It was brought to my attention that there is a trader who has a very consistent daily profit over the past few months.  So I took a look at his stats:

This is very familiar to me because this is how I’ve been trading for the past couple years.  I typically used a 6 pt stop and have even taken 10 pt losses (about $500/contract).

This can “work”, but is it optimal?  I have been trading 2 contracts for 2 years now because I was not comfortable increasing size knowing that at $500/contract, a $2k loss could happen any time.  And what if I had two $2k losses?  It’s bound to happen.  So that fear kept me at 2 contracts.

Even trading 2 contracts, I’m still scared because a $1k loss could be around the corner.  So every time I put on a trade I know this could cost me $1k.  This is a bit stressful.  The result is I’d scratch trades that came back to my entry, and I scratched a lot of winners that way.  And I’m convinced that this isn’t the best way for me.

Lately I’ve been learning a lot from RomaTrader & GoldTrader740 on Twitter and how they use small stops, 2 pts on average.  RomaTrader will aggressively trail his stop so I’d say his average loss is probably much less, I’d guess around 1 pt. He’s not fearful, when he sees a good opportunity he takes it.  There is a lot to learn from these guys.

RomaTrader has made a very strong case for tight stops and says you can just re-enter if you want so best to just get out.  So why wouldn’t one just stop out at -2 and look for another entry?

Commissions is one reason.  Every time one does that it costs $3.80/contract (or more depending on your broker).  So that weighs in the decision making, at least subconsciously.   When I’ve tried using “tight” stops, it was usually 4 pts.  And when I stop out -4 and re-enter, I usually re-enter at a worse price than my stop out, meaning it would have been better not to stop out.  So I had a delima and that’s how stops got to be more flexible and quite large.

What I learned from these two traders is that my timing was off.  I knew I was always too early.  GoldTrader says to watch and see how it trades there.  You might miss a few but you are less likely to be early.  Entering early requires a bigger stop.  If one enters late, one can use the recent high/low for the stop.  So one advantage is smaller stops.  The disadvantage is missing a few.  There’s no perfect answer here so everyone has to find out what works best for them.

For the past month I’ve been trying my best to use 2 pt stops and trail aggressively.  It hasn’t been easy and my performance has decreased a bit.  But I really feel like I’m on the right track.  When I know a trade will cost me at most $250 for 2 contracts, I have less fear to take it.  As soon as it moves my way I trail my stop and then my risk becomes $100 or even $0.  When a loss is on average $100 and winners are $300-$500, I really don’t care about taking losses.

At least in theory.  In reality I really hate losing and I hate being wrong.  But I am making progress in accepting this reality.  And once in a while a really good R:R comes up where I can risk 3-4 ticks with a potential reward of 4 pts.  These types of trades don’t have to win often to be profitable.  So I feel I must take these.  One winner will make up for several losers.

Lately I compute the R:R for every trade and if I can’t get 2:1 on the first scale I will pass on the trade.  As a result I’m taking less trades, but so far the results are encouraging.  My results are improving each week.

I’m rewriting my trading plan again, it’s a never-ending process.  But with input from RomaTrader & GoldTrader, I really think I have a plan that will work well.  I’ll trade this plan in January without any fear.  My max loss will be 2.5 pts/contract and I’ll have loss limits for each session, day,  & week.  I’ll keep detailed records on every trade so I can track my progress of each setup.  I’ll have a written plan before the start of each session and I’ll only trade my setups. I’ll review my trades every day.

I’m really excited about this and I can’t wait for January 2.  In the mean time I’m working on my plan, practicing on sim, working on some programming projects, and just enjoying some time off.