Dec 212011

First, I’m trading on sim this week and next week.  But I’m trying to trade as if I was trading real money.  That’s important.  I wrote out my new plan and I’m testing it.  I will trade it with real money on January 2 and will be posting my progress.  I seem to do better when sharing my results and getting feedback from others.

Second, I did not trade well today.  I reviewed my trades with another trader and my entries were rushed.  My biggest weakness is being too quick.  My wife tells me the same thing.

Today I was not having discipline problems but rather just not seeing it properly.  Ok I think Trade 2 was partly a revenge trade but I really believed in a long there.

And I was also unlucky.  I had two stop losses that were 2 ticks off the high/low of the move!  That usually doesn’t happen twice like that.  Could be bad luck or holiday trading who knows.

But what I wanted to share is this:  Even though I traded badly, misread the market, was early, and was unlucky, I still finished positive!


Because one winner made up for the 3 losses!

This is exactly how I want to trade.  Well I don’t really want to start every day with 3 losses, but I do want losses to be so small I don’t care that much and I want winners to make up for them.  Instead of the other way around.

I’m quite happy with my day today because it gives me confidence that I’m on the right track with this Risk/Reward idea.

  11 Responses to “R:R in Action”

  1. “My biggest weakness is being too quick. My wife tells me the same thing.” ROFLMAO

  2. Michael, I’ve just started following your blog more recently. Do you use the DOM for reading orderflow when entering and exiting your trades much?

  3. Kyle – I place orders with the DOM but I rarely use it for trade decisions. I think it’s more of a distraction than anything else. There are so many bots playing games that I don’t really find it useful. I much prefer to study what actually traded using the volume ladder.

  4. Thanks for your posts. Here is an idea I am working on with the following assumptions:
    1) Risk management is a top priority
    2) I don’t want to care about missed trades because by the time I recognize and act sometimes they are gone
    3) Trade only the setups that I am comfortable with and they will get tweaked as I improve

    Apart from the usual questions we ask (like what has the market done so far, what is it trying to do, and how good a job is it doing), I am adding the following questions before entering:
    1) Are the odds of getting my first scale-out better than hitting my stop?
    2) Do I have a good R:R for the rest to make it a worthwhile risk?

    I am making mistakes in entries but my good trades mostly have answer of “yes” to both of the above questions. And my bad trades have an answer of “I had no clue or I took a chance without an edge”.

  5. Brahma – These are all great questions to ask and that’s how we should feel about missed trades. I think we should work hard not to miss them and if we do then we must not be upset at missing them.

    Your question “Are the odds of getting my first scale-out better than hitting my stop?” is an interesting one. I believe one does not need > 50% win rate to be profitable. I think if one uses tight stops and big targets, the win rate may be less. I think 50% is a good win rate to go for because any strategy with a target bigger than a stop will be profitable with a 50% win rate.

    FT often says it’s 50/50 on the next trade, so rather than try and figure out if my next trade will be > 50, I prefer to just put the trade on and see what happens. I will track my results over time and find out what my win rate is. In my simulations one can still be profitable with a 35-40% win rate.

    What I’m saying is I’m not able to accurately determine if my odds are greater than 50/50. Usually when I think a trade is high probability it is the one that will not work, and the ones I’m not sure about are the ones that pay well. If it’s obviously everyone will be on it. If it’s not obvious then people will miss it and have to chase it and that really fuels the move.

  6. Hi Michael, I was wondering if the 3 trades you were stopped out on would have worked with a wider stop ? or did the market reverse and you would have been taken out anyway ? Would you take 3 hits in a row live and come back with a fourth trade ? I appreciate what your trying to do here. For me those stops are pretty tight.

  7. Hi Michael,

    I’ve been sim trading this R/R idea for quite a while now, and unless you have VERY GOOD entries:
    1) It is hard getting 10 points on a 2 lot, 6-7 points is more real (again, unless your entries are perfect). So usually a winner cover for 2 loses not 3.
    2) Trading for big winners with 2 lots will lead you to leave quite a bunch of points on the table, which will result frustration, which will result revange trading (sometimes B/E or even losers trades have MFE of 2 points, this is hard to see).
    ** LIVE – just happend, a 4 points MFE turned into a B/E on a quick drop – frustrating.
    3) Sometimes in order to get the big winner you need to trade late into the US session, which I know you try not to do.

    My conclusion thus far – You need to be very good in finding S/R and trade those aggressively (meaning as close as possible to the level).

    Just my 2c… Good Luck.

  8. “If it’s not obvious then people will miss it and have to chase it and that really fuels the move.”

    Very good point.

    Re:Brahma’s comment- I believe questions are useful as part of a filter when making trading decisions. But rather than focus on system-based questions, most would benefit from SELF-based questions. Every system/approach is discretionary to some degree (exiting at price zones instead of prices etc) so we need to make sure that WE are consistent in the face of the uncertainty of it all…through the inevitable draw-downs as well as the increases in equity.

    One would be surprised at how much even the most disciplined person can stray under pressure/elation. That’s where the “Trading Well” S.Sheet comes in handy!!

    Love the blog and the discussions.


  9. Jason – The first two trades were the same trade and it would have worked the first time with a 4 pt stop. The third & fourth were the same trade and that would have worked with a 4 pt stop as well.

    The issue for me is if I use a 4 pt stop then to have a favorable R:R I need a target of 8 and that’s not easy to get. If I go for 4:4 then I’d need a > 50% win rate.

    ValYouW – that 10.75 pts was for 2 contracts so I got something like 4+6 (don’t remember exactly). I think 4 & 6 are doable. Over the past few months I’ve went for 4 & something much bigger like 8-10 and as you said, several times I’ve have 6 pts and given it back. That sucks. So my plan is to start with 1 contract and go for 3-4 and then once I have some data on that, add the second and go for 6 and then add a 3rd and go for 8, etc. I want to build it up slowly. At some point it’s better to just get out rather than try to squeeze every drop out of it. When FT & Rob squeeze, they’re doing it with 10% of their position which is negligable. With a 2 lot it’s not possible to squeeze it that much. So I agree with your first two points.

    On the last point, I don’t intiate trades after 6pm my time because I have to pick up the kids and give baths etc. But if I’m in a trade I’ll trail a stop and let it go.

    I agree with your conclusion. This is all an experiment. Before I agree that a 4 pt stop is the best I can do, I really want to try it with 2. I think that will force me to be more picky and wait for better entries. And if I can make 2 work, even with less profit, I can increase size more easily.

    I’ve seen traders trade with 2 pt stop and do well with it.

  10. Hello Michael,
    I am wondering, how can you afford 2 point (or less) STPs now, did your entries (timing) improve that much? Do you only lean on the strongest references? Are you better at reading order flow? Seems to be a big change in your trading, hope it goes well. Happy Christmas days btw 🙂


  11. In my opinion one has to have a combination of strong support & resistance and order flow. The order flow part is the most challenging for me. Picking some levels is not that hard. Until one is good at reading order flow the best way is to enter as close to the level as possible and use a wide stop. Once one is better at reading the order flow one can let the order flow trigger the entry. This way if the market goes a little past a level you can still wait and get a better entry. That’s easier said than done though. 🙂

    It’s a huge change and I can’t wait for Jan 3 to give it a shot!

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