Active positions are not required to have a protective price order entered into the market to be successful.  However, positions without a protective price often have larger point losses than would have happened had the position been protected with an active protection order.

 

When we created the MACD Entry and Exit system in our first tutorial lessons, we didn't use any protective price orders to control how much a failed position would loose.  That decision was intentional so we could keep the process of creating a simple trading system uncomplicated.  In this lesson we are going to add protective orders as part of our order process and use that initial protective price as a maximum risk amount for each order.

 

Price Protection Methods:

Determining how to protect a position is best determined by the trader's perception of results from using various protective price calculation methods.  For example consider these ideas for calculating a protective price value:

Money Amount Offset

Percentage Offset

Volatility Range Offset

 

Protective prices are best placed close enough to the current market prices to prevent unreasonable losses, but they must also not be placed too near them so the normal range market's price oscillations interferes with the positions opportunity for larger gains.  When prices interfere with the trends normal movement the protective price will prematurely terminate the position leaving the opportunity that position might have provided.

 

Money Amount Offset:

Protective price is determined by establishing fixed monetary amount and using that value to discover how many points to offset the price.  In most cases this protection method is used with a fixed quantity size of 1.  When more than one contract or share is required the fixed amount can be the risk amount of each contract, or it can be the total risk when the quantity is greater than 1.

Example:

Fixed quantity position of 1 Long position share for a symbol priced at $100.00 the offset protective price will be determined multiplying $1,500 by $0.01 to discover the protective point offset of $15.00 and a protective price of $85.00.

 

For a fixed quantity of 2-shares of a $100 market Long position will divide the $1,500 by 2 to get $750 protection amount for each share.  With $750 multiplied by $0.01 the protective offset amount will be $7.50 subtracted from $100 to get the protective price of $92.50 for the total position quantity.

 

Futures use a monetary basis determined by their contract size and have Big-point value that is used to find the protective price.  For example a Crude Oil contract priced at $100 will use a Big-Point value of $1,000.  A monetary amount offset of $1,500 divided by $1,000 determines the a contract protection offset must be placed 1.50 points in price change.  This 1.50 point offset for a Long position priced at $100 will place the protection amount at $98.50.

 

Percentage Offset:

Price percentage offsets are frequently used with equity type trades, and they are calculated by applying a percentage rate to the purchase price of the share.  A percentage can be applied for portions instead of the total position quantity by creating various protective price orders for some of the quantity of shares in the trade.

Example:

A Long position of 1 symbol-share will exit the position when a 10% drop in price is printed in the exchange.  Using our $100.00 share we get a $10.00 price offset with out 10% price drop rate to establish a protective price of $90.00.

 

Volatility Range Offset:

Future contract trades often use a measurement of recent market volatility to determine likely price range that a position might experience.  An advantage in using a volatility measure is how it gets the trader away from using their wallet size for making critical decision.  Instead a volatility approach allows the trader to get an estimate of the likely price range the market is experiencing at the time of entry to estimate where a protective price can be established without it being in place that would cause the trade to terminate with a loss from having the protection to close to the market's current price range.

 

Volatility estimation used for initial price protection placement use a the most recent period of history to get an estimate of the most recent price range.  Recent period lengths are often a user available parameter where the number of bars to observe can be adjusted by the trader.   With a period length the range of each price bar is then observed There are various methods available that calculate the range of of each price bar and then average that information to get an estimate of price point movement that can be used in helping the trader establish a protective price.  

 

Along with a volatility estimation of price ranges and method for adjusting the volatility average is needed so the size can be can be increased or reduced by the user.  Adjust volatility size usually needs a decimal number to create a offset estimate that will work for all the markets in the portfolio.

 

Trading Blox provides users with a built-in function known as the Average True Range calculation.  This concept was published by J.Welles Wilder Jr. in his book "New Concepts in Technical Trading Systems" Chapter III, Volatility Index.  Wilder's Volatility Index measures a price bar range from its high price to low price, but it also includes the previous price bar's close price if including that price into the range would increase the point value of the range.  In that same chapter uses the index in an averaging calculation to estimate the price volatility.  

 

Our lesson plan to add protective exit orders will use Avg.True-Range calculation and we will show how to add it to our tutorial system.  For now know that when it is applied along with the parameters required to control its calculation and adjust its volatility application in an entry section consider this type of code will be added as this section makes progress:

Example:

'  Create a protective offset point protective point sizeL
stopWidth = ATR_AdjustRate * AverageTrueRange
 
'  NOTE:
'     ATR_AdjustRate = AvgTrueRange Entry Adjust Protect Rate
 
'  In each entry order section for a Long and Short position
'  the application of points changes:
 
'  Create an initial LONG Position protective price
longStopPrice = (instrument.close - stopWidth)
 
'  Create an initial SHORT Position protective price
shortStopPrice = (instrument.close + stopWidth)

 

Example above shows the price adjusting points to create a Long Position protective price below the current market prices, and also for creating a Short Position protective price above the current market prices.

 

This completes this topic.


Edit Time: 9/25/2017 09:09:58 AM


Topic ID#: 479

 

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