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Hi Simon, thank you for taking the time to reply in such depth. I guess
my question was not put in the best way. I was asking about how you trade
to try and get to the bottom of your idea that profitable traders use stops
to enter whereas those who are not profitable are inclined to use market
entries. I have worked in this business for 10years now and have come to
realize that the key to most general assertions made such as this lies
within the methodology (whether that be scalping vs swing trading vs
position trading or Gann vs Elliot or breakout system vs whatever etc etc
etc). I am not saying that you are wrong I just don't see a lot of
difference (and lets assume that we are not talking about breakout or
Stop-and-Reverse type ideas) between entering on a stop or market order. I
believe (and this is obviously not an original idea!) that where and how
(i.e. money management rather than order type) a trader gets out of his
positions is more important than how he gets in. I was confused by a
couple of the things in particular that you say
> I am afraid I can not get my head round all of the methods of
> measuring retracements and all of that. I have tried, but at the end of
the
> day I found that the only consistent way to determine if a retracement is
a
> retracement or a reversal is just to let the market tell me and pick me
up
> if appropriate and save me the expense if not.
How do you know then where to put your stop order? Surely you have to
define what a reversal or a retracement (fibonacci's, MAs, swing points
etc) is to be able to anticipate that it might occur?
>
> 2. I do not enter on breakouts. If the retracement is so shallow that
my
> stop would be outside the previous swing high or low I pass up on the
trade.
but if you put your stop INSIDE the swing point then you are going to get
caught if the market tests and rejects that swing point?
> Why? Where do you think everyone else's stops are? Whether they are
> entering or taking a loss at that point all of the stops are clustering
> above or below those points.
But there is a good reason why they are 'all' there. The market has
clearly determined that as a key 'decision' point. A break of that point
is telling you something new and important about value and supply and
demand.
>That is often what drives the breakouts. I do
> not like slippage and that is a sure place to get it. (I know locals
that
> actually do the opposite for this reason. As the swing high is
approached
> they are buying, when the stops are hit they are selling into them,
whether
> the move continues or fails they have made some loot!).
>
> 3. If you enter on a stop the market is going your way as you enter.
Don't you get slippage here as well then if the market is going the same
way as you?
> Usually it is 50+ points past your entry by the time you get your
protective
> stop in. Even if not when I take trades I am looking for a move
instantly
> and will trail a 110 pt stop as soon as there is 1 tic of profit so my
> maximum risk (exc slippage) is 100pts. If we have gone 50pts to the good
as
> the stop goes in my risk is already down to 50pts. Do I get stopped out
> with such close stops? Yes about 50% of the time I am out for a small
loss
> or small profit. About 50% of the time I catch a move leading to 100,
200,
> 400 + points profit. In summary if you enter in the right place on a
stop
> you can use very tight stops. If you are looking to enter on a limit you
> must risk much more as you are entering as the market is moving against
you
> and hoping (for a very valid reason no doubt) that it will turn before
you
> get uncomfortable.
I guess the above centers on what chart period you are basing your entry
decisions on. I use a 5 min chart and keep an eye on the 20 period MA of
True Range which gives me an idea of volatility. 5min bars are usually
about 150/200 points which means that my stops can rarely be less than
that. I therefore assume that you are using much shorter charts?
>
> 4. If the bars are volatile, again I do not want to play. I know I miss
> big moves but (a) I do not want to take such large risks and (b) the
> slippage is wicked when the market is moving in 50pt+ increments.
>
I agree.
Many thanks again for your in-depth reply.
Regards
Philip
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