Monday, July 16, 2012

Stop and Scalp size for swing trading

In a previous post, I discussed a way to optimize your stop size. From an extensive history of trades, including various experimental trades, I deduced that my best entries pullback 4t or less after entry. This implied that I could possibly get away with a 5t stop for most trades.
On the left you see a chart displaying the Maximum Adverse Excursion (MAE) of over 100 winning trades. (Losing trades are irrelevant since they always have MAE of where the trade was stopped out.)

The most striking feature of this chart is that most trades are crowded in the first 5 columns (0t, 1t, 2t, 3t and 4t). Entries that have pulled back beyond 4t after triggering and have eventually been profitable less than 10% of the time. Out of those only 3 have managed to give more than 10t profit. I have not made a lot of trades with stops larger than 2 points recently so the sparsity on the far right is probably simply insufficient data. But when I did the same analysis long ago with price action stops (beyond bars) I noticed a similar pattern.

I focus on large market moves and signal bars that lead to large market moves pull back very little after a they trigger. The obviously important turns and their pullbacks today were  b8(4t), b23(2t), b40(0t) and b59(1t). If you notice, they pulled back very little after they triggered. For swing trading, you need to only focus on the large moves and ignore small moves, i.e. your aim is to buy a bar like b40 and hold it till b59 rather than buying the low of b50, b54 and selling at +1 profit each.

Therefore, if you are looking to swing and the price pulls back more than 4t from your entry price, it may not end up being a good swing at all. The next step then is to tune your trading to accurately assess the largest market turns of the day and take only those setups.

Once you have a fixed stop size, then your scalp size is automatically twice the risk if you want to swing half your contracts. (If you want to take a fixed profit, anything larger than your risk is acceptable). This gives a 5t fixed stop and 10t scalp target for my style of trading. Since most of my entries eventually end up being large moves, on an average I'm always better off swinging at least half.

Naturally, 5t/10t above is determined based on my personal trading history and for my strategy of trying to only trade major swings. Your mileage may vary and you would need to determine your stop and scalp points based on your own trading data and strategy.


  1. I Cad,
    you entered on b40 because of the BW fBO (b35-36-37)?

  2. Hi Cad,

    In your analysis, were you looking at the 5 minute bars, or, the actual price action within each bar?

    Was b8 the signal or entry bar? If it was the signal bar and b9 was the entry, there's a pretty long tail there where in the course of 5 mins it could have taken you in, ran all the way down and then all the way back up again. 5 ticks wouldn't have held with the price action even though it looks fine after the bar is over.

    Thanks for your analysis. This is great. Ever thought of opening a live trading room?

    1. b8 is a signal bar. Its a poor buy signal bar since its the wrong color. But often during the first hour, poor bars work.

      The tail formed before 5m b8 triggered. If you look at a 30 second chart, it triggered on b86 and pulled back to 1344, i.e 4t on b90 before resuming upward move