Random principle, tight stops and failure of E-Mini trade

If there has ever been a topic that will send experienced traders to argue, how to measure and consider random and stop loss / profit target levels. Also, I couldn’t talk randomly without recommending Dr. Burton Malkiel’s “A Random Walk Down Wall Street”. Dr. Malkeil stresses that past movement cannot be used to predict future price movement. Needless to say, you will not find this domain in technical merchant libraries. As a person who has spent most of his life institutionally and recently in retail, I think Dr. Makiel is wrong but it is worth reading the book to get random attention and the implications for your personal trade. Dr. Malkiel’s ideas are randomly classified as Random Walk Theory.

I can personally verify that this component will be doomed to fail by any trader who is not included in their written business plan. If you trade for a period of time you will realize that price action tends to follow unusual and conflicting patterns of price action. These patterns are frustrating for the trade and can cause you to want to set your hair on fire.

What is random short-term e-mini trading?

It is random to accept and comply with orders that are not tied to a specific business plan. For example, plumber Joe stops by your house and tells his uncle Peter that he has heard that General Electric has a new wiz-bang technology that will be released soon and that the grid will change the way electricity is distributed. Without doing your research, you think Uncle Pete is a reputable source of information and you are buying 84 shares of General Electric. You have not checked GE’s price, nor reviewed the company’s charts, but have purchased them based on third-party or fourth-party recommendations. This is definitely a random purchase. You don’t know that Uncle Pete and Joe the plumber, at best, are ordinary acquaintances. This type of purchase is much more common than you might think.

What is the relationship between the mean true range, the narrow stop, and the random range?

Any trader who does not take into account random movements 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 the volatility of the forecast market) and set my stops and profit targets accordingly. It is very common to read commercial websites that say they use tight stops. While researching this article I found e-mini scalping sites that say they settle in 5 ticks. Consider also that ATR is a 2x 24 point interval. I can say that putting your stops at 5 when the correct loss is 24 will result in consistent 5 tick losses. To win a trade setup of this nature, price action must move in your direction from git-go. I haven’t had much of a career in my career without going around a bit. Overall, I place little faith in those who claim to negotiate ultra-tight stops on individuals and a large pile of academic literature supports my belief. On the other hand, winning consistently with a 5 tick stop is certainly appealing. Unfortunately, I have yet to meet with a trader who claims to use close encounters to prove that the strategy works. He doesn’t.

My intention is to let you know that you need to have a random account in your trade. You cannot set stops in the volatile market based on the size of your account or the aforementioned 5 narrow markings. If you set the stops correctly, you have a much better chance of winning than when you use 5 tick stops. As always, best of luck in your negotiation efforts.

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