Simple trading system idea? (simultaneous long/short with trailing stop on both)

[azioni]

I understand you can open the second trade, but that was not the question. It can be done in sim on the futures platform I use, however not when live trading because the way my brokers back end accounting deals with it, creates a loss on the first part, equal to whatever gap between the 2 positions.
Cheers, M

AFAIK the 2 positions are standalone and of course the balance at the end would be the gap between the 2. That's what I use in my strategy to know exactly how much I will lose/gain. In the 2nd scenario I have a loss of 2.5 points+2spread on the 1st position and a gain of 12.5-2spread on the 2nd. Balance +6 points in case the break doesn't work.

 

[skc]

The 2nd contract is always opposite the 1st, just to cover the 1st position in case the break doesn't work.

I clarify a bit the scenario:

I buy the 1st contract (long) on the lower TF break at 100, it rallies up to 110 and then pulls back. I buy the 2nd contract (short) in the opposite direction. The pullback has a 50% retracement and drops to 105 then the original trend resumes (in the direction of the 1st contract). I wait for the price to reach 110 before selling the 2nd contract. In this way I have only lost the 2 points spread. However I will be able to reach the break on the higher TF, lets say around 120 with 20 points profit, without risks.

OK. When you short please say "sell" or "short" instead of "buy". And when you close your short say "buy back" or "cover" instead of "sell".

So let's put some real numbers into your scenario (in bold).

You buy the 1st contract (long) on the lower TF break at 100, it rallies up to 110 and then pulls back to 105. I short at 105the 2nd contract (short) in the opposite direction. The pullback has a 50% retracement and drops to 105 then the original trend resumes (in the direction of the 1st contract). I wait for the price to reach 110 before covering/buying back the 2nd contract at 110. In this way I have only lost the 2 points spread (you've lost 5pts on contract 2 + spread). However I will be able to reach the break on the higher TF, lets say around 120 with 20 points profit, without risks (after your 2nd contract is closed, the risk is still there - you still have 1 contract open).

So
Contract 1, long, open at 100, close at 120. 20 pts profit. 2pt spread paid on entry and exit = 18pts net.
Contract 2, short, open at 105, close at 110. 5 pts loss. 2 pt spread paid on entry and exit = -7pt net.

Total = +11pts.

Compared to the alternative of just closing your contract 1 at the same price levels as above. In stead of opening a 2nd contract as short at 105, you close contract 1. And at the price level where you close the 2nd contract (at 110), you re-open contract 1.

Contract 1a, long, open at 100, close at 105. 5 pts profit. 2pt spread paid on entry and exit = 3pts net.
Contract 2a (re-entry), long, open at 110, close at 120. 10 pts profit. 2pt spread paid on entry and exit = 8pts net.

Total = +11pts.

It's the same. And doing what you suggest doesn't change anything wrt risk.

 

[azioni]

OK. When you short please say "sell" or "short" instead of "buy". And when you close your short say "buy back" or "cover" instead of "sell".

So let's put some real numbers into your scenario (in bold).



So
Contract 1, long, open at 100, close at 120. 20 pts profit. 2pt spread paid on entry and exit = 18pts net.
Contract 2, short, open at 105, close at 110. 5 pts loss. 2 pt spread paid on entry and exit = -7pt net.

Total = +11pts.

Compared to the alternative of just closing your contract 1 at the same price levels as above. In stead of opening a 2nd contract as short at 105, you close contract 1. And at the price level where you close the 2nd contract (at 110), you re-open contract 1.

Contract 1a, long, open at 100, close at 105. 5 pts profit. 2pt spread paid on entry and exit = 3pts net.
Contract 2a (re-entry), long, open at 110, close at 120. 10 pts profit. 2pt spread paid on entry and exit = 8pts net.

Total = +11pts.

It's the same. And doing what you suggest doesn't change anything wrt risk.

I think you are missing the point. I have never said that the strategy allows you to make more money. On the contrary you can manage the risk without stops and still make a profit when the break doesn't work.

The fact that both options give the same gain actually confirms that the strategy works. With my strategy I can enter the break at the very bottom and I don't need to use any stops. If I am right I get all the way to the top, if I am wrong I'm still getting some profits. I don't think that it is possible with a standard stop loss strategy.

Plus as I said to Sky before, if you re-entry long at 110, you are an extra 10 points away from the real break at 100 and that sounds like a higher risk/reward ratio to me.

 

[skc]

I think you are missing the point. I have never said that the strategy allows you to make more money. On the contrary you can manage the risk without stops and still make a profit when the break doesn't work.

The fact that both options give the same gain actually confirms that the strategy works. With my strategy I can enter the break at the very bottom and I don't need to use any stops. If I am right I get all the way to the top, if I am wrong I'm still getting some profits. I don't think that it is possible with a standard stop loss strategy.

Plus as I said to Sky before, if you re-entry long at 110, you are an extra 10 points away from the real break at 100 and that sounds like a higher risk/reward ratio to me.

But that IS the point exactly. It is no different if you simply close contract 1 and re-enter. We both agreed that the P&L is the same (aside from any difference in interest but let that pass for now).

Now how does your approach reduce risk? After you close your contract 2, where do you put the stop for the still-open contract 1? Where ever that is, do the same for the re-entered contract 1 and you have the exact same risk.

Again - none of the benefits you've stated are valid. And the only potential benefit you have is avoid your stop being hunted. Although you still need a standing order to open that 2nd contract - may be they will hunt that?

Seriously... it's not that hard to see.

 

[azioni]

But that IS the point exactly. It is no different if you simply close contract 1 and re-enter. We both agreed that the P&L is the same (aside from any difference in interest but let that pass for now).

Now how does your approach reduce risk? After you close your contract 2, where do you put the stop for the still-open contract 1? Where ever that is, do the same for the re-entered contract 1 and you have the exact same risk.

Again - none of the benefits you've stated are valid. And the only potential benefit you have is avoid your stop being hunted. Although you still need a standing order to open that 2nd contract - may be they will hunt that?

Seriously... it's not that hard to see.

I thank you for your feedback however I am not trying to convince anybody to use this strategy. If trading with a stoploss doesn't bother you simply don't use the strategy.

Repetita iuvant
Again the main benefit is that the 2nd contract allows you to get a profit also when you have traded a false break. Plus while you are trading the 1st contract you are risking only the difference btw the 2 positons, rather than 2/3 ATR.

I think anybody can see that the risk would be much lower If you compare this to a standard stop loss strategy.

 

[barney]

AFAIK the 2 positions are standalone and of course the balance at the end would be the gap between the 2. That's what I use in my strategy to know exactly how much I will lose/gain. In the 2nd scenario I have a loss of 2.5 points+2spread on the 1st position and a gain of 12.5-2spread on the 2nd. Balance +6 points in case the break doesn't work.

Hi there Azioni, Just a couple of quick things you may or may not have factored in.

Do you have a contingency plan if the market starts whipsawing your position? (ie your short covering postion gets triggered ..... market recovers and you buy it back .... then the market falls back and triggers that price point again ....... This could happen many times over before it breaks in either direction)

Do you have a contingency plan if after your first entry, the market simply starts to go down ....... Do you cover at a loss or simply close the trade.

The theory is ok, but implemetation is not that easy in the "heat of battle". I assume you are looking at the SPI with this idea ...... hopefully not Forex

Cheers.

ps I like to try out new ideas as well, but I have those two little yellow guys at the bottom of the page to remind me to behave myself according to the amount of time I have spent testing it live ..... if you do that, you won't get into too much trouble.

 

[nomore4s]

I'm really confused

1) I still don't see how this reduces your risk on the original trade, especially if it moves against you straight away - you have no protection against this because you have no stop. All it does is lock in your open profits which is no different from exiting & re-entering the position. You're kidding yourself if you think the market can't move against you quickly especially with the current volatility.

2) I see no advantage over closing the original position and re-entering where you would enter & exit the second position in the opposite direction. Infact there would appear to be a number of disadvantages.

3) What happens if you get the entry wrong on the 2nd position, all you are doing then is stopping the trade moving into further profit.

I personally think that you would be better off spending time trying to find a strategy that lets you pyramid into the trade so you have 2 contracts moving the same way.

As far as the stop hunting thing is concerned, of course during after market hours there is more chance of you stops getting hit due to lack of liquidity causing spikes again especially with the volatility around in overseas markets atm. This is the market doing what the market does not your broker hunting stops, if they did hunt stops in that manner they would open themselves up to arb trades.

 

[azioni]

Hi there Azioni, Just a couple of quick things you may or may not have factored in.

Do you have a contingency plan if the market starts whipsawing your position? (ie your short covering postion gets triggered ..... market recovers and you buy it back .... then the market falls back and triggers that price point again ....... This could happen many times over before it breaks in either direction).

Hi Barney thank you for joining in,

In general when the swings are overlapping it becomes clear that you are trading a correction rather than an impulse wave. Therefore if the market falls after you buy back you may decide to exit all together and wait for the end of the correction. However If you feel confident and you are experienced with patterns I think you could trade the correction keeping the 2 positions till the market breaks in one direction.

Do you have a contingency plan if after your first entry, the market simply starts to go down ....... Do you cover at a loss or simply close the trade.

That would mean that you entry setup didn't work at all. Using a dual TF momentum strategy and assuming that you set your indicators correctly, you should be able to filter false breaks as much as possible. However if you experience a quick turnaround I would close the position asap, especially when you are trading intraday.

Usually in trading you go for the higher probability scenario and I don't think a flash crash happens that often. Plus with a flash crash a normal stop strategy wouldn't save you from extra cost for slippage as well.

The theory is ok, but implemetation is not that easy in the "heat of battle". I assume you are looking at the SPI with this idea ...... hopefully not Forex.

You are completely right. Thats why I am writing on the forum and I need your help guys. Although I trade indices and I don't have experience with forex, I am assuming that you know the market you trade and you understand the dymanics of that market.

Cheers

 

[azioni]

I'm really confused

1) I still don't see how this reduces your risk on the original trade, especially if it moves against you straight away - you have no protection against this because you have no stop. All it does is lock in your open profits which is no different from exiting & re-entering the position. You're kidding yourself if you think the market can't move against you quickly especially with the current volatility.

Hi there,

As mentioned in the previous reply you should have enough time to exit your position. You may have a big problem only if you are scalping or trading a very low TF, which I've never suggested to do.

In case you experience a flash crash, which doesn't happen very often, a normal stop wouldn't save you anyway unless you are keen to pay extra commission and points for a guaranteed stop.

2) I see no advantage over closing the original position and re-entering where you would enter & exit the second position in the opposite direction. Infact there would appear to be a number of disadvantages.

I have never said to close and renter the original position, that was SKC suggestion. I would keep the original position till the pullback drops lower than the entry level, closing the short position with a profit.

3) What happens if you get the entry wrong on the 2nd position, all you are doing then is stopping the trade moving into further profit.

If I get the 2nd entry wrong I close it asap, while I'm still in profit from the 1st position.

I personally think that you would be better off spending time trying to find a strategy that lets you pyramid into the trade so you have 2 contracts moving the same way.

I think there is a bit of confusion about the strategy objective.

My strategy objective is to enter a break on the lower TF in order to get to the higher TF break without risking the standard 2/3 ATR used in most stop loss strategy.

For example if the lower TF break is 100 and the higher TF break is 120 I want to make sure I am already in the trade when the price breaks the 120 level with no losses.

I am really not interested in how much I am going to make before I get to 120, I am not looking for a profit btw 100 and 120, I just want to risk as less as possible or at least less than 2/3 ATR. I am just using that range as a buffer that allows me to control how much I am going to risk and the 2nd position is the insurance I am paying.

The main difference with a normal stop is that I can use my insurance to make a profit if the trend goes against me.

Cheers

 

[skc]

I feel like this guy...

 

[skc]

azioni, you seem like a nice polite guy so I really wanted to try this one more time and show you what you are missing. But I've tried to draft a response a few times now and I haven't been able write something that I am happy with. It's like trying to explain something so simple and fundamental that it is actually more difficult than if you are explaining something more complicated.

It's not a matter of opinion or us failing to see your point of view. The undisputable fact is that, what you are doing has NO ADVANTAGE over just closing and re-entering the single contract. Not in P&L, not in risk, not in win rate. NOTHING. But with very real additional costs.

By opening contract 2 in the opposite direction, it is the COMPLETE EQUIVALENT of closing contract 1. And when you close contract 2 in the opposite direction, it is the COMPLETE EQUIVALENT of re-opening contract 1. Except for the additional costs. Again these are undisputable.

I am sorry that I can't articulate the facts any better in order for you to understand them. And I don't know if the fact that I trade more CFDs this month than you would for the next 5 years matter to you or not. I just hope you can investigate for yourself and see the light.

Good luck.

 

[azioni]

I feel like this guy...

that's good to know, I am not the only one then

I keep in mind your advice and I'll do a bit of backtesting on the DOW 1H and daily. Ultimately, the market is the best judge.

Cheers

 

[skc]

that's good to know, I am not the only one then

I keep in mind your advice and I'll do a bit of backtesting on the DOW 1H and daily. Ultimately, the market is the best judge.

Cheers

You are still missing the point... It's not about backtesting, your entry/exit strategy or your expectancy.

It's something way more rudimentary.

You somehow think that doing something that is completely equivalent to each other can reduce your risk. This indicates that somewhere in your understanding of your strategy's risk is incorrect / incomplete.