Brainstorming here on position sizing & stop loss:
Let’s say you have a $20k account and you are experimenting with stop size. You want to risk 1% max per trade which is $200. With a 3 tick stop, you could do 5 contracts. With a 8 tick stop you could only do 2. Now the 3 tick stop will be hit more often so let’s say in you do 1 pt/contract with a 3 tick stop and 2 pts/contract with 8 tick stop. The 3 tick stop would make 5 contracts * 1 pt = 5 pts. With the 8 pt stop it’d make 2 contracts * 2 pts = 4 pts. So even though the 3 tick stop method may have a lower expectancy, it can still make more money.
Interesting isn’t it? The 3 tick stop method would make $250/day. At that rate another contract could be added after just 15 days and a second contract even less than 15 days later.
Now in between a 3 tick stop and 8 tick stop there are lots of possibilities. Not only in the stop but also in expectancy. A tighter stop may lower the expectancy. So there are a few variables here. Everyone has to work it out for themselves. And that’s my current focus.
I don’t want to write too much about my trading today. I was “off” but I made a good trade going long 1175.75 and ended up positive. I didn’t trade well and that’s the main issue. I took a 6 pt drawdown on a trade. I’ve written about that before. I decided a month ago that my trading plan would not allow such things. And it’s happened several times lately. I often just take the next setup and somehow figure out the best way to get out of the entire position. I know that’s not optimal but the problem is it usually works. “Works” as it I end up with a small profit or small loss. And that’s why I did the math above, to show that total profit isn’t just about avoiding losses or maximizing profit per trade. It’s about finding the best combination of variables to product the most money. I have a feeling what I’m doing now isn’t efficient. For one I’m not trading the maximum size for my account.
It’s a bit difficult to open up & write about this publically. Most traders would just pretend it never happened, at least publically. I can’t count how many times I see someone tweet a trade entry and then go silent as the market goes against them. It’s common to see someone tweet how they exited with a few points, it’s rare that I see someone tweet how they exited with a loss. It’s just human nature to try and cover it up.
But covering it up doesn’t help us grow. Today someone told me it looked like I was revenge trading and I should “take a breather”. He was right. I don’t know if it was revenge trading but it certainly was trading outside of my plan. And when that happens one should take a break. He did me a service and for that I thanked him. My point is covering it up doesn’t help. Looking out for each other definitely helps.
It’s good that there’s a holiday coming up. I have some work to do. October I spent most of the month working some issues out on simulator. Now I think I have to work out this stop issue. When I stopped trading today I took some sim trades. Actually took one of them while I was in that big drawdown. My ninja DOM is set for a 4 tick stop. And guess what? I did quite well:
6 pts on sim with 6 contracts. That’s 1 pt/contract. Compare that to real money:
Real money I got 2.75 pts on 13 contracts! Talk about night & day difference. The sim trades never went against me more than 2 ticks.
So my point is I know I can trade with tight stops. I’ve done it in the past on simulator. But I have trouble doing it with real money. And I need to fix that before I increase size. So two ways to work on this: With real money and risk losing money, or on simulator and risk not making any real money.
To be honest I thought I had this worked out when I was trading with Ninjatrader. I set the ATM with the stop loss and it was automatic. With X_Trader I don’t have the OCO plugin so I don’t have an automatic stop loss. I don’t want to make excuses because I could (and should) set the stop manually with X_Trader (or use the OCO plugin), but I haven’t. I slacked off, time to fix it.
I really sharing all this as it’s very helpful & motivating for me. I hope you find it as useful as I have.