E-mini Trading: Do Your Stop/loss Points Get You In Over Your Head?
There is a tendency among traders, both new and experienced
, to overestimate their predictive abilities as they relate to e-mini futures contracts. Over trading and trading too many contracts are common characteristics of the hard charging e-mini trader; but their exuberance might be put to better use if they held off a few years and gained some valuable experience to match their aggressive trading style.In any event, it is imperative to always trade with your stop/loss limit defined and in place. I have known many e-mini traders who managed their stops mentally, without even an emergency stop, and eventually they encounter a disastrous result via a spike in the price action. Always trade with stops in place; enough said.
But how do we set stops that are wide enough to allow a trade to develop, but narrow enough to fall within individual risk parameters. If you run your stops too tight, you will find yourself stopped out of trades by ordinary market noise. Too wide, and your losses can be staggering. There are other factors when considering your stop losses targets, too:
Individual appetite for risk, ranging from aggressive to conservative (I recommend a conservative approach to trading.)
Market conditions at time of trading
Price positioning at time of e-mini trading decision
Size of traders account can sometimes dictate a certain trading style
I find myself favoring the use of the Average True Range (ATR) when considering the length of my stop/loss points. Depending upon which author/system to which you subscribe, the suggested stop/loss is expressed as a % on the ATR; and the percentages range from 50% to 150% of the current ATR. Though the numeric value of the ATR is an average of a pre-selected time period, they mustnt be construed as predictive in the sense that they have an incredible sense of accuracy. What we can glean from the ATR is that over the last, say, 14 time periods the market has average x and if things stay roughly the same, this is the kind of price range you can expect on a 3 minute bar, or whatever time period you have chosen.
So, we have learned that the ATR can give us an idea of what kind of price range/bar we have been experiencing, and barring any knowledge to the contrary, we base our stops on the ATR.
I like to use at least a 1:1 ratio on my ATR-set stops, and that may be a bit wide for some tastes, but I am a vocal proponent of using wide stops, as opposed to tight stops. With our ATR number in mind, we now have a general idea where the price may move in the next 3-4 bars. Its a great technique, but dont forget to keep an eye on support/resistance lines, fibgrid lines, and important Fibonacci lines when eyeing a trade. Can you safely execute your trade while staying within the general parameters of support/resistance?
In summary, I have tried to make the point that stop/loss targets should be given consideration. Too tight, and you find yourself stopped out of a trade on simple market noise; too wide and you expose yourself to excessive risk. The key is to find that happy medium each day where you can handle a retracement without getting stopped out, and let your trade run when possible. Great luck trading.
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