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Today I was short one mini CD from .6601 with stop at .6475 . stopped
out at .6540 on the open. While i'm grateful for the $300 profit, i'm
aware it was almost $1500 (about 6x the margin!) at one time. Seems to
happen too often! I try to run stops that will keep me in the trend but
these have the disadvantage of letting medium size (and here a pretty
big) profit get away. My current stops are either volatility or
parabolic based. (price-n*atr for vol-base; parabolic uses Wilder's fn.
with my own parameters). When a mkt moves sharply, both allow
substantial amts of the profit to be at risk. Yet at other points you
need the "room" to get thru temporary reversals/consolidations. I could
set the volatility to a lower multiple of atr or speed up the
parabolic. This would preserve a bit more of the profit but stop me out
more often other times un-necessarily. The un-necessary stop out seems
to have happened in the past when i overruled my stop rules. (I know
re-entry is a v. good option; in fact this Cd short was a reentry after
being stopped out previously at .6610.)
As well as any specific suggestions you may have, i'm interested in
what more general approach i need to take:
Is this just an inevitable tradeoff?
Should i look for a different stop method? Perhaps something that
"catches" up to the mkt faster - one of the new hi-tech averages, say??
Doesnt' seem correct, but how about n*(atr_at_trade_initiation) for the
stop (rather than using the current volatility)? It would keep the stop
from "widening".
Does anyone use the % risk approach to set *trailing* stops? In other
words, if you are risking x% of your acct. on a trade, never let your
stop, even as the trade progresses, risk more than x% of your (total?)
equity? This would have the effect that, as you accumulated a profit
that was large relative to your account, you might "have" to run
tighter stops than your system, which may have widened them to allow for
vol. If volatility had increased so that these $mgmt-profit stops were
closer than the "system" stops, then you would have to look at closer
ones (conceivable on an intraday chart). If no reasonable chart points
existed, then either an arbitrary $ stop or liquidate. You wouldn't do
this because of a feeling that you gotta take the profit but for a
calculated reason. The downside of this, for a small account, is that
is seems like you might often be putting your stops too close. Also,
your trading results would depend on what your particular acct equity
was at the time. Maybe a small account *should* take smaller, more
certain profits; but it would make backtesting pretty uncertain. (A
larger acct might not use closer stops as a result of a
%acct.risk/trailing approach, but might instead do a partial
liquidation?)
Given that my acct has shrunk to 1K, I have a lot of retooling to do
before doing much if any trading. So i appreciate your help. (Been
hard to watch the recent action in a lot of mkts from the sidelines!
Let's see there was corn, sugar, ED, currencies, and oh yeah something
about stock indices :) )
Conrad Bowers
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