Jan 282012
 

My plans of increasing size were derailed a bit as last week was a losing week and the one before it was flat.  I can attribute my regression to a few factors:

  • Trading 2 lots made me more risk averse since my size was bigger
  • I started getting lazy with entry timing by entering half position and planning to add on to it at a better price
  • I scaled my first lot early in several cases which effectively “cut winners short”
  • In a couple trades, I neglected to keep the tight stops I’d been using due to overconfidence in my read

The last point was the biggest factor.  When we broke out of the multi-day trading range to the upside, I expected follow through and bought pullbacks and give it plenty of room and added to my position.  This is my old method of trading.  It’s not compatible with my new plan.  Had we had continuation I would have had a major win and done great.  But it didn’t.  And I took a big loss.  Then then the next day we broke to the downside and since we failed on the breakout higher I expected us to break down to 1297.  I shorted pullbacks, scaling in to build a large short position that I eventually capitulated.  Double whammy.

This was good punishment for reverting back to my old methods and gives me more confidence in my new plan.  Had I followed the new plan I would still have had 2 losing days, but the losses would have been minimal.

At this point I don’t want to go to 1 lot again because I think trading multiple lots gives a better edge (can stay in longer).  So I will take the best setups with real money, ideally 1-2 per day and the rest on sim.  Two losses per day will limit my daily loss to around $250 and I can live with that.  So I shouldn’t have fear right?  I’m sure I still will.  But I hope it’s manageable.

For the sim part, I’ve been abusing sim lately, using it to control my urges of wanting to put on risky trades.  I need to curb that.  I need to treat sim as real money and be very selective.  So my focus for the next two weeks are to have profit results sim & real.  I need to learn to be patient and sit out when there is no edge.

So a bit frustrating the last two weeks but I’m still confident in my approach.

 

  9 Responses to “A losing 2 weeks”

  1. Hey Michael,

    good points regarding sim trading. Perhaps best might be to not trade on sim at all. Because if you take trades on sim which are not good enough for live trading why to take them at all? It might just ingrain bad behaviour.

    “Two losses per day will limit my daily loss to around $250.” Does that mean you plan to risk only 1.25 points per lot on each trade? This seems to be a very tight SL – the other extreme to the very wide SL you used last year.

    Cheers,
    Markus

  2. Hey Michael,

    Thank you for another great, honest post. I would like to point out something that jumped out at me immediately.

    You wrote, “When we broke out of the multi-day trading range to the upside, I expected follow through and bought pullbacks…”, and, “Then the next day we broke to the downside and since we failed on the breakout higher I expected us to break down to 1297”.

    Whilst I believe that trading is the art of aligning yourself with what you believe to be the bigger picture and executing on a smaller timeframe than that perceived bigger picture, when I read your post I got the feeling that your expectations regarding the larger timeframe actually interfered with your execution. You said it yourself, your “new” method is potentially not compatible with your plan.

    In other words, when one is using stops like 6 ticks, and trading 1-2 contracts, letting the big picture “capture” your mind can be harmful in that you can lose sight of the smaller rotations, supports, and resistance levels that you actually trade and “refuse” to react on the current market information. For example, you wrote that you were expecting us to test the 97. So was I. The problem is that 97 was very far away, particularly if one trades 1 or 2 contracts and uses 6-8 tick stops. Therefore, I think that too much focus on such a distant level can potentially take you out of the reality of what is around you.

    I have done this myself, and still do. I had trades go up to 500 $ in my favour and come back right in my face because I thought that they had more potential. Even on Friday I made another mistake: Remember when we were expecting a gap fill after it had rejected previous day’s low, but the market actually turned and took out the low by 1 tick? I was long 09s, and did not even really watch once we were back above the MID….well, talk about leaving money on the table. In reality, I should have listened to the market, and taken all off at 13s, after the VPOC had shifted up again, and not let my larger expectation interfere with the actual trade.

    Now, it would be all different of course, if one is trading 4,6, or even 8 lots… that’s when you can let your last lot run. But even then, I really understand how Rob will take 50% off by 2-3 points *no matter what*, and is also quick to take the rest off if there is something he doesn’t like.

    So, I guess what I want to say is that, with a stop of 6 ticks, maybe it is important to focus on the next 3-4 points potential and keep the bigger picture present, but maybe just a little more in the background.

    Have a nice Sunday!

    Benko

  3. Markus – excellent comment on the sim. I agree. In the first two weeks of the year I took the really good setups with real money and if I wasn’t sure on sim. Those sim trades kept me out of trouble. For the second two weeks I did less on sim as I had more confidence to do more real and my results were not as good. So I need to think about this. But for the moment my idea is to avoid sim and either it’s good enough for real money or it’s not good enough to trade at all.

  4. Benko – Thank you very much for that point of view. I believe I am coming to that same conclusion myself. I made some similar points in an email to another trade just yesterday. I’ve been trying to capture too much with just a couple contracts. Your point about rob taking half off by 2-3 points makes a lot of sense. By the time he’s going for 6-8 pts he’s down to 10% or so. I believe one can’t expect to get 6-8 pts with 2 contracts, it’s just not reasonable as many profits will be left on the table.

    I also agree that the big picture is a little less important if one is going for 2-3 points.

    So that tells me I need to focus more on the intraday session, is it making higher highs and high lows? or lower highs and lower lows? Did we just reject a major level? What’s likely to be next? Etc. And just focus on getting 2-3 pts consistently and only then worry about getting more.

    In my opinion the key to going for 2-3 pts is that one must have a risk that is less than 2-3 points otherwise one would require a 50% win rate. So there are couple options: use a 1:1 R:R and hope the win rate is greater 50%. If it were random the win rate should be 50% so if one trades at good levels the win rate should be greater than 50% right?

    Or one can use a stop of 1.5 pts and go for 2-3 and then the win rate can be lower than 50% and be profitable. I’m leaning towards the latter. I feel when there is absorption at a level, either that level will hold or it won’t. So that’s why I like a tight stop. It requires patience to wait for the right spot, as close to the level as possible.

    which reminds me, when I’ve stated my avg loss as 5 ticks, that’s an average. It may be 2 pts on one trade and another it could be zero as I try to get to no risk ASAP. So I figured on average it’d be in between, around 4 ticks so I picked 5. I usually start with a 6-8 tick stop and then tighten it up as it moves my way.

    I will test out these ideas for the upcoming week and report back. My goal is to find just 1-2 really great setups a day.

  5. “In my opinion the key to going for 2-3 pts is that one must have a risk that is less than 2-3”

    I agree. Right now, I am using 2-2.5pt initial stops in my trading right now, but rarely stop at those. Rather, if the market goes against me in an unexpected manner, I will take myself out earlier, and reassess. So, in reality I too use 6-8 ticks.

    I love those two sentences:

    “Or one can use a stop of 1.5 pts and go for 2-3 and then the win rate can be lower than 50% and be profitable.” + “And just focus on getting 2-3 pts consistently and only then worry about getting more.”

    You just summed up my current approach.

    On a side (and on a more academical) note, “so if one trades at good levels the win rate should be greater than 50% right?”. The problem is that this is not necessarily so, and that is often overlooked. Trading is multi-dimensional, and a level is likely the most important, but still only one of several dimensions. Others are: Market mood and volatility, but also the *uknnown*, aka 3rd force. While the latter cannot by quantified by definition, we can try to make educated guesses as to the first two. This is important because they can and will influence the chances of our levels holding. But I digress…

    I am looking forward to reading your report!

  6. Fascinating exchange Benko, I’m going to start reading your blog. Sounds like we’re facing the same challenges.

  7. Yes, I am looking forward to continuing this!

  8. Great self-analysis.

    Perhaps you already do this, but have you considered categorizing your trades, then varying the stops and profit targets for each? Or, as you add more contracts, just vary the lots removed at each scale? I’ve had luck with the following:
    Trends
    – Early and Middle, prior to divergence signals
    Scalp/Range
    – Countertrend during a weakly trending day, or on extremes during ranging day
    Counter-Trend
    – Countertrend at the end of a trend move after divergences, or blow-off ends, or well established volume nodes

    These determine whether I exit with one profit target or scale out. They also decide whether I scale in or go with one entry. If I’m scaling in, then I’m expecting a much better return to offset the risk.

  9. hey michael,

    i think you arent alone with having had to experience loosing weeks.
    Apart from what you already mentioned its certainly not an easy time right now. At least it had not been “easy” (when is it really easy LOL) for me.
    Beeing able to scale more and to keep losses smaller I had moved to the YM (because of lower point value and because i can well take a 10point stop while the equivalent in the ES would be 1 point which is too tight for me) but im struggling a little with this ultra low volatility. Today was another perfect example where i went long 12650 and while ES and NQ saw range extension to the upside and slowly but contiously traded higher the YM just refused and stayed below the IB high… it took one quick equities sell program to drive the YM down to the LOD again (and to stop me out)…

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