Friday, October 07, 2005


Yesterday was again one of those days:

  • Long ER, …the market makes a new low for the morning session
  • Long QM, … the market makes the low of the day

Despite everything I had told myself, I remained in my trades. The market came back and I covered both trades profitable.
Had I used my mental Stops (I have only disaster stops in the market at every time) I would have been -10 on both trades and had most likely not reentered for the upswing, as I would have questioned my signal long, having had a signal in the same direction going against me just before. So it might just be my Ego telling me, “Hey Chris I was correct in the first instance, so take the trade now”.

Therefore, I asked myself, is there a way to confirm this feeling, that trading with bigger risks aka bigger Stops gives more rewards? It is something I noticed in my trading, I do it and I get beaten up from time to time, because when the bigger Stop is hit, it hurts!

Yesterday evening I found some parameters for my Backtesting module, which provided results, which let me waver in my resolution to still manage everything by myself. It was a very profitable strategy for September (other months still need to be checked, so don’t trade it right away) and therefore a great canditate to test how different Stops affect the testresults:

The basic parameters:

Take a trade in the Euro every 30min, synctime is simply midnight and trades are taken from 01:20am to 04:14pm. The range to be broken for a trade is 4 ticks up and down from the close of each 30min candle, with a 1 tick retracement to get a slightly better entry.

Stops vary from 5 ticks, 10 ticks, 15 ticks and 20 ticks.

Let the results speak for themself (click on the image to increase size):


5 tick stop, 46% winning trades, 3590$ incl commission profit



10 tick stop, 60% winning trades, 9004$ incl. commission profit



15tick stop, 64% winning trades, 10453$ profit incl commission



and the Winner is:

20 tick stop, 66% winning trades, 13570$ profit incl. commission

I did not continue the row, because I don’t like more than 20 tick stops. Especially as 20 ticks on bigger lots becomes very exhausting emotionally. On 2 contracts it’s “just” 500$, on 5 that becomes a 1.250$ loss. Think about that, before you increase size, as these max Stops happen regularily.

But regardless of these hits, the result is absolutly clear: Trading with a Stop of less than 10 ticks is not worth the risk, 20 ticks hurts more, when the stop is hit, but it happens not so often, so you need to decide what trader you are:

If you take less trades, trade with bigger Stops, you take more trades, so trade with smaller Stops. What is less and more? Well, the 30min system I tested made on average 25 trades/day. So you can see where you fit in.

What this test confirmed for me was, that my “gut” feeling of using bigger stops in my case makes sense. Still a 20 tick Stop is big, so the next question to be answered by hard statistical data is:

Is it correct, that only scaling into a winning position is a valid trading strategy, or will taking 1 lot at the signal and adding 1 at -10 ticks (assuming a 20 tick stop) increase the overall profitability.

This means adding a scale in/scale out part to my Backtest module. This is a bit more complex, so I expect it to be ready next week. I’m extremly interested, what the results will be!