I started a new blog post (which I’ll post tomorrow) and while writing I was watching ES test the prior day low. We’re in the Globex session and it’s normal for this low to be tested. I saw strong selling going into this low and the trend is down, so this would be a fade trade. I was going to pass on it as I don’t like fade trades, but I saw that it was holding.
I calculated my risk and where I’d put my stop. I have a support level at 69.25 but that would make a stop over 2 pts wide. Then I thought, why let it go that far. I could put my stop 2 ticks under yday low and it holds or it doesn’t. So I took the trade and my stop was just 3 ticks away. I’d say the probability would be greater than 50% that I’d stop out. However, my target was the Globex VPOC at 76. So if I’m right, I’d make 20 ticks. So I risk 3 to make 20. Even if the win probability was 20% I’d still make money (4*-3 + 1*20 = +8 expectancy).
So I entered the trade and sellers came in just 1 pt above my entry. I scaled half at +4 ticks and that put me in position to win 1 tick. I have no risk. However there is a small catch, that alters my expectancy calculation.
Now I’m risking 6 ticks to make 24. With 20% win rate, my expectancy is now 0. So I would have to win more than 20% of the time to make this work. This shows how scaling out can hurt expectancy. I’m not sure I understand how all that works really because the expectancy is actually changing as the trade unfolds. Seeing strong selling right after my entry lowers my probability of a winning trade. Taking half off puts me at no risk and makes my probability of a winning trade 100%. It gets complicated. My current thinking is that a planned, forced scale at +x ticks can hurt expectancy. Instead I prefer to go for something bigger like 4 pts and if the trade starts looking bad or that it won’t hit my target, I scale one off.
This trade side-tracked my
discussion other post a little but since it came while writing this I thought it would be worthwhile to include it in this post. I started my other post because I didn’t plan on taking any trades here, since it’s against the trend. But then the calculations made sense to me and I thought I’d give it a shot.
It’s like calling with pocket 2’s in a big multi-way pot. Your chance of winning is small, but if you flop a 2 you can win a big pot. And this is an example of how studying poker has helped improve my trading. I’m constantly calculating my outs & odds while playing poker. Shouldn’t I be doing the same while trading?
Cutting winners is another problem of mine. That’s like folding a decent hand in a huge pot. Notice here if I cut my winner short and say take profit at 75, then I’ve completely changed my expectancy calculations. The reward would be 16 ticks instead of 20. That requires a higher win rate, and unfortunately win rates the most difficult thing to predict as the market can do anything. Those who trade the same quantifiable setup over and over have a much better idea on their win rate, I’m not there yet.
So I let this go. It may pull back a couple points but I’m not cutting it short unless I see massive selling & absorption just before my target. Actually I just noticed VWAP dropped down to 76.00 so I have VWAP & VPOC there and I should front run by 2 ticks so I moved my target to 75.50 and will leave it a lone.
It may come back and stop me out. But if it does I’ll know I made the right play. Because if I cut the winners short each time, over time I’ll actually end up with less profits.