Mar 222011

There is an interesting discussion about stops & targets going on in the forums.  I will copy what I wrote there but I invite you to read the thread and give your own input.

…why are stops & targets based on a set number of x ticks without taking into account context?

I have studied my trades and I’ve found a few things:

1 – The best trades do not go against me at all. Here is an example from yesterday.

2 – If it goes against me by 4 ticks then it’s likely to go against me 8-10 ticks. Why? Because if we believe the average stop in ES is 8 ticks, which I do believe simply because the average rotation in ES is around 10 ticks which is just enough to stop out a lot of traders.. so if it goes against me 4, all the other traders who entered when I do will stop out at -8 ticks and then if there isn’t size on the order book there then the market will run another 4 ticks or so as they stop out and flood the time & sales. So now we’re looking at -8 or -12. Interesting how the OP came up with 13 ticks as that’s just outside my estimate of 8-12.

The problem with a 13 tick stop is that you’re in a bad position. A rotation in ES is on average 10 ticks, so it will take 2 rotations for you to scratch. That’s not good odds just to scratch a trade.

My stop varies from 3 ticks to 8 ticks. It depends on the behavior around my entry. I enter at levels so the logical stop for me is the high/low just before I entered. Either the level holds or it doesn’t. I try my best to get this to be 4 ticks. The reason is if I stop out at 4 ticks that’s $50. If I need to, I can re-enter and risk another 4 ticks and still come out risking less than the 8 ticks.

Go back over your charts and see how many times a level holds to the tick. Why give it 13? Either it holds or it doesn’t. If the level doesn’t hold then my reason for entering the trade is gone and I want to be out.

That was about stops, targets are similar. I usually go for 6 ticks to scale half as I know the average rotation is 8 ticks (on both ES & Bund). I never enter to the tick at the high/low so I figure there are 6 ticks left. That will cover my risk. Then my next target is at the next level, usually a CHVN.

I’m debating about having a first target of 6 ticks. Today I got a 14 tick move on the bund, so I got +6 +14. My hypothesis was for the bund to reach 121.91 which was 16 ticks. I front run that 2 ticks. So why take +6 on the first half? The theory is because that covers my risk and the average rotation is 8 ticks so I can’t count on more than 8. But I’m not sure. When I take half off at +6 then it’s like I’m betting against my hypothesis!

When consistent with 2 I will add a 3rd and will be able to capture more of a move. I feel the becoming profitable with 1 contract is extremely hard. With 2 it’s still pretty darn hard. But if one can do it with 2 then they should make even more as they add units.

That pretty much sums up my thoughts. Most importantly this is all a personal choice and everyone must discover what works for them. This is a trial & error process and it takes quite a while. But when you discover what works for you then you own it and it’s yours.

PS: The MAE of the first trade says 0, I believe that is a ninja bug and I’ve reported it in their support forums. I checked the rest of the MAE’s and trades 3&4 should be 3 tick MAE, the rest are correct – they really were only 1 tick which is pretty amazing.

And another post about scaling out of losing trades:

This is an interesting theory. I do not feel it is a good match for the way I trade and here’s why: One of the criteria for my entry is, for example if I want to get long, I want to see support on the order book. So if that support on the order book disappears, then my reason for entering there is no longer valid. So I want to be out of my trade and look for another entry. So for my method of entering, it wouldn’t make sense for me to scale out because that would leave me in a trade without a valid reason for being in the trade!

I think if one uses static x ticks stop/target, including scales, then it’s attempting to apply a “one size fits all” solution. I don’t know about you but whenever I see a hat or shirt that is “unisize” or “one size fits all” it never fits me properly.

Instead, the stop & target should be unique for each situation. That can still be studied an optimized. For example,

let’s say I enter on a HH on a 1min chart. I can put my stop under the previous bar’s low. I can put it 1 tick under, or 2, or 4, etc. So I can do a study on what is the optimal number of ticks below the bar. But the total stop size will be variable.

Compare that to say 4 ticks. If the previous bar is 6 ticks tall then my stop is not away from the action and is not safe. Say the bar is 4 ticks tall and my stop is 8 ticks. That could be too far.

I’m not saying any of the ideas in this thread won’t work, I’m just saying I don’t believe they work for me and presenting another point of view. If dynamic stop loss works for someone then I’m happy for them that they found what works for them. Everyone has to find what works for them.

Mar 192011

Ninjatrader has changed the way Ninjatrader handles protected compiled indicators starting with version 7.0.1000.3.  This had a side effect of making existing protected compiled indicators incompatible.  Since I use one of these myself, I have refrained from upgrading.  However it has been brought to my attention that my paintbar indicator that was available last year is not working with the latest Ninjatrader versions.

I’m now in the process of upgrading my Ninjatrader so that I can make a new release of my paintbar indicator.  Which means it’s a good time to talk some indicators I have in development.

I stopped selling my paintbar because the Eminiwatch Pro Am Paintbar was released for Ninjatrader and quite honestly I felt the Eminiwatch Pro Am indicator was better.  I’m not one to sell an inferior product.

However, for the past 6 months I’ve been hard at work on new ways of detecting professional activity which has resulted in two new indicators.  The first will show professional buying & selling as a paintbar, and the second will show areas of high intensity buying and selling as markers on the chart.

At this point I want to point out that there is no magic indicator, pattern, or “setup” that can be traded mechanically to make money.  This simply doesn’t exist and my indicators cannot be used in this way.  My indicators simply make it easier to analyze the data.

For example, if i have determined a potential support level and I see professionals are buying that level, then that increases my confidence that the level will hold.  It doesn’t mean, however, that any time I see professional buying that I’m going to go long.  The most important part of trading is context and so any tools (indicators) must be used in context.  I’ll be showing some examples of this in the future.

I’m still working on these indicators and how to get them to both display on a single chart in an unobtrusive manner (visually as well as performance).  And I have a few more ideas that I want to prototype before they’re finished.  I hope to make a beta demo version publicly available soon in order to get some feedback.  If you’ve seen some of my ninjatrader charts lately on Twitter you may have already seen them.

Mar 172011

The equities markets have hit my expected downside levels, and then some.  Most of my short was scaled out at what now looks like rediculously high prices but who could have known it’d drop this far?  I’m now flat.

It’s interesting how many people blame the Japan incidents or Egypt or any of the other world events for the markets plunge.  When in fact we’ve known for a while that the market was in weak hands (late laggard longs) who would run for the exits at any sign of trouble (Jan 28 is a good example).  So while the world events did not cause the correction, they were certainly a catalyst.  And that’s exactly what the market needed to scare the late longs and encourage profit taking to start the correction.

Now the question is how serious is this Japan thing going to be?  First the Tokyo markets are dragging down the US & European markets as they’re all very much correlated.  But was the selling over done?  Or is the market pricing in a far more negative future than we’re being given by the Japanese government?

It’s really too early to tell.  There is a lot of uncertainty and therefore volatility.  I’ve found trading particularly challenging this week.  A few days ago I had a great day where everything went right, followed by a negative day (thankfully only 4 pts loss).  Sitting out is OK.  As they say “Flat” is a valid position.

So I have no idea what’s about to come and I’m happy to admit that.  So I’m  just watching and taking it one level at a time.  I originally expected continuation up after the correction but the Japan news is changing that expectation.  We’ll have to see how things develop.  My guess, and only a rough guess, is that if there is no major nuclear radiation leak, the markets will bounce up.  On the other hand if there is a real disaster, the markets could fall quite a bit more.  No sense in trying to bottom pick here, if the market bounces there will hopefully be some pullbacks to get on board.