Trading Naked - Part 2

[Bloodhound]

you think this week has been choopy during the morning session because of half-term??

TBH - I've treated this week as just 'one of those weeks'. Monday and Tuesday were pretty horrible but I've seen worse. In order to preserve my own sanity I tend to look on weeks like this as cable just testing my nerve to see how long I can take the grief!!

 

[Vaco]

I certainly do. Blame other people for your losses, that's my motto.

Big players were probably spending time with their kids and family.

Not trying to lame blame for losses, thats always my own fault.

But august is seen as choppy due to summer holidays, easter/xmas holidays are pretty much the same and was wondering if I should tread with caution during half term breaks as well.

 

[Bloodhound]

Not trying to lame blame for losses, thats always my own fault.

But august is seen as choppy due to summer holidays, easter/xmas holidays are pretty much the same and was wondering if I should tread with caution during half term breaks as well.

Swings and roundabouts if you ask me Vinnie. Just a rubbish few days. Wait for the overnight range of 40 pips on Sunday night and a gentle 200 pip break on Monday morning and this week will be forgotten

P.S. Looked like a few nice runs on M1 today. Did you catch any? You'll be amused to hear I am starting to use M1 more. I'll try and explain why next week if I get a chance.

 

[Vaco]

Swings and roundabouts if you ask me Vinnie. Just a rubbish few days. Wait for the overnight range of 40 pips on Sunday night and a gentle 200 pip break on Monday morning and this week will be forgotten

P.S. Looked like a few nice runs on M1 today. Did you catch any? You'll be amused to hear I am starting to use M1 more. I'll try and explain why next week if I get a chance.

Unfortunately all the nice runs seem to be taking place after 12:00 this week so I missed them, Need to improve my damage control on choppy periods like this week. Need to learn to walk away when it looks ugly.

 

[Bloodhound]

Risk Reduction / Management etc. - Part 1

Hello,

I thought I'd throw a few thoughts down on risk management. Some of you know that I have been having huge problems with this of late (logical stops v. hard stops etc.) and I am extremely grateful to those who have kindly helped me get my head straight on a few matters. I thought this might be of interest to those who have so kindly given their time to help me. (As an aside it fascinates me that my mind can be so dangerous as to almost destroy a perfectly good trading plan as it has been trying to do of late!!)

As always there is nothing new here, just the way I look at it and definitely not for everyone, but may prove interesting to some – feel free to disagree, comment etc. I think this may be geared more to lower timeframe trading but may work with position trading etc. as well, although the higher timeframe stuff is out of my comfort zone.

(Apologies in advance for the slightly lengthy way of explaining this but, as it is such a crucial aspect of trading (for me anyway), I thought it deserved a bit of time and effort in setting out my thoughts.)

1.First things first (and pretty obvious, but read Feb's thread if you don't believe me) – losing is an every day occurrence. It can not be any other way because I, and for that matter no-one else, can predict the future which means that, no matter how great my entry methodology is (and if I were honest it's pretty basic i.e. not great at all), things won't always go according to plan. In fact, in my experience, things seem to go wrong on a pretty regular basis!! Expand on this and it is logical that, if I can't predict the future, then I have no idea what a 'good' entry is going to produce in terms of returns. Which leads onto win / loss ratios.
2.These, IMO, are a huge red herring and I was probably suckered in, as much as everyone else when they start, to think that one needed a high win / loss ratio to survive. Gradually the mists parted and I realised that in fact it was just about making sure that the size of the winners was greater than the size of the losers. That was all to the good and, quite naturally, opened up the concepts behind risk / reward ratios etc. - 1:1, 1:2, 1:3 etc. etc.
3.Fast forward to just under 3 months ago and I sat and thought about win / loss ratios, risk / reward etc. and came to a few conclusions:

• Win / loss is rubbish and should be discounted (for the reasons mentioned above)
• Risk / reward is better BUT
• As I can't predict the future risk / reward is a complete fallacy too. WHY?
• Because if I can't predict the future then I cannot possibly have any idea what my reward will be so no system metrics can be designed using reward as a basis for the system's underlying success or failure
• Now I know that last point is a huge over-simplification of what is a very complex subject (and also probably highly contentious) but I like to keep everything simple so, for me, it was as above. I can never, ever, guarantee reward BUT I can (to a certain extent) guarantee (or at least manage) my risk.

4.In other words I would stop worrying about how far price would travel in my favour to produce a risk / reward ratio that would, when coupled to a less than 50% win / loss ratio, offer me profits over time, and focus all my efforts on the risk side – the only part of the trade I could control.
5.Hopefully that may beg the question, how on earth can one make any money if all one is interested in risk? Well it did for me anyway!!

I'll try and write a bit more later on.
Bye for now
Rob

P.S. They're might be a simple system explained in the course of this but not intentionally and would certainly need testing – it will be more for the purposes of explanation.

 

[oiltanker]

for those who haven't seen it exact trading do 5 min charts on euro with PA

http://www.exacttrading.com/?cat=52

 

[blancspa]

for those who haven't seen it exact trading do 5 min charts on euro with PA

http://www.exacttrading.com/?cat=52

yes , but looks diffrent when markets whipsaws a bit intraday

 

[Bloodhound]

Risk Reduction / Management etc. - Part 2

Right - so I've decided that my focus is on risk and not reward but I must have some idea of reward otherwise I'm doomed to failure. How about if I try and define a fixed reward?

This is where I got thinking about the 20/20 and 20/40 rules and, in particular, the 20/20 rule. Why? Because I want to be shooting for the least possible amount of pips possible in order to retain consistent profitability, and also cut down the risk inherent in remaining in the trade for too long. I couple to this the fact that I trade breakouts / continuations and, in my given market, it's not unreasonable to expect it to breakout and hit 20 pips in the blink of an eye (but not always LOL!!).

OK - so I have defined a fixed target for each trade of 20 pips. What about risk? Well how about making the risk (stop distance) the same as my take profit target?

There's an obvious reason why most would see this risk / reward ratio of 1:1 as suicidal.....

 

[HawkTrader]

Hi Rob,

Interesting posts. Perhaps you could have a 20/20 rule with a partial take profit at 20 points and leave the rest to run? It's actually funny because I've just moved up to the 4H timeframe for a few reasons, mostly because I have less time to be at the screen but also some phycological issues. I'm giving it a shot and we'll see how it goes. I'm still trading just like on the 5M TF, buying new highs and selling new lows. It's a bit weird waiting 4 hours for the candle to complete though and I've cut some losses too early because I'm not used to it.

All the best tomorrow everyone.

 

[Bloodhound]

Hi Rob,

Interesting posts. Perhaps you could have a 20/20 rule with a partial take profit at 20 points and leave the rest to run? It's actually funny because I've just moved up to the 4H timeframe for a few reasons, mostly because I have less time to be at the screen but also some phycological issues. I'm giving it a shot and we'll see how it goes. I'm still trading just like on the 5M TF, buying new highs and selling new lows. It's a bit weird waiting 4 hours for the candle to complete though and I've cut some losses too early because I'm not used to it.

All the best tomorrow everyone.

Hi Owain,

Good point about scaling out but let's assume for a moment that I'm only running 1 position and keeping it really simple. What you say about H4 has a major impact on what I'm talking about. More to follow.

All the best

Rob

 

[Bloodhound]

Risk Reduction / Management etc. - Part 3

So I thought a bit harder about this 1:1 problem, as I genuinely struggled with the idea that one could achieve a greater than 50% success rate over the longer term and, if one couldn't achieve that, then a 1:1 risk / reward would fail. Then I read about hard stops and realised that the answer might lie, not in the reward side (as that was fixed), but in the risk side which could be moved; not widened but tightened. I'd always read that one set a stop and then let price either go one's way and make money or sat waiting patiently for price to go the wrong way and take one out - but why be taken out with a 100% loss when there were plenty of opportunities to see that things weren't going according to plan, a long time before one's stop got hit?

Put another way. Say one's stop was set at 20 pips and one's TP was set at 20 points, if the trade worked then the r/r would be 1:1. If, on the other hand the trade didn't work BUT was stopped out at 10 pips offside (i.e. the stop had been moved up from 20 pips to 10 pips), then the r/r would be 0.5:1. Now I have no idea from a mathematical perspective whether what I've just said works, but in practice it does.

I'll try and show it practically on a chart but need to switch PC's......

 

[HawkTrader]

I don't understand, you're saying your SL is 20 pips, but somehow it's 10 pips??

Do you mean that when you reach a few pips profit, you will move your stop to 10 pips?

 

[jel31]

20/20 rocks!

Right - so I've decided that my focus is on risk and not reward but I must have some idea of reward otherwise I'm doomed to failure. How about if I try and define a fixed reward?

This is where I got thinking about the 20/20 and 20/40 rules and, in particular, the 20/20 rule. Why? Because I want to be shooting for the least possible amount of pips possible in order to retain consistent profitability, and also cut down the risk inherent in remaining in the trade for too long. I couple to this the fact that I trade breakouts / continuations and, in my given market, it's not unreasonable to expect it to breakout and hit 20 pips in the blink of an eye (but not always LOL!!).

OK - so I have defined a fixed target for each trade of 20 pips. What about risk? Well how about making the risk (stop distance) the same as my take profit target?

There's an obvious reason why most would see this risk / reward ratio of 1:1 as suicidal.....

It is not suicidal, i'm a great believer in keeping things simple. I too love break-outs and if you are VERY choosy about which break-outs you go for and wait for the best set-ups, a 20/20 approach is likely to work very often indeed. You will have to put up with the odd run of losers but in my (humble) experience they can be good for 70+% of the time. Add a few more pairs (with different SL obviously) and you've got a decent trade most days. Oops, talking H1 here, keep forgetting you like your M5...

Couple that with e.g. letting half run, moving SL to BE, banking some more at 40 etc. or combinations thereof and you won't feel like you're missing out on all the big moves, but even an ultra-simple 20/20 on it's own works IMHO.

Just waiting for the wrath of the experts now ;-) really feel like i've stuck my neck out now but hey ho...

Julie

 

[Bloodhound]

Risk Reduction / Management etc. - Part 4

I don't understand, you're saying your SL is 20 pips, but somehow it's 10 pips??

Do you mean that when you reach a few pips profit, you will move your stop to 10 pips?

Sorry - currently smitten with swine flu so I may not have explained myself particularly well, so here goes...

Generally, when one reads about stops they are a place where price has told us we were wrong and where we get stopped out. In other words, when you initiate a trade you set a stop? What I am saying is that when I initiate a trade I set up a hard stop BUT (and this is the crucial bit) I never let this stop be hit. That initial (hard) stop is there for things like PC crashing, broker going on strike etc. The thing is that my take profit is a multiple of the value of that hard stop - in this case with a 20 pip Hard Stop my TP level is 20 pips.

Now, as soon as my entry in triggered I start aggressively finding ways to reduce my stop level from the initial hard stop level to as near to my entry point as possible. To do this, I used to just trail pip by pip but I am now using M1 to trail (see charts).





Now whether this would work with, say, an H4 entry, but then trailing up to break even using H1, I don't know. The reasoning behind the way I do it is that price should generally be trending on the lower tf in the direction of the higher tf trend. In other words, if I went long M5 I'd ideally be expecting the first 5-10 minutes of M1 price action to be printing HrH's and HrL's - if M1 wasn't then perhaps there was no strength in the up move and the trade might fail. If that were the case would I prefer to be stopped out at minus 20 or minus 5 or 10?

 

[Bloodhound]

Risk Reduction / Management etc. - Part 5

So what's the point?

Although how I manage my trades is a little bit more complicated than just 20/20's I reckon that this way of shooting for targets works well because:

You can set a target that it is reasonable to expect a market to move on a breakout, with reasonable confidence that it will be hit quickly
You can have an initial risk / reward from hard stop to TP level of 1:1 and, even with a win rate of less than 50%, still make money.
Most importantly for me is that it psychologically keeps my focus on the risk side and getting the stop onside ASAP
Even when cable goes into complete chop monster mode I tend to avoid big losses as I am actively managing and reducing them

Anyway hope that may be of interest.

All the best

Rob

 

[Bloodhound]

It is not suicidal, i'm a great believer in keeping things simple. I too love break-outs and if you are VERY choosy about which break-outs you go for and wait for the best set-ups, a 20/20 approach is likely to work very often indeed. You will have to put up with the odd run of losers but in my (humble) experience they can be good for 70+% of the time. Add a few more pairs (with different SL obviously) and you've got a decent trade most days. Oops, talking H1 here, keep forgetting you like your M5...

Couple that with e.g. letting half run, moving SL to BE, banking some more at 40 etc. or combinations thereof and you won't feel like you're missing out on all the big moves, but even an ultra-simple 20/20 on it's own works IMHO.

Just waiting for the wrath of the experts now ;-) really feel like i've stuck my neck out now but hey ho...

Julie

All sounds pretty good to me Julie. TBH I just hit every level as I don't believe that one set-up can be better than another (but that is a 'me' thing and I know others will disagree). What keeps me in the game is cutting the losers super quick. The best days for me, after the big winners, are the days when I end the day having taken 12-15 trades, most of which have lost, and am still at break even or thereabouts.

 

[Bloodhound]

Do you mean that when you reach a few pips profit, you will move your stop to 10 pips?

Just to answer this Owain - I mean the opposite. When I am offside I am looking to move my stop up as I am looking to reduce the risk of the trade costing me too much. I 'expect' a certain thing from my trades which is that they will go pretty much straight into profit - if they don't I am on red alert and looking to reduce risk.

 

[trendie]

on a more broader note, do you analyse the daily chart, or higher time-frame?
your trading triggers longs and shorts in what is, a fairly intense 2-3hrs of trading, implying you care not about previous days action, or daily trend, or anything else.

is each trading day a totally fresh canvas, unaffacted by the higher TFs?

Lots of good things, especially about the risk:reward thing.
Its easy to get waylaid by these stats, which may ultimately be meaningless.

 

[HawkTrader]

Hi Rob,

Hope you get better soon, can't be fun trading with swine flu...

I like everything you have said about R:R, but, they say being critical helps so here goes. Even though I agree with you on this, I can only see one problem, the fact when a trade goes against you are looking to exit quickly, but won't that mean you will end up closing potential winners too early and too much? You could end up with three -10 losses and then only one +20 win.

Haven't you been taking profits at pre predetermined levels anyway, or have you only been letting them run?

Edit: I've been trading 4H recently, and when I enter I go down to the 1H and watch. I see trends changing (HrHs in a short trade!!), price shooting in the opposite direction, etc but if I ignore that and just keep watching the 4H, as long as thats in my direction it seems to end in a profit. It's so hard though!!

 

[Bloodhound]

on a more broader note, do you analyse the daily chart, or higher time-frame?
your trading triggers longs and shorts in what is, a fairly intense 2-3hrs of trading, implying you care not about previous days action, or daily trend, or anything else.

is each trading day a totally fresh canvas, unaffacted by the higher TFs?

Lots of good things, especially about the risk:reward thing.
Its easy to get waylaid by these stats, which may ultimately be meaningless.

Hello Trendie,

I think it's fair to say that I do treat every day as a new day, BSD (on the cable thread) commented that this style of trading is more akin to 'pit' trading than anything else. Whilst I am completely unphased by the bigger picture I do have one screen set up with all the H1 / H4 / Daily swing levels so I have some early warning of levels that may produce reactions. I think the most important levels for me, outside of what is going on during the day are the previous day's high and low - for instance price printing the following sequence for me on M5 of HrL, HrH, HrL, LrH coming up to the previous day's high is an extremely effective indicator that price may not want to break yesterday's high and may be turning to the downside (and the same in reverse if approaching the previous day's low).

Prior to trading this way I tried mixing tight entries to get into longer term (2-5 day) trends and failed miserably. I'm still not quite sure why but I think it has a lot to do with my risk averse nature and reluctnace to actually be exposed to the market for longer than I need be.

All the best

Rob

P.S. Regarding statistics, I am sure they serve a useful function but, ultimately, IMO price isn't going to be dictated to by statistics, so I use them primarily to let me know how I am performing against myself over the prior period.