Many of us deal with trading systems or trading strategies
, be it manual or automated. One of the most common questions that traders have
is to where to place a stoploss in each trade and where to place targets? Typically
most of us keep a fixed point based or percentage targets. The problem with
such targets/stops is that they don’t have anything to do with the actual entry/exit
signal performances
Here we present a different perspectives This is a
method of deciding on how much can stop or target is based on data from the
trades. Every trade that one individual or system takes has two sets of data
called as MFE and MAE. These data sets are mostly available readily in trading
softwares like amibroker, metastock or metatrader.
So, what are these?
MAE: max adverse excursion -- max movement against my trade
MFE: Max Favorable excursion-- max movement in favor of my
trade
Let us illustrate this with and example say we went long
in BANKNIFTY FUTURES at 12000 levels with initial stoploss 11800 that is
200 points.
Trade went down to 11940 then went pulled back to make a
high of 12240 and finally close at 12120
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| MAE plot-sample system
we
see that most of the MAE data is within -1%. hence that can be mostly used as a
hard stop. That essentially means that most of the trade negative movement in
this system is within 1% after that stage the chances of an adverse movement in
the trading resulting in loss becomes significantly higher. So in this
particular system a 1% stop should serve fairly well in most cases
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| MFE plot-sample system |
With respect to the MFE data now, We also see that 80%
of trades are within 2% of profit. so that means markets will mostly reverse
within 2 % of movement and above that there are chances of a true break out.
Hence it would be ideal to book gains within 2% movements and re enter trades
above it as the probability of a significant move drastically increases for the
system.
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There are also numerous other ways of using this data
in Trading system design and system comparison. We will explore some of that in
future posts.
To learn on how to design/understand system based trading
attend our webinars/ training programs: write to support@powertrade.co.in to know
more
To use our advanced trading
systems visit http://www.powertrade.co.in/smartsignals
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