This amazing method to reduce risk by staying in good
trades, but trading with small stops to avoid large losses.
Usage of stop-loss orders is normally critical to trading
success. The most famous trader of all time, Mr. W. D. Gann, said repeatedly
in his books and commodity course that it's always critically important
to place a stop-loss order on each trade you make. That way bad signals
and losing trades will not likely wipe out your trading capital, thanks
to your stop-loss order giving you some protection.
Most systems and most trading methods require fairly large
stop-loss orders. That is because stops are frequently based on one
or more of the following logical (but frequently ineffective) methodologies:
a) Place a stop at a pre-determined percentage of the
true daily trading range. For example, if the true daily range or average
of recent true ranges (High minus Low, plus any gap between prior close
and today's low or high) is say 83 points, then the stop may be set
at perhaps 120% of that range or about 100 points. In the Deutsche Mark
that equals $1,250.00 stop, plus any slippage that occurs.
b) Another method is placing a stop-loss just under the
last swing-low or pivot-low. Note: A swing-low is a low point with higher
prices on each side. For example, if last swing-low was at 9650 and
price moves up for a few days to say 9650, then triggers a buy signal,
stop may be placed just under the low price of the low day, perhaps
at 9649.
That also represents a risk of over 100 points ($1,250.00+).
Of course, the reverse is applicable on a sell, with the stop being
just above swing-high.
c) Use a moving average penetration as a stop, i.e., place
a stop on a long trade at just under a simple moving average, perhaps
a nine-day average. The trouble here is that if we entered long at about
9650, by the time the moving average is penetrated by the price, the
moving average may be well below the market (due to its inherent lag-time),
at 9600 or so. That results in a stop-loss at 9599 stop, and a risk
of about $1,900.00.
d) Still another approach is to place a stop under last
week's lowest price. This method may be even riskier because last week's
low may be 9550. That requires a stop of 9549 or lower, and a risk in
excess of 200 points or over $2,500.00.
e) Another simple and a totally unscientific approach
is known as a "money stop." It involves setting an usually
arbitrary stop based on either the maximum money you wish to lose, or
stop based on a reasonable sounding number of points or dollars.
For example, psychologically you may not want to lose
more than $1,000.00, so you set your stop at a price equaling $1,000.00
loss potential. That number is arbitrary, so it may turn out to be either
too small or too large, depending on the volatility and the market involved.
For example, perhaps it's too small a stop for T-Bonds when they're
volatile, or too large when they are dull. If using the $1,000 stop-loss
in the Corn market or another low-risk low volatility market, it may
be too large a stop to use.
Q. Is there a better way to set stops scientifically and
more accurately, thus enabling me to keep risk low and still avoid getting
"stopped-out" needlessly and stay in the potential winning
trade?
A. Yes! By using "Drawdown Minimizer Logic."
Drawdown Minimizer Logic is an amazing way to set stop-loss levels very
tightly to guard against large losses, yet keep the stop scientifically
and strategically placed just far enough away to prevent premature hitting
of the stop-loss; thus keeping you in most trades.
Don't worry if this methodology seems too technical, because
it's really much more simple than it first appears to be.
"D.M.L." is based on the maximum adverse movement
(excursion) of past winning trades. For example, review the last "X"
number of back-tested profitable trades and determine the adverse negative
excursion incurred on each trade.
The idea is to look at the smallest stop-loss orders that
would have kept us in at least 80% of the past back-tested winning trades.
The worst 15% of those back-tested winners are eliminated from consideration.
Another important consideration is to review a sufficient
sample of trades for statistical validity. According to statistical
research by mathematicians, 30 samples are considered an optimum number
to review. However, depending on your trading system's frequency, 30
past back-tested trades may take too long a period to test properly
or reflect recent volatility.
Therefore, it may be best to work with a minimum number
of 10 to 15 past trades. Ten to 15 back-tested trades should work well,
but 30 trades are still considered an optimum number to use. However,
if it's not practical to use 30 trades, you should at an absolute minimum
use 10 trades to calculate the maximum adverse excursions. That way
the numbers are still fairly valid from a statistical sampling standpoint.
If the past adverse excursions of those 80% trades went
NO MORE than 15 Points negative before eventually being closed out at
a profit, we can subsequently set our stop-loss at 16 points. Scientifically
we should be able to stay in the vast majority of eventual profitable
trades, yet have low-risk by risking only 16 points per trade.
Back-tested closed losing trades are not calculated, because
with this amazing technique we only care about winning trade stop levels,
not losing trades. The losing trades, of course will have potentially
much larger adverse movements. By scientifically using the winners to
calculate stop levels, we also take care of the losers by sharply reducing
the losing trade stops.
"Drawdown Minimizer Logic" © will sharply
reduce your risk level and drawdown potential. It's a proven and scientific
way to drastically reduce risk without significantly harming overall
profits.
This amazing loss reduction technique will allow comparatively
small stop-losses, so your losses are small but still allow for consistent
good size winning trades and possibly make lots of money with sharply
reduced risk.
It's extremely effective in sharply lowering risk, but
still keeping you in winning trades. Surprisingly, few traders use or
have heard about this amazing technique, because it's rarely publicized
due to the fact large successful traders want to keep it secret.
Many successful large traders use "D.M.L." as
the most important ingredient in their trading. "D.M.L." may
be the primary reason for their great success!
Profitable and Simple Approaches For Commodity Futures Trading