Profits are fun but what about the potential losses
while in the trade? Figure 8 shows the MAE for
each trade. Notice that in Figure 8 the MAE for
most of the trades was –5 ticks or less, with two
trades between –5 and –10, and two large negative
movements, one for –17 (Trade 1) and one of –30
(Trade 8). Trade 3 never was at a loss.
If we compare this information with the realized
profits and losses shown in Figure 6 we can
see that Trade 1 had a closed out loss of 15 ticks
and Trade 8’s closed loss was 27 ticks.
Figure 9 (next page) is a composite display
of this information for each trade, including an
equity line for the month of April.
Based on this limited review of just one
month’s trading we could come up with two additional
strategies that would reduce our risk
while adding a target strategy for boosting our
profitably. First, use a two contract position with
a 10 tick loss from entry as an initial stop loss.
Second, use a target provision of 20 ticks for the
first contract, and hold the second contract until
an exit signal occurs.
CONCLUSION
What we have discovered here are the template
characteristics I described earlier in this issue. We can now make some
assumptions about this mechanical
system. If the market
goes into a tighter trading
range (the rhythm of the market
contracts) the twenty tick target
will probably not be hit and
only add more losses. But as
long as the daily ranges are reasonable
the mechanical system
has a chance to make profits.
But there is a problem in that
one month's trading results are
not enough of a back track.
Other months may be better
or worse. Therefore, this set of
procedures should be reviewed
over a number of years worth of
data before committing your capital.
It may turn out that the twenty
tick target is too high and the ten
tick stop loss is too tight. You
won't have a sense of confidence
unless you check it out.
Something else we gain is the
psychological edge of having a set
of procedures that are designed to
take advantage of two types of
markets: Trend and trading
ranges. Most importantly the
mechanical system is on the line
not the trader’s ego. You have
to learn to separate the two.
In the next issue of the Fibonacci
Trader Journal we will
look at both sets of rules for
trading during the month of
May and see if there is any improvement
based on the additional
rules.
We offer this particular topic in
the Fibonacci Trader Journal as an
example of the steps to follow when
deciding how to determine what is
a reasonable profit objective, and
what is a reasonable amount of money to risk on any one trade. We
let the market tell us.
Take these concepts and apply
them to your favorite market.
If you discover that your procedures
do not make profits on paper
you will be very glad you
learned it that way instead of the
hard way.
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