, with an occasional medium to large win.

 

All trades are for the day only. It does not hold over night.

 

This seems to be in opposition to other methods i have seen where the idea is to expect lots of losses and draw downs, but to keep them smaller than your wins. Draw downs and losses are something I have never been comfortable with. I seem to like the smaller wins, but more wins philosophy.

 

So, in my quest to further this concept, I was wondering what everyone does to minimize the number of losing trades?

 

I totally identify with this system because I am a day trader myself and I trade this way too.

My way of minimizing losing trades is by having an R (max amount of money I can lose per day) factor. This helps me control my trading. As hard as it is, I think this is a great rule because it keeps me in check. It pushes me to be more careful with my picks and my buying time.

I like being a day trader because I sleep better at night. I dont have to worry about waking up to a disaster in Europe or who knows where...and the market is down big...

Yes, of couse I have missed the gaps too, but overall my peace of mind is more important at this point.

I hope this helps!

[SpearPointTrader 10]

The subject is complex and can be approached in a number of ways. For intraday traders one assumes they have a risk management protocol in place otherwise why trade a system?

 

Generally risk can be managed by position size, by stoploss placement and by managing proximity to risk events (managing the timing of trade entry in relation to economic reports, earnings reports and unanticipated events (usually "pending" or "breaking news" that causes markets to move). Finally one can manage risk by chosing entries that would be likely to benefit from anticipated economic or news events.

 

As an example if one were to believe that markets would move positively on news of a solution or agreement to the current Euro problems, you would orient your entries to the long side in advance of meetings or announcements. This is more "macro" in terms of approach but thats the general idea.

 

Well, isn't this what everybody does?

 

On the micro side, one may prefer to trade a system that produces a high percentage of entries that move favorably and then require confirmation. If you don't see that confirmation you exit either with a small win, a scratch or a small loss. I am using that approach now and the downside is that you have lots of little wins and losses to deal with (therefore you have to have patience and a good commision rate). For those who cannot find that type of edge, you may want to experiment with a scale in process that limits your initial loss if the trade goes against you right away.

 

So you are advocating a strategy that seeks small wins, and losses in kind of a break even strategy? That is sort of what the Facts Trading stuff does. The idea is to assume most of your trades will go bad right away, and to try to get out with a little win more often than not. That way you are positioned and in the market to try and catch the larger moves when they take off.

 

Does anyone have any specific strategies? As an example, I was talking to one gentileman on another forum, and he insisted that the only time you should take a break out trade was on very low volume. his reasoning is that in those cases the big boys have not yet entered the markets, but will be forced to because they chase the patterns. So when the volume is low, they will jump in shortly and the price will really move in your direction. There is far, far less chance it will correct right away. When it does, it only corrects to about the area outside of the breakout, so you don't see drawdowns, just break evens.

 

I paper traded his idea for some time, and came to the conclusion he was on to "Something", however I am not sure things were really happening because of the reasons he cited.

[Phil-n-Texas 10]

I use a fixed risk stop loss method that sizes my position based on volatility and available trading capital. As long as I have an edge in my trading strategy and consistently apply the rules, etc. I will be profitable. I calculate my baseline stops and targets based on ADR...

 

For trades that show potential for larger moves, I'll scale out half at 1:1 and move stop to break even for the balance. Sometimes it'll be less than 1:1 if there's clearly resistance prior to reaching that ratio... but usually I won't even get into the trade if I'm not reasonably sure I can hit the 1:1 and then get breakeven / reduced risk for the balance.

 

Depending on the number of contracts I'm trading the 2nd half exits on a specific target based on ADR and/or a fib level, pivot, or some resistance level... if the ADR calculation is confluent with any of these then all the better.

 

if there are multiple contracts in the 2nd half of the order i will sometimes exit half of what's left per above and then trail stop the balance.

 

if i do things this way i seldom end up with a winning trade turning into a losing trade which is the worst IMO.

 

anyway, if i look for the right setups that allow me to do all the above, i'm usually limited to 3 or 4 trades a day at the most but often it's less than that. I only want to be in the market when the conditions are right because the more I'm in the market the more my capital is at risk.

 

Ideally I get it right in the morning and if I have a good one off the bat, I'll just call it a day.

[steve46 12]

Well, isn't this what everybody does?

 

 

 

So you are advocating a strategy that seeks small wins, and losses in kind of a break even strategy? That is sort of what the Facts Trading stuff does. The idea is to assume most of your trades will go bad right away, and to try to get out with a little win more often than not. That way you are positioned and in the market to try and catch the larger moves when they take off.

 

Does anyone have any specific strategies? As an example, I was talking to one gentileman on another forum, and he insisted that the only time you should take a break out trade was on very low volume. his reasoning is that in those cases the big boys have not yet entered the markets, but will be forced to because they chase the patterns. So when the volume is low, they will jump in shortly and the price will really move in your direction. There is far, far less chance it will correct right away. When it does, it only corrects to about the area outside of the breakout, so you don't see drawdowns, just break evens.

 

I paper traded his idea for some time, and came to the conclusion he was on to "Something", however I am not sure things were really happening because of the reasons he cited.

 

Have no idea what "everyone does"....I simply do what I was trained to do...and it has worked for more than 15 years.

 

As for taking breakouts on low volume...well that is problematic....at least for the futures markets..your better bet is to look to fade extremes, especially on the first and perhaps second test....I have done this and will continue to do so until they make me pay up...So far I am winning that game. For those who might be willing to take a shot at breakouts in general, I would advise waiting for the break to "take out" the upper limit and then hook back and re-test...that is a higher probability trade (in my opinion)...

 

The attached chart shows the daily time frame and for the last several months, fading the extremes of the distribution has been a winner.

 

Good luck

[SpearPointTrader 10]

I use a fixed risk stop loss method that sizes my position based on volatility and available trading capital. As long as I have an edge in my trading strategy and consistently apply the rules, etc. I will be profitable. I calculate my baseline stops and targets based on ADR...

 

For trades that show potential for larger moves, I'll scale out half at 1:1 and move stop to break even for the balance. Sometimes it'll be less than 1:1 if there's clearly resistance prior to reaching that ratio... but usually I won't even get into the trade if I'm not reasonably sure I can hit the 1:1 and then get breakeven / reduced risk for the balance.

 

Depending on the number of contracts I'm trading the 2nd half exits on a specific target based on ADR and/or a fib level, pivot, or some resistance level... if the ADR calculation is confluent with any of these then all the better.

 

if there are multiple contracts in the 2nd half of the order i will sometimes exit half of what's left per above and then trail stop the balance.

 

if i do things this way i seldom end up with a winning trade turning into a losing trade which is the worst IMO.

 

anyway, if i look for the right setups that allow me to do all the above, i'm usually limited to 3 or 4 trades a day at the most but often it's less than that. I only want to be in the market when the conditions are right because the more I'm in the market the more my capital is at risk.

 

Ideally I get it right in the morning and if I have a good one off the bat, I'll just call it a day.

 

it's been my observation that the markets generally make one strong move across thier range for the day, and then meander around aimlessly. I like to catch that move, which often only lasts a few minutes, and call it a day myself. The very act of calling it a day, alone, prevents losses. It seems many of my losses are infact a result of not doing that.

[SIUYA 11]

Basically it boils down to what you want out of the game - there are clearly many ways to do this and each of them has a trade off between size, number of winners/losers and magnitude and time taken to analyse, put on and manage positions (this time element and as Steve puts in one of his threads the ability to keep at it, day after day after day is IMHO a tough one)

Additionally, if you are only going to day trade, then you do limit your selection of styles....this whole game is about trade offs - and the more I think about it, the more I think its another psychological aspect of it that many of us dont take into consideration.

You need to be aware and accept that each style has its various limitations, and advantages....too often we want a bit of everything and maybe thats not possible - without combining styles

 

example; Steve46 - and not picking a fight (as I dont think you trade this way), this is just as a good illustration.

"For those who might be willing to take a shot at breakouts in general, I would advise waiting for the break to "take out" the upper limit and then hook back and re-test...that is a higher probability trade (in my opinion)..."

 

yes, you might be right/wrong about it being a higher prob trade, but there is one thing you can guarantee with such a strategy and you have to accept this to be the case.... such a strategy will ensure you get every loser, and will miss some winners, even if your comforted by the fact that you might be getting a better (more comfortable) entry for the winners you do get.... if you can accept this trade off then it can work for you.

 

so i guess Spearpoint the best thing is to work out what you can and cannot accept and live with.

[MightyMouse 12]

On most of my trades when the direction seems clear, I start chopping the size of the position quickly if it goes against me. There is no reason for me to stay in a position that is red. I will get out and get back in at a better or worse price if the direction is the same.

 

The dollars I risk are a function of the number of times I might trade in a day. So if it is a trade that can last one of more days or takes one or more days to develop, I will risk a max of 1.5% of my account. If it is a day trade may occur 5-10 times a day, then I will risk about .2%. In either case, I start chopping if the trade goes against me. These trades are generally high risk high reward trades but i am only taking the risk in small bits. I hope this makes sense.

 

On other trades when the market is choppier, I have a larger stop and a smaller position. I also do not try to add on these trades which is not the case on other trades. I am still risking only about .2% on the trade with smaller size. Context helps me to determine whether the direction is clear or not.

 

I think the better question that should be asked is " how do you limit the affect that losses have on your brain?". My answer is to make losses as small as possible to minimize the psychological damage that we all experience when our accounts get hit. It is the easiest way to manage or eliminate fear from your trading.

 

MM

[classy 10]

to limit losses - DON"T TRADE. if you insist on trading then you must learn to embrace your losses as lessons and part of the game. you will not last if you cannot accept that losing is going to occur (unless you are a US bank).

 

I fully agreed with your statement.It is better to accept loss.loss is not defeat ..take it is as lesson/part of the game.Remember every dog has a day..so you turn will come if you follow your system and money management above all disciplined.

[Do Or Die 10]

The simple answer is limit losses by placing stoploss orders.

 

For the long answer, it involves managing the Profit/Loss ratio, not just the losses. There are two layers of trade management-

1. Trailing stops and targets

2. Scaling in and out

 

Whether to use a trialing stop OR a target level OR a combination of both depends upon the type of strategy.

Its good to use a trailing stop when your no. of winning trades is low (typical of trend following systems); vice-versa for using targets.

A combination of using both a trailing stop and profit target is usually more profitable. This does not have to be complicated. An example is have a profit target say 100 points and use tight trailing stop loss when the market reaches near your target (+80 points). Another example is use a trailing stop but exit if there is spike in your favor (say more than x point move in last 5 bars)

 

Scaling in & out depends on the trading style, an example is the combination approach here: http://www.traderslaboratory.com/forums/psychology/10512-sin-predicting-anticipatory-trading.html Also, adding on a losing trade may always not be a bad idea, given that your second add-in increases the expectancy of trade. If you hold for more than 80 bars (say) on average continuity trades (adding at cheaper prices) can smoothen the equity curve.

 

You can also set a trailing stop for half your position and a profit target for other half.

 

IF you want the important numbers- exactly how close you should trail your stops or where to set stops- there is no easy way other than extensive backtesting.

[TimRacette 11]

I manage my risk in 3 ways...

 

1. Stops (I use 6 ticks on the ES and 8 pips on the Euro)

2. Per Trade Loss Limit (I use 0.5% risk per trade)

3. Daily Loss Limits (I limit myself to 2 full stop outs per day)

 

Each night I review the setups that occur each day to continue improving my trading and looking for more ways to fine tune my strategy.