The principle of randomness, tight stops and the commercial failure of E-Mini

If there was ever a topic that will send experienced traders arguing, it is how to measure and account for randomness and set stop loss/profit target levels. Nor could I talk about randomness without recommending reading “A Random Walk Down Wall Street” by Dr. Burton Malkiel. Dr. Malkeil emphatically argues that past movement cannot be used to predict future price movement. Needless to say, he won’t find this tome in most technical tradesman’s libraries. As someone who has spent most of his life trading institutionally and more recently retail, I think Dr. Makiel is dead wrong, but the book is worth reading to understand randomness and the implications of it on personal trading. of the. Dr. Malkiel’s ideas are broadly classified as Random Walk Theory.

I can personally attest that any trader who fails to account for this component in their written trading plan will set themselves up for failure. If you have traded for any length of time, you will have noticed that between market movements, price action tends to wander in unusual and contradictory patterns. These patterns are frustrating to swap around and can make you want to set your hair on fire.

What is randomness in short-term e-commerce?

Randomness is the noise of accepting and filling orders that are not correlated to a specific trading plan. For example, Joe the plumber stops by his house and tells him that he heard from his Uncle Pete that General Electric has a new wiz-bang technology coming soon that will revolutionize the way power grids deliver electricity. Without doing his own research, he realizes that Uncle Pete is a reputable source of information and buys 84 shares of General Electric. He hasn’t checked GE’s price, nor has he reviewed the company’s charts, but buys based on the recommendation of a third party or fourth party. This is certainly a random purchase. You don’t know Uncle Pete and Joe the Plumber is a casual acquaintance at best. This type of purchase is much more common than you think.

What is the relationship between the average true range, adjusted stop, and randomness?

Any trader who does not take into account the random movement in the market is doomed to fail. I measure this variable using the average true range (ATR) and multiply the reading by 2x or 3x (depending on anticipated market volatility) and set my stops and take profit targets accordingly. It is quite common to read trading websites claiming to use tight stops. While researching this article, I found several e-mini scalping sites that claim to set their stops at 5 ticks. Let’s also assume that the 2x ATR equals a 24 point range. I can tell you that setting your stops to 5 when the correct stop loss is 24 will result in consistent 5 tick losses. In order to win a trade setup of this nature, price action must move in your direction from the start. I haven’t had many trades in my career that shot up without wandering a bit. Generally speaking, I have little faith in people who claim they trade very tight caps and a large body of academic literature supports my belief. On the other hand, winning consistently on a 5 tick stop is certainly an attractive prospect. Unfortunately, I have yet to meet the trader who claims to use tight stops successfully to prove that the strategy works. he does not do it

My point here is to make you aware that you need to take randomness into account in your trading. You cannot set stops in a volatile market based on your account size or the aforementioned 5 tick tight stop. If you set your stops correctly, you have a much better chance of winning than if you claim to use 5 tick stops. As always, best of luck in your business endeavors.