I’ve been enjoying my time away from trading real time. For one it’s much more relaxed, I can step away from my PC to help my daughter figure out her wii game or held the younger one get dressed. Second, I’ve been taking a step back to re-evaluate everything and look at things from a fresh perspective. I’ve also spent time reading blogs and researching other methods and view points. It has all been very helpful for me. The last time I did this was during our summer vacation (about 4 months ago) and I think it would be a good idea to take a break and step back every four months. In the past I’ve made progress each time I’ve done this.
This time I’ve been working on a few ideas. The first is that lately I’ve been identifying levels and just fading them, without much regards to what could happen for the day or where the market was going over the next 30+ minutes. I’ve been trading with 2 contracts, going for +6 ticks and +12 ticks. The problem is often I get +6 (or slightly less) and then I put my stop to entry – 6 (or whatever my first target got me) and stop out on the 2nd and end up with nothing to show for it. The theory is the bigger winners will make up for the breakevens.
There are different ways to use scaling out (or not use it at all):
- Some use the first scale to pay for costs and then try to be there for the big wins. Joe Ross advocates this method and says that he may only win 20% of his trades and most of the rest will end up breakeven, with a few being a full stop out.
- Some scale out gradually (FT71 comes to mind). His scale outs are something like 12.5% each scale out. That means he can scale out 8 times before being totally out.
- Some don’t scale out at all
When trading 2 contracts, the 2nd method isn’t really available. When the first is taken off that’s 50%. This is why FT71 has advocated trading 3 contracts minimum. When you take the first at say 6-8 ticks, that’s 1/3 of your position. I guess I have proved to myself that trading 2 is not optimal. So I’ve been trading more like the 1st. But to do that one needs some big winners to make up for the breakevens and losses and I haven’t proven to myself that I’m capable of big winners.
I think I’ve been wanting to trade like FT71 a bit too much. I’m not going to get his 2.5 pts/contract. I don’t even see how that’s possible for me. I think a high expectancy like that would take years of practice and experience, which FT71 has and I do not. So it’s a lofty goal.
So I’m thinking I have skipped a step which would just be the 3rd option of not scaling out. I’d trade 1 contract and go for 6-8 ticks. I think this first target should be profitable before adding on. There are two cases:
- It’s not profitable. In this case it doesn’t make any sense for the 2nd contract to bail out the unprofitable first contract. Better to just trade the 2nd and skip the first.
- The first is profitable. In this case do I need a second? Why not just ramp up size on the first and be out of the market? More testing would have to be done to see if an extended second target really adds profits or just reduces the profits from the first target.
The other thing is I’ve studied some statistics from other profitable traders and found that many average just 2-4 ticks. I’ve seen many traders making $750+ per day just averaging 2-3 ticks. I’ve seen a prop firm average just 2 ticks. This idea was brought to my attention by Markus and I’ve been doing a lot of thinking on this point. My November average was 2 ticks and I think that’s not so bad.
In the sake of completeness, there are also big traders averaging over 2 pts/contract. But I don’t know what they’re doing. They could be swing trading or anything else. But with the 2-3 tick average I know they’re not swing trading (at least I hope not).
To be clear, this doesn’t mean these traders are using 2 tick targets. It means they’re averaging 2 ticks per contract at the end of the day. They might have 4 tick winners and 4 tick losers and win 75% of their trades. There are a number of ways to arrive at 2 ticks average. I’m convinced that my way wasn’t optimal as I was using loose stops often getting out for +2 ticks, so that’s what I need to work and not the +2. I hope that makes sense. In other words, +2 avg is ok but I need to reduce my risk.
I’ve been debating about scaling out for a while now and my current thought is to trade 1 contract and use a max 6 tick stop and target the HVN ensuring that I have at least 1:1 R:R ratio or I skip the trade. This is a very simple risk management and I need a 50% win rate to be profitable. Ideally my risk would be 4-5 ticks and my target would be 6-8 ticks (often my levels are 6-8 ticks away from an HVN) and that’d give give a 2:3 R:R (risk 2 to make 3). With that my win rate would have to be 40%. Best case, risk 4 to make 8 and that’s 2:1 which requires a 33% win rate. So averaging all those would give a win rate around 40% required win rate to be profitable.
So my current thinking is that I will give this a shot. I will keep stats on how often price goes to the other side of the HVN and that will tell me if a second target would make sense or not.
In order to increase the chances of getting a 40% win rate, I’ll need to be more selective with trade areas and that means looking for more confluence and not just fading every level I see. This will take some more patience but trading two markets makes it much easier to be patient. Overtrading has been a big problem so this is one way to reduce overtrading.
So this is my current plan. What I’m doing now is using playback & market replay to practice a bit on historical data. This will help build confidence and give me some more data to work with.
This is a work in progress and could change over the next few days, but I thought I’d write out my thoughts. It really helps me in my thinking and I hope you find it useful as well. If you feel like sharing your view on scaling out, let me know how you’re doing it (or not doing it).