As a swing trader working on opportunities to make profit when the market changes direction the market will sometimes go against you. The results in the long run are dependent on how you and/or your trading robot handles those situations.
I’ll try to explain the rules and how my strategies solves these situations.
These are your options:
- Adding extra positions
Classic stop/loss close to the entry level doesn’t work well for swing strategies. Maybe it is okey for just one trade, but with many trades you will get too high percentage of trades that ends up in stop/loss. That will ruin your long term results.
Adding positions is also difficult, but I’ve found that it’s better. Especially if you combine it with many robots who runs i parallel with really small position sizes for their first positions. I also use safety stop/loss, but you are not supposed to ever reach them.
This is an example from Nasdaq 100 in the last two weeks with a swing strategy for catching reversals. In this case it uses max 3 positions and a stop/loss for safety. Blue arrows indicate long positions.
The entries on the Jan 4th didn’t reach target and the index fell further. When stop/loss levels were reached (small red lines) the losses were taken. The strategy then almost immediately entered another swing trade according to its rules with three positions. In that second case with trades nbr 4-6 the target is reached within a couple of hours. The equity curve on the right suffers from the safety stop/loss, but at least the positions were closed. The smallest possible total loss on my broker is 60 USD and that is a way to keep losses small.
Add another position
One option to improve the results is to allow max 4 positions instead of 3 in the same strategy:
Now the reversal on Jan 4-5th was enough and the combined target were reached after 2-3 days.
Add more space between trades
A better solution is to not allow the algo strategy to add trades as quickly. By adding to the minimum number of points the market has to move before an additional trade is opened the result gets better.
Adding space between first and second trade always improves statistics, but also lowers the profits for the same strategy.
With both these adjustment this is the resulting equity curve last year:
This area of risk and safety rules has been my focus area for the last two years. Risk and safety rules are ten times more difficult to define than entry and exit rules.
I believe you need to make a portfolio that combines many strategies to get it right. It is complex but it is much easier to do and execute with trading robots than to do it manually.