Stops are Harmful to your Euro Forex Trading
I've been involved in trading for many years, and don't pretend to have all the answers...
Here's a controversial claim to consider: "You should not use Stops when actively scalping." (I'm talking about stop losses, not using stops as a trigger mechanism to enter or increase a position.)
The idea is that Stop Losses result in realized losses. So they should be avoided if at all possible, and can be avoided using a distributed or incremental trading strategy. We want to tolerate unrealized price adversity, so that we can survive to realize frequent small profits. When Market Maker shakes the tree, we'd like to be in a position to hang on.
First of all, let's set the scene:
1) You are a small Euro scalper, and you use an Incremental or Continuous trading technique.
2) You don't leave your trade station unattended, so you are always "in control".
3) You design your "Risk Envelope" with the assumption that the market will move against you.
4) As long as you remain within your "Risk Envelope" you do not consider stopping out.
5) You always acquire a total position by distributing partial transactions across a wide range of pricing.
The definition of being inside your "Risk Envelope" is that you do not Stop Out, since that is your comfort zone by definition, despite the fact that this could strain your nerves and patience sometimes. There is no need to Stop Out, so long as we remain in our comfort zone.
Scalpers in EUR/USD know very well that this is a volatile and "dangerous" market. On the other hand, volatility is also related to profit opportunity.
So we need to assume that the market can very easily move against us by a considerable price range, and design our "Risk Envelope" so that we acquire our desired position size, but NEVER at the same price.
So, we decide the Range of Price Adversity which the market "normally" moves against us, let's say it's 40 pips in the Euro, which happens quite frequently. We are willing to acquire our position in increments.
(A modern Forex ECN brokerage like MB Trading allows traders Micro lot transaction sizes, with no penalty for small size, and fixed proportional commissions and even credits. Other brokers may penalize for small size or require minimum transaction sizes, or have non-proportional commission charges, which could compromise the viability of this type of strategy. Also, the brokerage needs to permit unrestricted scalping, using a basic LIFO strategy, where the Fast entry made, is the First candidate for profit-taking, such as MB Trading's Forex. Also, real interbank pricing helps a lot, since artificial spreads compromise the profitability of any scalping strategy. This isn't an advert for MB Trading, and there may be other brokerages offering similar deals.)
So, if I want 1 Forex standard lot, $100k, then I am willing to Buy 20 half-Mini Lots over the 40 pip range, which means I am fully invested when the market moves 40 pips against me from the price at which I began the process of acquiring my position.
And in the worst case, my cost basis, or price break even is 20 pips in my favor, through "back averaging" or "cost basis averaging", so that already provides me with a 20 pip advantage over an "All In" strategy. (On the assumption that the maximum position size is fully deployed over the 40 pip range.)
So I'm doing a linear distribution of my partial entries, in this case every 2 pips as the market moves against me. The fact that the market is moving against me is to be expected, and is considered "normal" in this strategy. Of course, I expect some retracements which will enable me to take profits.
I am easily able to "survive" or to "tolerate" this 40 pip move against me, because I've calculated this in advance. Although I'm not that happy if the market "pushes me" too much, it is still well within my anticipated operating envelope and so I RELAX, and follow the strategy of distributing my entries and my profits takes.
I record each price level at which I make each half-Mini lot $5k entry. Should any entry move to 3-4 pips profit, then I take profit on that half-Mini lot. This is a partial profit taken. As the market moves in my favor, I continue to take these Partials.
As the market again moves against me, I resume the process of linearly distributing my entries at 2 pip intervals, at the same time that I take any partial profits when the market retraces in my favor.
Only if I am fully invested and the market continues to move against me, will I consider any Stop Losses.
THIS STRATEGY obviously works very well when a market is in a channel. However, it can experience problems if the market trends persistently without retracements.
I am not a MetaTrader user, and probably there are EA's that use similar strategies, but Humans usually don't use such methodical techniques, because we think we know when to go "All In" or have a tendency to Chase the market because we know that it can be a Trending market. This strategy is somewhat counter-intuitive, and there's book-keeping involved in remembering where each entry level is placed, so the target profit taking can be done. Actually MetaTrader could help in that respect, but I have custom software to help with this mechanical aspect of recording each entry in the multi-entry strategy. (At one time, I tried MB Trading's MetaTrader implementation but found it lacking, don't know how good it is today. But MetaTrader doesn't have access to the ECN Depth of Market anyway, and that's one big factor I use for market trend Analytics through Quote Flow Analysis.)
This strategy, as outlined, actually Never Chases the market, but is increasing position size during "price adversity", and taking available retracement profits. Ideally, we would begin entering Long near a point where the bottom is forming, so that we don't have too muc price adversity, and we'd also hope for lots of target profit taking opportunities while we're waiting for the overall market to turn.
(Truth be told, I tend to prefer Short side opportunities, since they seem to be the least punishing. Market Makers' tend to punish Long positions, but that's for psychological reasons, which is a bit off-topic.)
One way to think about this Incremental Trading strategy is that we are constantly making small "base hits", rather than looking for the "home runs" which come more infrequently. The "All In" or chasing trader is looking more for the "home run" or "multi-base hits". We're happy with frequently small gains, and hoping to minimize the need for stop losses.
I haven't discussed Analytics, or just how we decide to start trading on one or the other side of themarket, but let's assume we have some analytics which give us some predictive advantage and that we're not just flipping a coin to decide whether to enter Long or Short side of the market. That's really another topic.
The Analytics should also be able to tell us "how its' going", in the sense that we could get an idea whether near the limits of our "Risk Envelope" it looks hopeful, or it looks like a lost cause.
If the "Risk Envelope" is exceeded, then the positions which were acquired incrementally, are also stopped out incrementally, and never all at once. So "stop losses" are a part of the strategy, but they appear only at the limits, and we try to "get out" in the same way that we "get in", which is a bit at a time, incrementally.
If this strategy accumulates enough partial profits to result in a net increase in account equity, then it's permissible to close out the existing or remaining positions. Some of the early entry levels are expected never to go to profit, but the aggregate behavior of this trading framework is able to minimize the usage of stop outs, and thus allow you to "survive" and hold in the market until there is retracement in your favor.
What do you think about this trading approach?
HyperScalper
I've been involved in trading for many years, and don't pretend to have all the answers...
Here's a controversial claim to consider: "You should not use Stops when actively scalping." (I'm talking about stop losses, not using stops as a trigger mechanism to enter or increase a position.)
The idea is that Stop Losses result in realized losses. So they should be avoided if at all possible, and can be avoided using a distributed or incremental trading strategy. We want to tolerate unrealized price adversity, so that we can survive to realize frequent small profits. When Market Maker shakes the tree, we'd like to be in a position to hang on.
First of all, let's set the scene:
1) You are a small Euro scalper, and you use an Incremental or Continuous trading technique.
2) You don't leave your trade station unattended, so you are always "in control".
3) You design your "Risk Envelope" with the assumption that the market will move against you.
4) As long as you remain within your "Risk Envelope" you do not consider stopping out.
5) You always acquire a total position by distributing partial transactions across a wide range of pricing.
The definition of being inside your "Risk Envelope" is that you do not Stop Out, since that is your comfort zone by definition, despite the fact that this could strain your nerves and patience sometimes. There is no need to Stop Out, so long as we remain in our comfort zone.
Scalpers in EUR/USD know very well that this is a volatile and "dangerous" market. On the other hand, volatility is also related to profit opportunity.
So we need to assume that the market can very easily move against us by a considerable price range, and design our "Risk Envelope" so that we acquire our desired position size, but NEVER at the same price.
So, we decide the Range of Price Adversity which the market "normally" moves against us, let's say it's 40 pips in the Euro, which happens quite frequently. We are willing to acquire our position in increments.
(A modern Forex ECN brokerage like MB Trading allows traders Micro lot transaction sizes, with no penalty for small size, and fixed proportional commissions and even credits. Other brokers may penalize for small size or require minimum transaction sizes, or have non-proportional commission charges, which could compromise the viability of this type of strategy. Also, the brokerage needs to permit unrestricted scalping, using a basic LIFO strategy, where the Fast entry made, is the First candidate for profit-taking, such as MB Trading's Forex. Also, real interbank pricing helps a lot, since artificial spreads compromise the profitability of any scalping strategy. This isn't an advert for MB Trading, and there may be other brokerages offering similar deals.)
So, if I want 1 Forex standard lot, $100k, then I am willing to Buy 20 half-Mini Lots over the 40 pip range, which means I am fully invested when the market moves 40 pips against me from the price at which I began the process of acquiring my position.
And in the worst case, my cost basis, or price break even is 20 pips in my favor, through "back averaging" or "cost basis averaging", so that already provides me with a 20 pip advantage over an "All In" strategy. (On the assumption that the maximum position size is fully deployed over the 40 pip range.)
So I'm doing a linear distribution of my partial entries, in this case every 2 pips as the market moves against me. The fact that the market is moving against me is to be expected, and is considered "normal" in this strategy. Of course, I expect some retracements which will enable me to take profits.
I am easily able to "survive" or to "tolerate" this 40 pip move against me, because I've calculated this in advance. Although I'm not that happy if the market "pushes me" too much, it is still well within my anticipated operating envelope and so I RELAX, and follow the strategy of distributing my entries and my profits takes.
I record each price level at which I make each half-Mini lot $5k entry. Should any entry move to 3-4 pips profit, then I take profit on that half-Mini lot. This is a partial profit taken. As the market moves in my favor, I continue to take these Partials.
As the market again moves against me, I resume the process of linearly distributing my entries at 2 pip intervals, at the same time that I take any partial profits when the market retraces in my favor.
Only if I am fully invested and the market continues to move against me, will I consider any Stop Losses.
THIS STRATEGY obviously works very well when a market is in a channel. However, it can experience problems if the market trends persistently without retracements.
I am not a MetaTrader user, and probably there are EA's that use similar strategies, but Humans usually don't use such methodical techniques, because we think we know when to go "All In" or have a tendency to Chase the market because we know that it can be a Trending market. This strategy is somewhat counter-intuitive, and there's book-keeping involved in remembering where each entry level is placed, so the target profit taking can be done. Actually MetaTrader could help in that respect, but I have custom software to help with this mechanical aspect of recording each entry in the multi-entry strategy. (At one time, I tried MB Trading's MetaTrader implementation but found it lacking, don't know how good it is today. But MetaTrader doesn't have access to the ECN Depth of Market anyway, and that's one big factor I use for market trend Analytics through Quote Flow Analysis.)
This strategy, as outlined, actually Never Chases the market, but is increasing position size during "price adversity", and taking available retracement profits. Ideally, we would begin entering Long near a point where the bottom is forming, so that we don't have too muc price adversity, and we'd also hope for lots of target profit taking opportunities while we're waiting for the overall market to turn.
(Truth be told, I tend to prefer Short side opportunities, since they seem to be the least punishing. Market Makers' tend to punish Long positions, but that's for psychological reasons, which is a bit off-topic.)
One way to think about this Incremental Trading strategy is that we are constantly making small "base hits", rather than looking for the "home runs" which come more infrequently. The "All In" or chasing trader is looking more for the "home run" or "multi-base hits". We're happy with frequently small gains, and hoping to minimize the need for stop losses.
I haven't discussed Analytics, or just how we decide to start trading on one or the other side of themarket, but let's assume we have some analytics which give us some predictive advantage and that we're not just flipping a coin to decide whether to enter Long or Short side of the market. That's really another topic.
The Analytics should also be able to tell us "how its' going", in the sense that we could get an idea whether near the limits of our "Risk Envelope" it looks hopeful, or it looks like a lost cause.
If the "Risk Envelope" is exceeded, then the positions which were acquired incrementally, are also stopped out incrementally, and never all at once. So "stop losses" are a part of the strategy, but they appear only at the limits, and we try to "get out" in the same way that we "get in", which is a bit at a time, incrementally.
If this strategy accumulates enough partial profits to result in a net increase in account equity, then it's permissible to close out the existing or remaining positions. Some of the early entry levels are expected never to go to profit, but the aggregate behavior of this trading framework is able to minimize the usage of stop outs, and thus allow you to "survive" and hold in the market until there is retracement in your favor.
What do you think about this trading approach?
HyperScalper