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In looking back at my crude oil trades (small sample size though it may be), because I mostly trade with stop orders for breakouts, it seems that most of the time after entry, on a successful trade, price never goes below my entry point (above for short). This being the case, wouldn't a tighter stop make sense?
Even if it winds up favorable for me, if it had to come within 2 or 3 ticks of a 15 tick stop, doesn't that mean that my basic idea was wrong and that I should improve the quality of the entry, not use bigger stops?
Can you help answer these questions from other members on NexusFi?
Yes, with CL there are many, many breakouts that "blast off". But there are also many that do not, yet ultimately work without ever really venturing near the previous swing (high or low). Then there are some that breakout only to instantly slam on the breaks.
For me, it's all about discretion. Looking at the market overall, looking at what is happening in CL today. On big trend days, it is easiest to ride the breakouts over and over. You basically are waiting for a pullback or a failed attempt to reverse, and then you jump on again w/the previous trend. Works great in trend days. On range bound days, you need the opposite strategy of buying the bottom and selling the top of a tight range. On CL, "tight range" could be 50 ticks or so, for me at least.
CL is also one of those instruments that tends to have two moves each day, and they don't always go the same direction. Very often you will see a huge morning rally followed by an afternoon sell off, or vice versa. Then there are plenty of days with a big rally or sell off in the morning, and then just a bunch of sideways action in the afternoon.
I use the session vwap as a gauge for where price may return. It works very well on CL it seems, but it is only a gauge. I talked about it here. Then I just use my 5m and 6r chart to tell me if we are trending or range bound, and trade accordingly.
I realize I didn't give you an exact answer to your question, but that is because I don't think there is one. You are on the right track by tracking statistics, now just keep refining and learning and you'll be fine. The market is not an exact science, just accept that and position yourself accordingly and you'll do good. Always trade with a positive risk/reward, I would aim for at minimum 2:1 if not 3:1 so even if you are only right half the time, you've still made money.
Of my trades today, except for one, no stop loss would have been fine. Obviously that's not realistic, but instead of a 19 tick SL, maybe 12, or 10 would do as well. That way I could either be wrong more often and be okay by reducing risk, or trade 2 contracts instead of 1 (probably the former would be preferable to the latter).
Basically the crux of my feeling is, if the trade does not work out except by testing the SL, then my entries simply need work. Heck, I can just buy the low of the day and sell the close and have a 50/50 chance of making money if I have an infinite stop loss!
My current plan is to run one DOM with the rules I used today: 19 tick SL, 20 tick TP, and move to BE+1 at +12 ticks. And run the other with something like: 12 tick SL, move to BE+1 at +15 ticks, move to BE+20 at +30 ticks, and close trade at +45 ticks. Something like that. Of course, for much of the day the 20 tick TP happened to line up well with S/R levels set earlier in the day. But as in earlier today, CL ran up nicely, and without a good idea of where it may stall, then the scenario above would have probably done well.
Before making too many changes I would evaluate it with 100 trades or so. The more data the better. The recent days are not 'normal', but then again there isn't really a normal for CL.
Today I ran side-by-side DOM with my secondary ATM strategy being a trailing stop only strategy, and it produced one nice 70 tick gain but failed in many others. It was not too difficult to quickly put two orders in side-by-side and then let the ATM run mechanically, so starting tomorrow I will replace this one with the strategy I mentioned above. My "normal" results will be the same, but now I will have a "shadow" strategy that I can compare over maybe 20 trading days and see how they stack up.
I really like the idea of discretionary entries, and then mechanical trade management--for me that's the tough part, wanting to take profit early, for example--when I set my stop either at a fixed point or at a discretionary exit, I can let the ATM handle it and just wait for it to succeed or fail.
My method of trading CL currently involves (over the last few days) buying and selling pullbacks, and using very tight stops, 5 or 6 ticks max. It means I have to have a very good entry, which I have been having recently. Now, many times, price will hit my limit and go my way for a few ticks, then stall a bit. I have been moving the stop to BE+1. However, often price comes back to re-test, and I get a +1 trade. However, how about this strategy:
=> When price goes some number of (say, 10) ticks in my favor, if it stalls, take the profit immediately, or trail the stop pretty tight so as to maximize gains.
=> Then right after taking profit, set a stop beyond the consolidation and use a stop loss 1 or 2 ticks less than the banked profit if a strong move further appears likely. This way I am risking only what I just banked or less if price does go my way.
=> If it moves back towards the original entry, if the premise of the trade still looks good, re-enter, and again, make sure the stop is less than what was banked, so as to reduce the risk to what was already earned on this trade's premise.
I am liking to trade on the touch of the area if price doesn't look like it's going to shoot through, because the risk is so low. But often when I buy/sell a level of support/resistance (say, the day's low or high, or upper/lower range), price comes to re-test the area, and I either take heat, or get stopped for +1. Why not bank profits, and re-enter on a break, or re-enter on a retest?
Been thinking about this for years. There's a number of things to try / explore, some of which you've already done. Some thoughts:
1) if for most of your trades price does not go much against you, you could try entries with SL 5, TP 10 (or 7 and 14 or similar). I don't have to tell you that if you hit 50% success rate, you are quite profitable (even with slippage...etc.). The huge advantage of taking trades with fixed SL/TP is that you are 100% free to focus on entries. Might help you to trade better without exposing you to heat that comes from managing an open trade.
2) from experience, you're probably much better taking the 10 ticks when stalling and then looking for re-entry, rather than moving to BE+1. It's our human nature to want to book at least a break even trade and get a free ride. The market often tests those points to a tick. If you really want to reduce your risk, trail further away (say BE-3 or BE-10), or DON'T trail stalling markets. Have a profit target >= SL.
3) SL - to answer your original question.... in my view, stop should be a reflection of 'noise' in the market. When you have a, say, 15 tick SL, you are effectively saying that a 15 tick move is NOT noise, that it is a meaningful price change that indicates not just 'random volatility', but a directional event in the market. My view has some interesting implications. In strong directional markets, you should have a much tighter stop than range markets... So by definition, trading in directional market is preferable as your risk/reward can be much better.
