Taking a Peek at the Risk:Reward Spectrum a little further over to the Risky side

There was a trader on her who although no longer posting (bless her little cotton socks, which are hopefully still slightly damp with her sweat from physical exertion so that I can perform certain sexual acts with them – that’s the mandatory lulz portion of the post out of the way) who has the following sig:-

“By the time the market 'confirms' what you suspected, it is TOO LATE. By the time the market passes or fails a 'test', it is too late. To be paid, you must act upon your suspicions before they are manifested.”.

Now while the risk:reward spectrum is wide enough to accommodate almost everyone and almost everyone’s trading style, it’s always useful in my view to perform ‘what if’ modelling exercises now and again. While you might not currently be emotionally comfortable (sorry, for Rande’s benefit psychologically capable) with scoring more losing trades than you currently do, if by doing so, you can improve your bottom line, it would make sense to do so. Wouldn’t it?

The answer actually is no. Levels of comfort with any and all aspects of your trading, although changing all the time, and at different rates through time, are profoundly important. While taking that 14th trade after the previous 13 consecutive losers is absolutely fine in theory, in practise, it isn’t quite as easy as taking the 2nd trade after the first one lost. Very few have the emotional equanimity to be able to treat all trades the same.

However, I’ve always liked the above quote and while those huddling on the safer side of the risk:reward spectrum should on no account force themselves to consider taking more risk than they feel positively comfortable with, there is an argument for learning to be slightly more comfortable with discomfort until it no longer is.

Indeed, waiting for the market to confirm your suspicions (or confirm your entry setup) is safe, very safe but sometimes gets you in just at the end of the move. And even on the more useful moves, gives you oftentimes less of the move than would be available had you had a crystal ball. Not so often to make your method a loser overall, but enough to cause a fleeting thought ‘what if’. And while a sudden and dramatic move to the other side of the R:R pendulum is not advisable (you don’t really want to go full throttle contrarian on your own method after all), there is a case for considering a toned down version of the above.

I like the ‘Darkest before the Dawn’ approach myself (DT will call “pedant” here, but technically, it’s not the hour before the dawn that’s the darkest but the one midway between the dusk and the dawn. An important point to consider if you do intend to consider this….). This approach says, rather than wait for your setup to confirm your entry, look for the contrary setup to fail to be confirmed – which will almost always occur before your normal setup anyway, and be ready to seize an early advance on your current entry methods. Sometimes, this can be as simple as the first pro bar after the contra setup fails to be confirmed.

Just thought I’d mention this.

Good trading.

I half agree. Yes you shouldn't take on more risk than you're comfortable with, but if you would be making more money by taking on more risk (relative to volatility etc etc) you should work on adjusting what you're comfortable with.

Good Post. The reason something works for one but doesn't work for another is exactly the comfort level or emotional state. How many times have we heard or told to new traders that they have to find something that suits THEM?

I'll be honest here. If you told me you have a better method than mine but it has considerably more losses than wins I would not be all that interested in using it for myself. This doesn't mean I don't care to improve my trading, it means I know where I stand as far as what is considered "OK" in my realm.

Peter

If you can do that then that's great. But not everyone is wired to adapt to change like that.

Peter

aye....and the same approach for exits, too.

Oh I never said that it would be easy or even possible. I'm willing to come round with a soldering iron and give it a go if you want though.

...also depends on where you get your comfort. Paradoxically, the closer you anticipate the lower your trade risk is likely to be, but the more likely the risk of a losing trade.

jon

This would be really good with some chart illustrations references.