# Risk Management



## ThingyMajiggy (13 February 2014)

Hey all, 

After some advice and tips on risk management, stuff like moving stops to B/E as soon as possible, what exactly does that mean? Do you have a set amount of ticks that is has to be before you move your stop to B/E or just literally move it there as SOON as it goes in your favour? Like for instance if I'm trading something with some volatility like Crude Oil, HSI, Dax, it doesn't make much sense to move my stop to B/E unless I have a decent area for it to move still, so there's not much point moving it there when I get 5 ticks in profit, 10 ticks even, that's nothing for those markets, I assume you would get stopped at B/E a LOT? 

Then how to re-enter, just jump straight back in or wait for another whole setup to match whatever criteria you desire? Also I am thinking of places to take profit, but I gather you wouldn't really need anywhere to get out, because if you just trail the stop, say at a tick above/below the previous candle's high/low then in theory you should catch all the nice trending moves and not get chopped to death when it's going sideways because of stop to B/E, that's if you have the move-stop-to-B/E set at just the right time. 

Just thought it'd be more interesting to have some discussion and trades that are more focused on the risk/trade management rather than how and why you entered or exited.


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## burglar (13 February 2014)

ThingyMajiggy said:


> ... I assume you would get stopped at B/E a LOT? ...




Wouldn't that feel good? 
No loss, 
no brokerage,
 ... all your capital intact.



ThingyMajiggy said:


> ... Then how to re-enter, just jump straight back in or wait for another whole setup to match whatever criteria you desire? ...




Different day, different instrument, ... whatever!




ThingyMajiggy said:


>


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## ThingyMajiggy (13 February 2014)

burglar said:


> Wouldn't that feel good?
> No loss,
> no brokerage,
> ... all your capital intact.




Getting a worse entry than what I had and having to re-enter because of chop? No, that wouldn't feel that good, would just make it more prone to more chop because I'd be getting back in in the middle of no where.



burglar said:


> Different day, different instrument, ... whatever!




Going to go lots of days with no trading during a choppy time if you're an intra-day trader then.


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## burglar (13 February 2014)

ThingyMajiggy said:


> Getting a worse entry than what I had and having to re-enter because of chop? No, that wouldn't feel that good, would just make it more prone to more chop because I'd be getting back in in the middle of no where.
> 
> 
> 
> Going to go lots of days with no trading during a choppy time if you're an intra-day trader then.




WELL!!

There's your answer?!

Become a "Value Investor" 

Buy good companies, cheaply!
Hold in "faith".
Collect divvies forever.

Compounding all day ...


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## ThingyMajiggy (16 February 2014)

Can an Admin delete this thread please.

Obviously bugger all interest in this discussion. 

Cheers


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## Buckfont (16 February 2014)

Don't despair, Sam, some seeds take awhile to germinate, and the thread is only a cuppla days old.


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## CanOz (16 February 2014)

This is great subject Sam. What i usually do is work out my initial stop based on the ATR of the time frame i trade, then x 1.5 or so. I just don't want to get stopped out in the normal volatility, but instead because i'm wrong. For breakeven, i think it depends on your size. IF you are trading 1 contract then maybe it is better to get it to break even once it halfway to a set target, whether that be a key level or x ticks of profit. This would depend on your particular play, for example if you're playing stop runs on a currency future, then maybe you know from testing or experience that some runs will go for 20-30 ticks then maybe that's a better profit target than trying to trail. 

Trailing stops generally hurt performance.

So we're not just talking about risk management but also trade management?


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## ThingyMajiggy (16 February 2014)

CanOz said:


> This is great subject Sam. What i usually do is work out my initial stop based on the ATR of the time frame i trade, then x 1.5 or so. I just don't want to get stopped out in the normal volatility, but instead because i'm wrong. For breakeven, i think it depends on your size. IF you are trading 1 contract then maybe it is better to get it to break even once it halfway to a set target, whether that be a key level or x ticks of profit. This would depend on your particular play, for example if you're playing stop runs on a currency future, then maybe you know from testing or experience that some runs will go for 20-30 ticks then maybe that's a better profit target than trying to trail.
> 
> Trailing stops generally hurt performance.




I thought so too, seems to be a bit of a sensitive subject to some so wasn't sure if it would get going or not because the people in the know often don't like to share/help with the stuff that actually makes you profitable. 

Can you explain it a little simpler, so you mean ATR as in average true range, the indicator? Then times that by 1.5 and set your stop to that? So if ATR is say 14, then you set your stop 21 ticks away? 

Regarding the "testing or experience" bit, how does one test to see how much something normally runs on stop runs? Never understood that either. Do people just literally scroll back through charts and check to see stop runs and then add them all together and get the average of the moves? As I can't think of any other way of testing such a thing. 



CanOz said:


> So we're not just talking about risk management but also trade management?




Absolutely, thought they were the same thing?


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## Wysiwyg (16 February 2014)

What is "risk management"?
Investopedia definition -



> Definition of 'Risk Management'
> 
> The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. *Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance*.




So we know every trade has a potential loss inherent. Every trade has a potential gain inherent. Me personally, I don't play games like moving to break even. I either make the profit target/technical target or take the loss for short term trades. Being a swing trader it is easier on my mind to take the loss if price goes on to new highs or new lows. I was wrong and take the hit. Being patient or in other words not craving instant gratification is the key.


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## CanOz (16 February 2014)

ATR, yes. Thats one way to look at it, at least you are outside the range of the normal volatility. Also you can use a chandelier stop, i have one for NT if you want it.

With the stops run, for example if you one of your plays is to take the second test of a prior session high/low and you get this coded and test it, you find that the optimum profit target is 15 ticks after you optimise the system. Not saying you need to trade this as a automated system but it just gives you some facts to base your trade management on. 

I have another open range system being coded for me now, i can give you a copy when i'm done....but i'm not going to trade it, I'm just going to use it to do the research for me. I'm going to code another up after we get back from TL to either fade or trend follow the VWAP (either session, session split, weekly, monthly or continuous). Then i can test it so find out what happens when the price and the VWAP start to mix it up. I'm not going to trade it...unless i discover the HG of course...but its a good way to research. 

I really wish i could code, it would save me a ton of money...


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## peter2 (16 February 2014)

Hey Sam, people are too busy trying to pick tops and bottoms or looking for better setups to worry about the next step, risk management. 

IMO most people get confused with what they're trading and this confusion leads to erratic and impulsive trade management. You know how this happens Sam. Your entry gets triggered and off it goes and your profits start accumulating. The price pauses and starts to reverse. Now you start to sweat out the pullback. You don't worry about a few down bars, but then you notice your open profits are dropping and you remember that you can't let a winning trade turn into a losing one. You exit at BE and think you've done a great job. You know what happens next, price bounces right after you sell and races to a new high. In hindsight price has retested your entry level. Arrgh. We've all been there, seen and done that. 

The confusion that I think most traders experience is because they don't know what they're trading, the price swing (momentum) or the price trend. If you are trading the price swing (momentum) then you exit at a target or trail the exit stop tightly so that you exit as soon as price starts to reverse. If you are trading the trend then you must allow price to pull back and form a higher low. An up trend has HL's and HH's. Most people think they are trading a trend but sell prematurely because they can't tolerate the frequent 50% corrections. Everybody can trade profitably in a strongly trending market when the pullbacks are shallow, but this doesn't happen very often. As soon as a pullback gets a little deeper most traders forget what they are trading and find themselves stuck like the proverbial "rabbit in a spotlight". 

I'm not sure what your OP is really asking about, risk management which is a huge topic or trade management which should be optimised to your trading style.


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## ThingyMajiggy (16 February 2014)

CanOz said:


> ATR, yes. Thats one way to look at it, at least you are outside the range of the normal volatility. Also you can use a chandelier stop, i have one for NT if you want it.
> 
> With the stops run, for example if you one of your plays is to take the second test of a prior session high/low and you get this coded and test it, you find that the optimum profit target is 15 ticks after you optimise the system. Not saying you need to trade this as a automated system but it just gives you some facts to base your trade management on.
> 
> ...




Yeah I'd be keen on those, I can almost code, actually been learning that lately too. Just annoying that almost all the different platforms have different languages 



peter2 said:


> Hey Sam, people are too busy trying to pick tops and bottoms or looking for better setups to worry about the next step, risk management.
> 
> IMO most people get confused with what they're trading and this confusion leads to erratic and impulsive trade management. You know how this happens Sam. Your entry gets triggered and off it goes and your profits start accumulating. The price pauses and starts to reverse. Now you start to sweat out the pullback. You don't worry about a few down bars, but then you notice your open profits are dropping and you remember that you can't let a winning trade turn into a losing one. You exit at BE and think you've done a great job. You know what happens next, price bounces right after you sell and races to a new high. In hindsight price has retested your entry level. Arrgh. We've all been there, seen and done that.
> 
> ...




Good post pete, well my OP was asking for a more detailed explanation of managing stops/trades, I hear/see/read a lot about moving stop to B/E , minimize risk etc etc. But what does that actually look like/mean in real terms, I'll post a video of some trading where I just enter and show you what I mean. If I set my stop to automatically move to B/E say after 5 ticks in profit then I just get chopped and whipped and it's no better than just leaving the stop alone, hence why I wonder at what point do people move their stops to B/E etc. 

It's just something I need more help with that I've never really understood, because I don't see any advantage in short term trading, I just tend to get chopped out and then I have to re-enter at a worse price than what I was originally. Seems to be just making the broker rich.


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## Valued (16 February 2014)

To be fair, if you could pick tops and bottoms, it would be very easy to place your stop and know how much you're risking... just saying:


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## ThingyMajiggy (16 February 2014)

Valued said:


> To be fair, if you could pick tops and bottoms, it would be very easy to place your stop and know how much you're risking... just saying:




Yeah....but no one can, hence why it's super important to know about trade/risk management. If you could pick tops and bottoms you probably wouldn't need risk management as it would be a sure thing.


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## CanOz (16 February 2014)

Pete, thanks for posting on this. You view is great because you articulate things so well... like this:



> If you are trading the price swing (momentum) then you exit at a target or trail the exit stop tightly so that you exit as soon as price starts to reverse. If you are trading the trend then you must allow price to pull back and form a higher low.




I 'm guessing the big size prop guys are going to do this differently somehow....but maybe only because its more difficult for them to get in and out. Speaking of outright directional but it would be interesting to know how the spreaders manager their risk too...


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## Valued (16 February 2014)

ThingyMajiggy said:


> Yeah....but no one can, hence why it's super important to know about trade/risk management. If you could pick tops and bottoms you probably wouldn't need risk management as it would be a sure thing.




That's why no one can pick tops and bottoms. They think they have to get it right 100% of the time so when they don't they give up on it. You of course need risk management since nothing is a sure thing.


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## ThingyMajiggy (16 February 2014)

Here is some video of a quick play on market replay. Stop is set at 4 ticks, 3m chart and stop moves to B/E automatically once it reaches 10 ticks in profit. Ninjatrader is saying I ended this session -28c(-$280). Entries weren't really based on anything, just entering straight back in, I was using time a little bit when it gets fairly active later in the video when those big spikes happen, went long again because it wasn't going  down after that huge push back on the two big candles up and back. 

I.E - Doesn't seem to work very well. What are some steps that could improve that? Bigger stop? Stop to B/E quicker? How can I manage that better? 

It'd probably be worse than that with real trading too because of the latency to the US markets taking half a second or so to send the orders, so entering at market would get a lot of slippage possibly.


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## Boggo (16 February 2014)

Valued said:


> To be fair, if you could pick tops and bottoms, it would be very easy to place your stop and know how much you're risking... just saying:






ThingyMajiggy said:


> Yeah....but no one can, hence why it's super important to know about trade/risk management. If you could pick tops and bottoms you probably wouldn't need risk management as it would be a sure thing.




It is not impossible to recognise when a top or bottom has recently occurred.
Judging by the comments above it seems that you are both referring to picking the precise top or bottom - good luck with that !

In the example below I am waiting for a close at or above 3.11 so I can move the stop to 2.88, until then there is <$1000 at risk.

(Weekly chart - click to expand)


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## Valued (17 February 2014)

The top or bottom has to actually occur before you can pick it. You can't say "The top will occur at $30.20" when the stock is at $20. There is are ways you could arrive at an estimate of a potential up move like that, some more accurate than others, but you don't use them to pick the top or bottom but rather to calculate a risk/reward ratio. You can also use them to know when to be on your guard and watch the position closely (although you probably should have been watching it closely anyway!).

The most simple example is an established perfect horizontal channel. If you bought at the support line you might say the top is at the resistance line of the channel and calculate your R:R from that. When it approaches resistance you make sure your stop is tighter than normal. If the market then tries to move through the resistance but ends up being on low volume and forming a shooting star, you might then decide this looks to be the top and exit your position.

That's a simple example since you don't normally have perfect established trading ranges that behave exactly how you expect.


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## peter2 (17 February 2014)

Sam: Not sure what you're trying to show with that video, especially as your "entries weren't really based on anything," 

1. I think your entries should be based on something rather than random. 
2. 4 tick SL is lower than the average range for a 5min bar. The volatility at the time of day in your vid is much greater than average as its the time for US news and the first hour of pit trading. I would suggest you trade CL in the UK session as it's not as crazy OR maybe the CL market is not your market.  
3. A 4 tick SL sounds like you're trading with scared money. If so then the CL or GC markets are too hot for you. Look at index markets (ES, NQ).
4. If you still want to stick with the 4 tick SL what's wrong with taking 10 tick profit? Your goal would be to get 4/10 winners to make a profit after brokerage. If you tried this on sim for a while it might seem like gambling and I hope you would want to improve your entries for a better W% and when your entries get better you might want to manage your trades for bigger wins.


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## CanOz (17 February 2014)

Here's an example of some profit targets...


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## howardbandy (18 February 2014)

Greetings all --

I understand the use of exits rules implemented as trailing exits based on multiples of ATR.  And on profit target exits and adjusting exits as the trade progresses.  Systems benefit from having those exits.  

But I recommend against putting position sizing calculations into the trading system -- that calculation cannot be done correctly from within the model.  Rather, perform risk analysis and set position size as a separate process using a set of trades that represent whatever you feel is the best estimate of future performance of the system.  Use recent real trades, paper trades, trades from whatever validation process was used during system development.  Subjectively add whatever losing trades you feel are not already adequately represented.  Keep this set of trades up-to-date with the addition of recent trades as they are completed.  Then estimate the risk of drawdown and compute the maximum safe position size for the next trade that will keep the probability of having an account-destroying drawdown within your personal risk tolerance.  Repeat before each new trade.   

Below, I have pasted a posting I recently made to one of the other threads on ASF related to a discussion going on there about position sizing.  

I will be giving two presentations at the ATAA Conference in Melbourne in May, 2014.  The second presentation addresses this issue directly.
http://www.ataa.com.au/conference-overview.html
http://www.ataa.com.au/speakers-presentations.html

Best regards,
Howard

-------------------

I Strongly recommend keeping All position sizing Out of your trading system logic. The maximum safe position size depends on system health -- on the current degree of synchronization between the model (logic, rule, parameters) and the data. It depends on the distribution of recent trades -- most importantly the number and magnitude of losing trades.

This information cannot be adequately determined from within the trading system.

Including position sizing within the trading system will introduce an unfavorable bias that Always over-estimates profit and under-estimates risk.

Rather, use this procedure:
1. Use fixed size trades -- not even compounding -- for all development, including validation.
2. Create a set of trades that you feel are the "best estimate" of future performance. A good source for these is the set of out-of-sample trades from an uncontaminated walk forward run. Augment this set with whatever you subjectively feel is likely to occur in the future but is under-represented in that set.
3. Determine your personal "statement of risk tolerance." An example is:
I am trading a $100,000 account and looking forward two years. I want to hold the probability of a drawdown from maximum account equity, marked-to-market daily, of 20% or greater to 5% or less.
4. Use the Monte Carlo simulation techniques I describe in my Modeling book to estimate the risk of drawdown for the two year horizon using the best estimate set of trades.
5. Calibrate the initial value of the position size so that risk is within your personal risk tolerance. It will almost certainly be less than full fraction.
6. Rerun the Monte Carlo at that position size and analyze the distribution of profit. Decide whether the system is worth trading. Look beyond the mean -- perhaps at the 5th to 95th inter-percentile range -- to estimate the probable range of CAR given your level of risk.

If you do decide to trade the system, after every additional completed trade, add that trade to the best estimate set and rerun steps 4, 5, and 6 above. Adjust position size for the next trade accordingly.

When the system health begins to deteriorate, and it will, this technique will automatically reduce position size in advance of account-destroying drawdown. If the system fails completely, you will already know that the correct position size for a system that is broken is zero.

There is a flowchart and brief discussion in Chapter 2 of my "Mean Reversion" book. You can download that chapter for free:
http://www.meanreversiontradingsystems.com/book.html

There is a deeper discussion in my forthcoming book, "Quantitative Technical Analysis."
http://www.quantitativetechnicalanalysis.com/

Best regards,
Howard


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## CanOz (19 February 2014)

I just realized that the video I posted was from school of trade....please note that I only picked as an example of profit targets instead of trailing stops...


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## Sellsword (19 February 2014)

ThingyMajiggy said:


> Hey all,
> 
> After some advice and tips on risk management.........




Hi Sam! Glad to see this topic posted, it's current for me as I've just started implementing risk management into my trading. I'm a pure TA trader. 

What I do is measure the risk per TRADE. Some educators recommend tracking portfolio risk, you can do either or both IMO. 

What I do; 
1. Pick an entry point. 
2. Pick the technical target, the exit. Measure the distance to the exit from your entry point. This is your reward. 
3. Look at the bottom of the pattern. 
4. Put a stop at the bottom or just below the bottom of the pattern. The distance between the entry and the stop is your risk. 
5. If the ratio of Reward:Risk is 4:1 or greater, I enter the trade. 

I know some people may disagree with this approach, but it's working for me successfully since I've started using the system. 

Hope that helps.


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## Boggo (21 February 2014)

Sellsword said:


> What I do;
> 1. Pick an entry point.
> 2. Pick the technical target, the exit. Measure the distance to the exit from your entry point. This is your reward.
> 3. Look at the bottom of the pattern.
> ...




And its no more complicated than that.
In my case I will look at anything that is greater than 2:1 but on some testing I did years ago I remember finding 2.9:1 the be the ideal minimum R/R.
Item 4 above, I use ~$1000 as the risk amount, covers brokerage and a bit of slippage etc.

Follow on below from this previous example here 
https://www.aussiestockforums.com/forums/showthread.php?t=28029&p=814098&viewfull=1#post814098

(Weekly chart - click to expand)


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