Scalp, Hold, or Trail Stop: What Do You Do?

[TimRacette 11]

If you're having trouble deciding whether scale in, scale out, or going all in all out, I think first question to ask is "do the #s make sense?"

 

A Quick Story With a Fellow Trader

I was having a conversation this week with a fellow trader and we were talking about the feasibility of a strategy that risks 2 to make 1. That is, your reward is less than your risk. While I was somewhat intrigued, the first thing that I thought of was the challenge of overcoming a draw down, or string of losers.

 

As an independent trader, I feel the edge lies in the ability to get in and out of the markets 'unnoticed.' Riding a trend or the meat of the move is the way I approach the markets. So that lead our discussion to risk/reward, what do the #s say?

 

Does Scalping Work?

While scalping (a few ticks/pips) can be a profitable strategy for big firms with co-located servers, it's not my method of choice. Holding out for a big profit target, well that allows for 1 winner to make up for a bunch of small losers, but waiting for that home run can be tiresome, and when the opportunity presents itself, it can be advantageous to want to take a small profit to "lock in gains." (Yes, you can go broke taking a profit).

 

What About Trail Stops?

That brings me to the trail stop approach, entering a position an incrementally tightening your stop as the trade works in your favor. I find this works well if you can have the self-control to not tighten the stop too quickly at the onset of the trade. Waiting for the trade to get away from your entry price before tightening, and then not trailing too closely.

 

So What Should a 1 Contract Trader Do?

From my experience when trading a 1 lot, and having to go all in all out, setting a profit target 3-4 x your stop size and trailing your stop to that target is extremely effective.

 

When increasing to 3 contracts then the options for scaling begin to factor in. I prefer to take a small profit (scalp) on 1 contract, set a target of 3x my stop price on the 2nd contract, and trail the third contract until I am taken out.

 

This reduces the risk at the onset of the trade, as a high percentage of trades (whether they work to a bigger profit target out or not) tend to give at least a small bounce. I use this same method for larger lot size as well, small profit target, 3:1 profit target, trail stop.

 

Everyone enjoy their weekend, and thanks in advance for everyones comments and thoughts.

 

How do you scale out of your position? (if at all)

[zdo 20]

Tim,

 

omg - broken record time again…

it’s “system specific” !

( more system specific than “…Riding a trend or the meat of the move…” btw )

…a disservice to the community… please revise and resubmit… thanks

 

What do the numbers say? Have you thoroughly tested what happens when you exit via those methods you mentioned?

 

For "meat of the move" systems have you tested exiting most of position via 'wave' counting (not EW, btw) and when swing count is sufficient go to 'exhaustion' PA at extremes of thrust excursions and then exiting the balance of the position via gradually 'accelerating' trailing stops?

 

ie for your system, is it better to exit longs at the top of a channel than it is at the middle (or even worse, at the bottom) ? For example, exiting on the red arrow beats the snot out of exiting on either of the two blue arrows on the attached ‘detrend’ – especially when the actual price chart ‘trend’ is steep (as this example was). ie Exiting at top of channel might net more “meat” across time … it’s s_____ s_______ !

 

zdo

Edited February 6, 2012 by zdo
fix illustration... still not really good but don't have time...

[Predictor 11]

Trail stops is good in theory but bad in practice because you end up taking liquidity when there isn't a requirement. If I'm so worried about a position that I'm going to trail a stop, its best just to exit. I will typically do better.. Where trail stops have some benefit is when the market moves too fast for me to hit a target.. on very fast moves, trail stops might help me.

[BlueHorseshoe 10]

I have already tried to have this discussion with Mr Racette in a different thread (http://www.traderslaboratory.com/forums/futures-trading-laboratory/11717-quit-job-watch-dom-6.html#post137296).

 

While Tim is happy to talk in general terms and present ideas, as in his post above, it seems that he is unwilling to provide any hard figures with which to back up his claims. I don't know how you feel, but I find it very difficult to have any kind of meaningful conversation when people on this forum aren't prepared to discuss things in terms of what they can demonstrate actually to be the case.

 

Hopefully this time Tim will be a little more forthcoming with the evidence for why he thinks scaling out and trailing stops improves his profitability.

[TimRacette 11]

Hey Bluehorse, perhaps I should have painted a better picture for when I'm using trailstops etc. I've always been comfortable talking about my strategy and the specifics. For instance on the 6E I look to enter once a 15-min level shows participation (buyers or sellers stepping in) I use an 8 pip stop. With 6cts for example I take 2 off at +4, move my stop to -4 and then trail my stop on the remaining 4 cts under the prior swing high/low until I'm taken out. I've found the +4/-4 method to work extremely well on the Euro as it cuts down my risk on the trade. Those +4s get hit close to 85% of the time (basing this off my live trade #s). Thanks for the comments.

[BlueHorseshoe 10]

Hey Bluehorse, perhaps I should have painted a better picture for when I'm using trailstops etc. I've always been comfortable talking about my strategy and the specifics. For instance on the 6E I look to enter once a 15-min level shows participation (buyers or sellers stepping in) I use an 8 pip stop. With 6cts for example I take 2 off at +4, move my stop to -4 and then trail my stop on the remaining 4 cts under the prior swing high/low until I'm taken out. I've found the +4/-4 method to work extremely well on the Euro as it cuts down my risk on the trade. Those +4s get hit close to 85% of the time (basing this off my live trade #s). Thanks for the comments.

 

Hi Tim,

 

Thanks for your reply. As your entry method is undisclosed and/or discretionary (which is perfectly understandable - I don't tell people exactly how I trade either), there's probably no way that we can get a certain answer to this question through any kind of testing of historical data.

 

However, if you were willing to provide us with the basic figures a sample period of your live trading, then we could easily work out the effect of scaling out on your performance. If you were prepared to do this we would need the following info:

 

Number of contracts out at -8 stop

Number of contracts out at -4 stop

Number of contracts out at +4 target

Average gain of contracts exited for greater than -4

Total number of contracts traded within sample period

 

This would be interesting as it would allow us to make a valid comparisson even though the entry method is not known.

[Minetoo 10]

Hi Tim, what is your highest probability, most successful setup? Please detail.

[TimRacette 11]

From my experience the highest first target getting hit % is on the Euro Futures (6E) at +4pips. Just over 75%. I use an 8 pip stop and in essence am entering just after a 15-min pullback in a trend. Hard to completely visualize with words, but since the 6E moves so fast and has such large ranges it makes for great reward to risk ratios. For instance a 3:1 r/r ratio puts a target at 24 pips, a very small move for the 6E.