I have done another analysis of my trades, particularly looking at the effect of different stop loss positioning. I have considered stop losses 1x, 2x or 3x the average true range of the past 10 days from the entry point, and assumed that I used a daily chart to make entries (so entries in the exercise are at the open on the day after the signal that I actually traded).

My conclusions are the same as last time:

  1. Trades other than breakouts have a lower success rate (I have only traded ranges and breakouts since the last review, but range trades have not done well).
  2. I am still placing my stops too close.
The evidence for 2. is as follows. 
  • For all trades from 24 Feb to 5 May (after 5 May the market has often not moved enough to draw a conclusion yet), the net return was approximately zero risk units.
  • Had I placed the stop 1 average true range from entry, with a profit target the same distance in the opposite direction, the return would still have been zero risk units.
  • Had I placed it 2 average true ranges away, again with a symmetrical profit target, the return would have been 2 risk units.
  • Had I placed the stop 1 risk unit away and the profit target 2 risk units away, the return would have been 4 risk units.
Turning to 1., the actual profit on breakout trades alone was 3.5 risk units. Had I done only the breakout trades with asymmetric stop and profit target orders at 1 and 2 average true ranges respectively, the return would have been 10 risk units.
This shows that my process is identifying instances where there is a good chance of the market moving significantly in one direction. The problem is that I am not capitalising on it. I have been trying to place tight stops using intraday signals, and accepting a higher stop-out rate in exchange for higher leverage on winners. But it has proven to be sufficiently difficult to pick the right entry point with a tight stop that I have actually detracted value. I have also been placing trades using range signals that do not have a good chance of success.
It should also be noted that I have done some really terrible trades, and not just back in February. There are some things that I just wouldn’t do now. The exercise has reinforced my view that I should not trade on technicals alone — the worst trades have been occasions where I have not had a fundamental view.

Since my gut feel for where to place a stop is clearly way off, I am going to bring an automatic element into the placing of stops. I am not going to make it fully automatic because 1. I like a bit of discretion and any system has to be one that I will plausibly follow and 2. some markets are fuzzier than others, and would benefit from wider stops (had I placed stops at 2 average true ranges for currencies and equities and 1 for commodities, returns would have been better still). So the system is going to be as follows:
  1. Trade on signals based on daily charts, after the close.
  2. Stop must be between 1 and 2 average true ranges from the relevant price.
  3. The relevant price is either the open or the current price, depending on which gives a wider stop.
I have made a page in Tradestation that shows the permissable range for the stop. Here is a screenshot using EUR/USD:
Where to put the profit targets? If the stop is 1 average true range (ATR) away, then I will put the profit target at 2 ATR’s. I will scale this smoothly to 3 ATR’s as the stop moves towards 2 ATR’s. I need to give some thought to a process for moving a profit target — I think it should cost me something to do it.