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Improve Risk:Reward by using different time frames?

Posted: Tue Apr 22, 2003 1:21 pm
by Sir G
Thoughts on using multiple time-frames to generate trades & control risk.

I have a buddy who watches setups on daily/weekly bars, then enters his trades on 3min bars. His entries and risk begin in the world of 3min bars, so the risk is tight... but he looks for the market to move in his favor where he will hold the trade for a number of weeks. Recall his setups and expectations are based on longer time frames. His reward:risk numbers are in the area of 6:1 and this for the last 7 years or so. And he is a very nice guy to boot.

My big thing (well, one of my big things) is to take entries based on daily signals and control the risk in the 3min world. Nothing new, just something that makes sense

While you need to give the markets room to run, there may be a benefit to ponder this little trick.

Apply behavior conditioning to the market, if it behaves at the intraday level expand the risk up to the Longer Compression exit levels. Make it prove itself, but only reward the trade when it proves that it deserves it!

Whatever timeframe you are basing your system on, if you look at things from the perspective of Reward:Risk it just might make sense to try to decrease risk while increasing the opportunity.

One way this might be accomplished is by looking at a smaller time frame to base your entries/risk on, while the goal is to have the trade work it’s way up to the longer time frames exits.

Food for thought. Any feedback?

Sir G

Posted: Wed Apr 23, 2003 3:43 pm
by Forum Mgmnt
I often do this sort of thing on a discretionary basis. We have various shorter term systems that sometimes generate trades that turn into longer-term system entries. I sometimes keep the trade on and ignore the exit criteria for the shorter-term system for a trade that makes the transition into the longer time-period.

I know a few long-time traders who have used this technique to build positions of great size without incurring as much initial risk.

I would love to do more analysis of this concept but I don't have enough intraday data for the stock market, yet, and this concept has not reached the top of the "research pile".

Posted: Mon May 19, 2003 3:44 pm
by Josh M.
Hi Sir G. In the world of 3 minute bars how many points would an entry have to lose before your friend is convinced the initial move requires an immediate exit?

Posted: Mon May 19, 2003 5:39 pm
by Kiwi
Yes, I have Josh's curiosity about the number of failures you would take between 3 minutes and daily. This is not because I believe the approach is flawed but because I think that if shes looking for 3 minute setups she may get whipsawwed a lot.

On the overall technique it seems sound. When trading with discretion I use Andrews Median Lines to form a reliable channel (see posting on moving averages viewtopic.php?p=1404#1404). Like most ML traders I use them to confirm continuation of a trend and offer a likely entry point rather than to predict a future direction. Many ML traders trade a 15 minute or 30 minute bar within a daily timeframe. On indexes it tends to be shorter with the larger trend defined by 45minute bars and trades in the 5-15minute range. In my experience this does offer a high profit factor.


Posted: Sun May 25, 2003 2:04 pm
by Sir G
Josh M wrote:In the world of 3 minute bars how many points would an entry have to lose before your friend is convinced the initial move requires an immediate exit?
It is dynamic so it's based upon the market action. Initial Risks are based upon the market action in the 3 min world, so it isn’t much.

This concept is not about choppy trading.... a system where you will be stopped out forever for a series of small losses while waiting for the big move to show up. This will happen if you are trading a very static system. But it’s really the opposite as this concept screams for the system to be dynamic. Risk is controlled by being graduated to the next higher time frame. It’s the same as behavioral conditioning, if the trade is profitable, reward it by moving the risk control to the next higher time frame.

Because the trade’s origins are in the world of 3min bars, the stops can be moved to a point that would result in a profit somewhere between the first few minutes or the first couple of days. It’s really the ultimate in being true to the adage of cutting losses and letting profits run. You really milk the opportunities this way as your trade will morph into the current opportunity & environment. If you look at most all systems you will see that they try to demand things from the markets, this concept is one of the ways that you can accept the market and its opportunities for what they are and demand a few things from your system. I believe that this is a much healthier way to view things.

Take a look at c.f.’s R-Mult distributions at
Imagine something along those lines, but with a few 20R, 30R, 40R & 50R trades added to it. By design higher R-Mults will be nurtured with this kind of logic.

BTW, Van Tharp is usually given credit for the concept of R-Mults, but in fact the concept was conceived and developed by my good friend Chuck Branscomb. It is from Chuck that Van Tharp learned this complete and very important paradigm. Thank you Chuck for that contribution!

We should always give credit to whom it is due. Then you can easily see the line drawn between the experts and the messengers.


Posted: Tue May 27, 2003 12:26 pm
by Chuck B
Thanks complete the story, I thought of using initial risk, R, in a trade to base my system analysis on back in 1994. I was looking for a way to normalize expectation calculations as opposed to looking at it $ terms which was next to useless in system design. I viewed a tape from the "turtle" who was marketing the turtle system where he talked about how the turtles were taught to use volatility multiples, N-multiples, to measure how far a trade had progressed as I recall (sorry, it's been 9 years since I saw it when a friend invited me to view his copy). After thinking about it some, it became clear that in order to calculate expectation properly, I needed to normalize my analysis by the initial risk,R, in each trade. This is something similar to the turtle thing, but in my case it extended to whatever the risk assumed was (i.e. 3min bar reversal pattern, volatility exit, opposite channel breakout, moving average, whatever -- just as long as that initial risk is known at trade entry).

That one step opened up a whole new paradigm for me to understand how my systems work as I could now view each market, market group and the whole system as a collection of risk multiples, R-multiplesâ„¢, whose summation divided by the total number equals the expectation in terms of R. From that spawned R-multipleâ„¢ distributions, etc... I provided a number of articles for Van's Market Mastery newsletter in 1996-1998 showing a lot of system design based on R-multipleâ„¢ stuff. I own the copyrights to all my material, so I have thought of making it available in PDF form for free at some point. The term "R-multipleâ„¢" and its derivatives are actually Registered Trademarks (with the USPTO) of my company.

Following from my thoughts, Van incorporated R-multiplesâ„¢ into his seminars and teachings in addition using my writings in his book (with my permission) although they are labeled with an incredibly small footnote. Also following from R-multipleâ„¢ thoughts was Van creating the marble game where the marbles are an assortment of various R's, both positive and negative.

As an aside, in terms of position size management, if you look at what Tom Basso (in Van's early seminars and then later in a booklet the CME produced on how to become a CTA where Tom disclosed his whole position sizing and dynamic risk control strategy) and Ed Seykota have offered along the way over the years along with the turtle pyramiding scheme, you cover 95% of what Van has discussed in his book and reports. The last time I had contact with Van was in 1998, and he used to give credit to Tom and Ed during his seminars when talking about these concepts. When I did an article showing the effect of Tom Basso's position size algorithm, I credited him and gave a footnote to the CTA booklet. Tom's a great guy and his sharing his work freely at a Tharp seminar many years ago (damn, I think it was 10 years ago this month! how much faster can time fly? :D ) was a great benefit to me. I would assume that Van honestly tells the story of how this R-multipleâ„¢ stuff all came about also in his seminars now.

Posted: Tue May 27, 2003 4:25 pm
by AbsoluteReturn
Could anyone tell us, if Tom Basso's booklet where he disclosed his position sizing strategy is still available?

How to Become a CTA

Posted: Tue May 27, 2003 6:38 pm
by Joe

I recently received 'How to become a CTA' with Tom Basso's risk control report from CME – give them a call or email them and they will send you a copy.

Best regards

Posted: Fri Dec 05, 2003 11:22 am
by eminime
Forum Mgmnt wrote:...We have various shorter term systems that sometimes generate trades that turn into longer-term system entries.
Forum Mgmnt, do you sell any of these short term systems?

Re: Improve Risk:Reward by using different time frames?

Posted: Fri Dec 05, 2003 12:09 pm
by eminime
Sir G wrote: Whatever timeframe you are basing your system on, if you look at things from the perspective of Reward:Risk it just might make sense to try to decrease risk while increasing the opportunity.Sir G
Sir, isn't this exactly the intended result of trying use MAE and MFE studies on one's trading? This topic of reducing risk is SO intriguing to me because when I review my results I see that if I could control my losers to the point where they don't exceed the average MAE of 80% of my winning trades, I'd have a profitable system [until I find another anomaly but that's a different discussion] .

As I think through this, tightening up my risk would result in more b/e trades, less $ lost on the losing trades, and, a positive sloping equity curve in my trading account. I wish it were this simple.

Posted: Fri Dec 05, 2003 12:10 pm
by Forum Mgmnt

I don't sell systems and never will. Any of the systems included with VeriTrader are publicly available elsewhere for free.

We sell software to help you learn about trading concepts and systems that already exist. When Version 2.0 of VeriTrader comes out you will also be able to develop your own systems with our software.

- Forum Mgmnt

Posted: Fri Dec 05, 2003 12:18 pm
by eminime
Understood c.f.. Thanks for the clarification.

CTA book

Posted: Sat Dec 06, 2003 9:28 am
by yp
I just wanted to add that the book "how to become a CTA" is not a book written by Tom Bosso, it does have a few sections written by him.

I had a fellow at work bring it in a few months ago. The book is absolutely loaded with helpful hints on regulatory advice from top traders, money managers and accountants dealing with business issues relating to CPO's and CTA's. I highly recommend anyone interested in these topics to order one for free from the exchange, I found it very informative to say the least.


Posted: Sat Dec 06, 2003 10:44 am
by MCT
When Version 2.0 of VeriTrader comes out you will also be able to develop your own systems with our software.
Hi Forum Mgmnt,

When will it be available?


Posted: Tue Jan 06, 2004 5:20 pm
by Douglas
Back to the original thread: Improve Risk:Reward by using different time frames?

This actually makes very good sense to me. Think about volatility – volatility is a function of time. Movement per unit time. So why not think about risk in the same way? Most of us likely already do because we link risk to volatility. Volatility is linked to time, therefore risk is linked to time. You wouldn’t put a 2N stop on a 3 min bar system. You would use the appropriate length of time for the system. So, if the length of the trade becomes longer, the volatility should be accounted for as well.

Of course, then you have to get into actually implementing the system, which would mean a system of measuring series of volatility periods, then switching from short to medium to longest as the trade goes on (but hey, computers are cheap these days, right?).

Now consider if you started with a day-length in volatility (say, N) then I wonder if there is any merit to examining a longer term (say, weekly-N, or monthly-N) to expand this risk-time view to very long trades with massive positions. But now my mind is going faster than my typing…

Any more thoughts?

Posted: Tue Jan 06, 2004 6:13 pm
by Bondtrader
The list of age-old market aphorisms includes "always use a stop" and "cut your losses, let your profits run." Another one is "never loosen your stops, either leave them alone or else tighten them."

However, this longer-timeframe, bigger-volatility-stop idea will result in drastically loosening your stops. You start on, say, 15 minute bars and your stop is 2*(15-bar Avg True Range) = 24 ticks. As the trade progresses you switch your viewscreen to, say, hourly bars and now your stop is 2*(15-bar Avg True Range) = 86 ticks. As it progresses some more you switch to daily bars and now your stop is 210 ticks.

Notice that you've loosened your stop from (24-ticks-away) to (210-ticks-away). The old timers call this unwise.

What does Neoticker / Tradestation / Trading Recipes / Veritrader show? Is the idea unwise?

Posted: Tue Jan 06, 2004 8:49 pm
by Douglas
I suppose the shorter term system traders would typically trade more contracts than when it morphs into its longer term Green Hulk. So one would have to either trim down the size (make the position smaller to account for the widened stop) or trade the smaller number in the short term system with smaller risk. I’m going to do the latter because I’m crazy like that.

If the system is designed to take short term trades and turn them into long term trades, let’s assume that the initial risk is very low. In this manner, when the stop is widened due to the increased length of the trade, the risk is still low (although substantially increased from the initial amount).

Say you risk 0.25% on your short term trade and it happens to turn into a long term trade, so your stop loosens to, say, 4 times as large. Now you’re risking 1%.

This can be likened to the original turtle rules (this is the name of this forum, right?) where there was an intial ½ N stop during the first day of entry, but this stop was widened if the stop wasn’t taken out. Initially there is, say, 0.5% risk then 1%. I still think there is some room for thought for those who wish to keep extending their trades – even without breaking fundamental rules of trading. I’m not one of them, but hey, I like to think.

I wonder if those who DO extend the length of their trades start off with smaller risk, or do they make the position smaller to account for the widened stop?


Posted: Tue Jan 06, 2004 11:37 pm
by Kiwi
Your provide one approach to it Douglas but here are a couple more.

I would evaluate my equity based on closed trade equity or a variant including money protected by stops. I would never "loosen of my stops".

So say I entered with a 5 tick risk (vs 30 for a normal eod entry). When the first retracement took place I might snuggle my stop up to give a near zero risk of loss on that position by gap or fast market. Then I would take the next entry with a 5 tick risk ... etc etc.

I might also use strategies based on taking a part position at first trigger then a second when the move provides more confirmation etc as a way of reducing loss if the initial trigger doesnt produce and increase size as the potential move becomes more likely.

Overriding would be some allowance for total position risk which would prevent you pyramiding to infinity. Possibly this is the same thing you were saying :)


Posted: Fri Feb 27, 2004 8:15 am
by Bernd

Posted: Fri Feb 27, 2004 9:11 am
by Forum Mgmnt
I meant to comment on this earlier but forgot.
Bondtrader wrote:However, this longer-timeframe, bigger-volatility-stop idea will result in drastically loosening your stops.
Not necessarily.

What I've looked at is not increasing your stops, but simply not exiting the trade based on the shorter-term profit exit criteria when it moves into a signal for a longer-term system.

Let's say you enter at 310.50 with stop based on 5 minute bars at 310.20. Normally, you'd exit based on say the low of the last 10 bars.

Assume this trade progresses to the point where it triggers a signal for the medium-term system based on daily bars which might exit on a penetration of the previous days low.

At this point, you simply remove the short-term exit criteria and move to a longer-term profit exit. You don't change the entry stop loss price, only the price you'd use for a profitable exit.

In this example on the first and second day the original stop price might be the closest. However on the third day it is very possible that the second day's low is much higher than the original short-term system would have exited. The trade might go for eight or ten days and then trigger a longer term system with a stop based on a moving average and allow for even more profits.

This approach will allow you to have a much larger position for the same or less entry risk.

I know of several very successful large traders who do this sort of thing on a semi-discretionary basis.

- Forum Mgmnt