Recommended reading

Coming back from a week away from the markets, I first refreshed all my charts and took a look at what happened last week. But to get myself tuned in and prepared for monday, I needed something to read.

First some blogs:
Gossip from the Cheese, who turned on the comments again I noticed
Market info from Random Roger, whose blog I will add to the Circle of Blogs
and of course Lioness, Fearless and Tack
Then a look at FXStreet to get up-to-date with the newest market analysis on the Forex market

Checking my E-Mail I found two interesting ones, which I read and thought to put them up as recommended reading for this Sunday afternoon, where you might not know what to do until the Euro finally starts ticking again at 6pm EST.

First a new Blog: Gross Speculation from Bo Yoder, whose post It Can’t be that simple..Can it? (April 21) is really worth reading.
Then a Publication from Norman Hallett: Mental Fitness for Trader's (just ignore the last page)

Keep yourself focused and for all of us:

Relaxed Trading

Btw: I have to make a confession: I’m a trading junkie.

On Monday the first thing I tried was convince the wireless internet access in the Hotel to work with my notebook. Nothing, no chance to get this working.

Tuesday, I accepted, that I could not do a single trade.

Wednesday I just heard about these nice Euro moves on the news. But with no internet access I had to remain calm and tell myself: Next week there will be a market as well!

Thursday morning a client called, who needed a contract the next day. Fine I said, no problem, but there is this internet access problem… I will fix it by buying a new wireless lan adapter for the notebook. In the afternoon the client called, that I had time until next week and the new WLAN card I bought, is still not working.

So Thursday afternoon I accepted that I really could not do a single trade, had no reason to drive home early and finally relaxed for the rest of the week.

Follow-Up

You raise a few points in your reply (posted here), which I want to address seperatly:

Simtrading
Simtrading is fine and the cheapest way to pay your tuition fees. As long as you have to learn to execute your plan that's correct, but don't try to be too good in Sim or you will never go live. Sim trade for as long as it takes to reach about 70% to 75% winners. This will be good enough for gov work. The rest is just plain Trade Management. It's quite some time, that I posted my real trading results (last time was with my Trade Journal at the e-minitraders site), but maybe it can help you see, that you don't need to be perfect to have an edge in the market.
Daily Statistics
My statistics aren't near perfect: 58% Winners, 30% Breakeven and 11% Losers, but the Loss$ still outweigh the winners with 1.67 : 1 (Loss$ on average is 145$ vs 86$ Win)
Still it works, because I happen to manage most of the losing trades to become Breakeven + 1 tick trades. I have my disasters like the one on March 14. You could say, this was just the exception and that's correct on the one hand, but on second thought, these events were always rare, they were the trades causing me to seasaw my account.
But the trades thereafter are the ones which really count. Are you able to shrug it off, are you able to leave the 3 bad trades behind you, and continue trading your plan. Or are you shaken emotionally, do you question everything on your charts, do you redefine your plan after a disaster struck?
March 14 was the first time, when I was able to shrug it off, to leave it behind me and continue trading my plan. It was the first time, where undoing a disaster did not take 2-4 weeks but just 3 days. You need to analyze, what caused the disaster. If it's the plan, then it's really back to the drawing board. But that's the exception.
Usually the plan is sound, it's the execution and the Trade Management which lacks. So work on yourself. Learn to be able to follow a losing trade unemotional, watch the little clues, the details in the trade as if you had no open position.
On Friday I was in a Dax trade early morning (around 7am EST I think). Dax had sold off twice 10 points and recovered 8 immediatly thereafter. Nice, I thought. Dax trading at 4344 and starting to sell-off, I put a Limit Long at 4334 and was taken in. But instead of reversing, Dax sold off another 10 points to a Low of 4324 before it bounced to 4328 (Dax is 16.25$/tick and trades in 0.5 points a tick). It took 10 minutes to trade up to 4331, still 6 ticks or 97.5$ down. As it was a momentum low, common sense told me, we would see a second lower divergence low. And sure enough Dax started to sell-off again. 4330, 4328.50, 4327.50 down 211.75$. Draw the line at 4326, try to get at least 4328 or wait was the question. I noticed ES upticking a quarter, YM holding, but that was early premarket, so not a real clue. But then I saw a 700c trade on my market volume display in Futures-Trader at 4328. Someone buying 700c Dax at the Ask, that means someone was willing to pay 11,375$ just to be in the trade instead of patiently waiting at 4327.50 to be filled in a market which looked as if it would make a diverent new low.
This convinced me to remain in the trade. Sure enough Dax ticked up, and ticked up and ticked up. 10min later I closed the trade at 4334.50 Breakeven + 1 tick. Follow-up was, that Dax traded to 4335, sold-off to 4332 and then spiked to around 4343. This Fund manager buying 700c made a killing in the trade, but for me it was the difference between a loser and another Breakeven + 1 trade. These are the trades where the market demands payment for your trading errors, but where it is content to ask for emotional payment only, where you have learned enough to avoid the payment with your hard earned cash. And if anyone tells you otherwise, don't try to argue. You know better, you know how hard a job trading can be at times.
Most of you would either have taken the Short trade in the first instance or taken a Stop at 5 ticks and reversed. I know, I know. But that's not the way I traded it. I made an error and had to manage it. I paid emotionally as these trades cost you a lot of energy. They focus you, they let me miss a sure 30 tick trade in the Euro, one I was watching all morning, which I posted about in the Chatroom, which others took and I missed. But I managed the trade, I was able to watch the market objectively and still see the little clues, which you need to know to read the market direction.

Trade Plan
You tell me you have no trade plan and then you describe a neat setup you like to trade in the Euro. That is a Trade Plan! Take this weekend, take a Euro trend chart and a Euro trading chart (I would use a 5000 Volume for trend and a 500 Volume for trading, you might use a 30min for trend and a 5 min for trading or whatever you like) and search for your setup. See it on the trend chart, see it on the trading chart, what where the little clues, which gave away the new trend springing from the consolidation. Where there Fake-out’s, what was the priceaction prior to the new trend move, what did your indicators tell you. Define your entry rules. That is a trading plan. You intuitivly like a market, a setup and then you try to grasp it, try to define in words, what it is you see, what it is you “like” about this setup, which gives you the feeling you have an edge. Such a feeling comes from watching markets day-in and out, from screentime, from repetition. You train your subcontious mind to see the setups and it answers you by giving you a feeling. It’s your task to listen and to try to define the reasons for this feeling.

When i have such a feeling, I have 2 choices: Listen and follow or Watch it develop. I have learned, never to ignore the feeling.

It’s the way my subcontious mind is communicating with me. It’s its way to tell me, hey Chris, I have seen something, Watch out.
And that’s what I’m doing now, if I don’t take the setup: I watch. If it’s working, if my feeling proves to be correct, I try to define it. I try to look for the little clues, which gave my subcontious mind the setup. Once I have done that, I might have a new setup, I watch for in the future and the next time or the time thereafter, my rational mind won’t override the feeling but instead see it for himself. If it’s not working, it teaches my subcontious mind as well, as then it’s the rational mind, which acts as overseer and filter, which get’s the boost and which is as important to my trading as my feelings. The rational mind takes care of me and my account, it alerts me to known trading setups and decides, which setups to take and which to pass. My feelings are there to continuously provide me with an edge, to let me adapt to changing markets, to give me new trading ideas. Both are necessary, so i can prosper as a trader.

Yesterday in the afternoon, ER2 sold-off into the close. Reading, commenting about the email in my last article, I had to test the bounce theory myself. I had had a real nice day yesterday and had closed trading a few hours earlier. Still I got this feeling, that I wanted to trade a possible bounce 20minutes prior to the close expecting a short covering rally before the weekend.
But my rational mind said, Nope. You had a great day, don’t screw it in the last 20minutes. My feelings said: Take it. 
So I decided to comfort both: Click on Demo in Futures-Trader and place the trade. 13 ticks down in 3 minutes, Add-On and down 25 on 2 2 minutes later. From + 374$ up downto – 136$ in 5 miuntes. I stopped and reversed the trade short with ER trading at 581.40 10 tick target on the trade and was out another 2 minutes later + 194$. This feeling I got, would have cost me a real nice profitable day and made it into a + 68$ day.
But it was not all bad, all wrong about the feeling. I have seen a lot of short squeezes 20 minutes prior to the close in ER2, to ignore the feeling. Just the usual clues were missing, when I placed the trade. And that might have also been the reason, why I switched to Demo instead of trading it real, which is what I usually do.

Still I learned a thing, I had seen Cometguy doing earlier in the Euro. If it’s not going one way, join-em the other way. Stop and Reverse trading is something alien to me. Something I still need to learn, to grasp. It’s not yet intuitively, it’s not part of my trading plan. But it might become so in the future. Eman is doing it regularily, as he is trading an always in the market strategy. And I watch him, I learn, try to see how he is doing it. If it pays off in the future I don’t know. But you need to keep your edge.

What market to trade
Trade the market you feel comfortable with. Concentrate on this market, learn it and ignore the markets you can’t grasp. Markets change, markets evolve. You should learn different markets, just to be able to switch if need be, if one market becomes dull and another market emerges as hot leader. But while learning concentrate on one market, one setup. Don’t make it harder than necessary to you. And don’t trade against yourself. If your feelings tell you, this market is nothing for you, heed the advice.
I don’t trade the British Pound at the moment. Why? Because it just does not move like I expect it to move. I still have it on my screen, I follow it, but I don’t trade it. I have traded it, but right now my setups don’t work as expected. They get faded and and have no follow-through. This happens once or twice. Fine, I can accept that. I don’t expect 100%. But if you notice your setups failing one after the other, if it really takes a lot of effort and trade management to just get a breakeven + 1 tick trade or an acceptable loser, then it’s time to move on. And make sure you have something to move on.
Here is my Trendscreen. It shows me 6 currencies. I usually trade the Euro and the Australian Dollar, sometimes the Canadian Dollar. But I always see the British Pound, the Yen and the Swiss Franc as well. And there will be a time, when the Euro stops working as I’m used to, when it will no loger give me the results I expect. Then it’s time to move on and I will already have trained my mind to trade the Yen or the GBP or the CHF, just by having them on the screen. My subcontious mind will know how they trade, how they trend and countertrend. I will just have to activate this knowledge, define the rules and start trading them.
While learning, watch 1 market, but once you master one market, add another one. As trader you need to be flexible, still you need to invest the screentime and what better, if you can invest the screentime, while actively trading another market. I’m sure you know the old story about a man, who followed one stock in the newspaper day in and out, suddenly on a hunch  bought another stock and made a killing. He had uncontiously followed this other stock, while scanning for the stock he was interested in in the newspaper. He invested the screentime necessary to learn, while actively doing something different.

Relaxed trading

Such a familiar story

I received the following email from a fellow trader and it’s really difficult to give any kind of advice here. But let me quote the mail in parts first.

“I've only busted my account one time previously. Until today, when I busted it the second time (been doing CCI maybe for 1-1.5 years).
I just gotta tell you the trade, because I'm sure you will be familiar with how it goes. My account was at about $2050 when I entered the trade. I had had a really lousy day. Turning a 150 buck winning day into a break-even day. I should have stopped right there, with bells going off. But no, I had to get it back. With the ER tanking the whole day I, like a total brainless fool, was looking for a bounce.
So with about 1 hour trading remaining I went long the ER on what looked like a ghost (counter trend trade, real bright with the OBVIOUS trend being down the whole day). I think it went my way for like 1 tick. I made my stop wider (mistake no 1) cause I needed a winner and it was going to bounce. So it went my way 1 tick and then IMMIDIATELY dropped 10 ticks in like 2 seconds.
So now I'm sitting with an account value of 1950 (below minumum margin for futures on IB), and a losing trade on the board. What to do?
Mistake number 2: go for broke. Widen the stop even more. I just knew it was going to bounce. Just get me out break even and I promise to never do it again. Went into total pray mode, and watched it tank another 30 ticks into the close...
Ffffuu"#¤"%!"#..Time to pack the bags....
So now here comes the question for you. Because I found the following text on one of your entries:
"Btw: The reason, why I remaind for 2 years in the 2-3k range was simple: I was an undercapitalized novice daytrader, who had had huge swing trading losses. I could not afford a single loss and that means you get a lot of these. It.s just the way it is. But for me it meant healing from prior huge losses, it meant learning, what it meant to be a daytrader, it meant learning the necessary skills to survive."

This just sounds so much exactly like me it's uncanny. All I do is trade with 2-3k in my account. I can't afford more than that. And even that is stretching it.
So my question is this: Is this a good way to do it? Am I making it unnecessarily hard for myself? Since you already went through this thing once I was thinking you could tell me if it's really worth see-sawing the account month after month with the 1 contract trades, and staring at the account value like a scared rabbit afraid it'll go bust again at the smallest mistake.
I mean should I just load up the account with all I have (admittedly not much) and trade 1 contract hopefully being less afraid of busting out?
I'm just thinking maybe this stuff is not for me..oh the pain the pain is just unbearable. I was already starting to think I could make it. I was even able to do proper money management, and I have seen the light on what MM means. But yet when I go from sim to live my brain seems to just short circuit. Sigh..oh well..back to the drawing board”

It's the Journey not the Path...

Let me start with the above Journey of a Trader. It’s a description of the different ways we chose to follow. All might eventually lead to the golden valley we all seek, but for some it’s a meandering leisure like way, for others it’s a stony hard road.

Reading your experience, I will first tell you, what 99% of all traders will tell you:

• Stop trading immediatly
• Read Tack’s article about Trust
• Develop a sound trade and money management plan
• Sim trade until you have 4 green weeks in a row trading your plan
• Get yourself a trading account which will allow for a few losses before you go bust. As I have written in another article trading with 5k – 10k per contract is a safe way to go.
• Start trading 1–2 contracts real. If the first week is red go back to the drawing board and simtrade until profitable

And this advise is correct for 95% of all novice and struggling traders.

Beware of the stony hill road

But if you already took it, if you can’t simtrade like you trade real, because you never do the dumb things in simtrading , which you do once real money is on the line, then you have 2 choices

1. Stop it right now, trading is not the right business for you. And again 95% of all traders on this stony road should heed this advice. Stop it before you are forced out. There is no Ego involved. You’r not a loser, just because you can’t make it in trading. It’s just a fact, that not everyone is a born trader. And if you can admit it before all your funds are used up, I draw my hat. You sure made the right decision.

2. Continue reading, but be aware, that this is just the way which helped me. I can show it to you, but you have to decide whether it fits you or not.

• Stop trading and think about the reasons, why you want to become a trader. If you just come up with the money as reason to trade, forget it. You already know, that it isn’t as easy as they all claim it to be.
• Sit down and think about your trading plan. Do you really know when to take a trade and when to stay out? I don’t care what system you want to trade. Just make sure, you know what you see on the chart, what represents a signal and then be prepared to trade on the signal. Try to define your trade rules as exactly as possible. Look at your charts. Remove anything, which is not necessary to trade your plan. So if it’s not in the rules, it has no place on your charts. Simple as that. Think twice about the indicators on your chart. What do they represent, what do they measure? It makes no sense to have redundant information on the chart, as it will just fill your chart and provide false security. Also try to limit yourself to a maximum of 7 lines, indicators or other information on the chart.
• Think about your Moneymanagement. What times of the day do you want to trade. What contracts can you afford to trade. Is it allowed to trade news events? Do you set yourself a daily goal and if reached, do you continue trading? If you are green in the morning, do you continue in the afternoon, or are you content with what you got? If you give it back, do you stop before it gets a red day? Just formulate the rules and be sure you don’t violate or redefine  them, once you have a trade open.
• Open 2 accounts: One account is your trading account and you put 2.500US$ into it. The other is your bank, the account where you put in your tuition money. 5.000 US$ should be sufficient to get you going for 2 years, but that’s upto you. I’m setting you up to trade with the back at the cliff. One wrong step and you’r out of the game. But I’m not setting you up to trade with scared money. Your education to become a trader will cost you money. But different from other schools you visit, here you decide yourself, what you are willing to pay. The market will teach you harsh lessons and it will be a long time before it is content to demand the emotional payment only.
• Start Sim-trading your plan until you know it in and out. 2 to 4 green weeks 8 hours a day should give you the security, that you know, what your charts are telling you. If you change your charts during this time or thereafter, you are allowed to remove things, you identify as clutter, as unneccessary for the plan. But you don’t add new things! Don’t tell me, you have to make money now, you have to trade for real. The markets will be here tomorrow and in 4 weeks. But you won’t unless you give yourself the time to learn your plan.
• Once you are green in Sim start trading 1 contract. You have to earn the right to trade more than 1 contract, so don’t think about trading 2 contracts. You have emotional problems, which need to be addressed one at a time, while trading real. Moving your Stop to avoid a loss is just one example. Taking early profits is something a lot more damaging to your account as most Daytraders will have 50%+ winning trades, about 20%+ trades at breakeven (+ 1 tick I hope) and less than 30% losing trades.
• Keep a trading journal, where you make notes about every trade you take. Grade yourself, write emotions down you have in the trade. Follow the trade after you closed it. Keep notes to be able to calculate how much of the total move you were able to grasp. 40% is fine, 50% of the whole move is really great. But if it’s just 10% on average you need to look at your trading plan and your exit rules again.
• There is a saying: Take care of your losers, the winners will take care of themself. But that’s just not correct. Take care of your losers is sure correct, but you need to take care of your winners as well. You need to develop the right mindset to hold onto a winner as long as possible . You need to squeeze them and get every single tick. But never ever let a winner turn into a loser, it’s desastrous on your mindset. So move the Stop to BE+1 as soon as acceptable, meaning as soon as you are out of the wiggle range. But then give it time. A trade needs time to develop. Look at your charts. How much time do the good trades need to go the whole range of the move. If it’s 7 bars on a 3min chart, that’s 21 minutes! If you look at a 15min chart and it usually moves 5 bars to the top, that’s already 75 minutes.
• Once you bust your account, you stop trading immediatly. You are not allowed to trade back.  The next day you access your tuition account and fill up your trading account to 2.300$. This will allow you to trade, your first trade doesn’t need to be a winner, so make sure it is. But before you plunge in again, think about your trading error. What caused it, why were you not able to avoid it. Did you act on a valid signal and it just turned out to be one of the 30% failing signals or was it caused by an emotional problem, which needs to be addressed. Depending on the trading error which caused you to go bust, you continue real trading or it’s back to sim trading until you get it green again.
• You will find yourself in a range between 2k and 3k for as long as it takes you to get over your emotional problems in trading. Trading is a mind game, and the market is setup to get you out of your trade at a loss. Simple as that. So, unless you are able to develop the right mindset, you will lose.

I’m sure you will feel bad accessing your tuition account. And you will do a lot to avoid this feeling in the future. I can tell you for me it worked, after 4 or 5 times, but I was a real hard nut to crack. And still this whole period of 2 years has cost me just 10% of what I paid the market before I decided enough is enough, before I found a way to force myself to honor every single US Dollar I was able to squeeze out of the market. Before I knew a 10 tick stop on ER2 can mean the difference between being able to continue trading the next day or waiting one week until I had transferred funds from germany into my trading account.

See yourself as a stock currently going down, building a bottom, becoming waterlogged and ranging for as long as it takes to unlearn all the things you did wrong and which caused the downslide, learn the things necessary to really trade, until finally you see yourself going up again, reaching the 3k top and breaking it to the upside.

The way worked for me. There is no guarantee it will work for you. But being busted is a time to reconsider, to change something or to stop alltogether.

If you decide to continue on your journey,

Relaxed trading to you

 

I can't get a handle on this

3 years of daytrading indexes and I’m still not able to enter a long on a clear, clear trend.

I saw the reversal, I had my finger on the mousebutton, I saw 601.60, 602, 604 printing, but I thought, s**t you missed it. Wait for a pullback.
Ticks 1488, ER 605.40
It will reverse and I will enter
606, 607 and running
Ticks still around 1300
Anti posting that 611 might be a reversal point. Me, I’m unable to go long 8 points above the bottom.
611 is the reversal, ER retraces to 609, my long order sitting at the 50%pb 608.50, and sit’s and sit’s …
New highs, Anti posting, that he will exit 615.70, still 3.50 points to go

Me, I’m sitting here and telling myself, that buying at the top, at the new high, 11 points above the low is foolish, that a retracement is imminent and that any Long I enter now will be The High of the Day

Acceptance sets in, it’s 9pm local time

I missed it again, I couldn’t go long a 14 point move in the ER2. I did not find 1 lousy entry point. I could not bring myself to press this Go Long button, always thinking, fearing, this is the Top

But you know what:
It was so often The Top, I paid too much buying a breakout, that I can throw it over board in such a move. I had a green day yesterday, I’m consistently profitable after such a long, long time. I’m not getting rich beyond imagination (yet), but I’m sticking around and I’m learning. Maybe next time or the time after or after, I will be able to take the trade. There is nothing lost by missing this move. I traded my plan and my plan does not include buying a breakout. It includes buying retracements, but chasing is not allowed. So a rare Run-away market, which looks so simple, so easy in hindsight, is outside of the parameters.

I missed this train, but it’s filed away, I know how it triggered and I might board it the next time. Just need to make sure, that I’m around for the next time.

Still I had to tell you, that a bit of frustration still lingers…

Relaxed trading

Money Management - Can you make it

I have developped a Money Management Spreadsheet, which can tell you, if you statistically have a chance to make it

You need to know:

• Your account value
• Your current Win % and Loss % numbers.
• Your current average Win$ and Loss$ numbers per trade
• The number of trades you do on average/month

Win % and Loss%:
Win% + Breakeven% + Loss% = 100%

Win%  = Number of winning trades / number of all trades
Loss% = Number of losing trades/ number of all trades

I consider a breakeven trade any trade which is closed at the entry price or at the entry price +1 tick.

Win $ and Loss $:

Win$ is the amount of money you get on average on your winning trades minus commission
Win$ = (Amount won-commision) / number of winning trades
Loss$ = (Amount lost+commission) / number of losing trades

Let’s make an example:

• Account value: 10k
• Win% = 55%
• Loss% = 25%
• Win$ = 119$
• Loss$ = 81$
• Average Trades/month = 100

Download the MoneyManagement Spreadsheet, save it to your harddisk, start Excel and open MoneyManagement2.xls

You need to do the next just the first time you load the spreadsheet: Click Tools/Options and select Calculations. Enable Iterations, click ok

Enter the account balance in field D4, the Win$ in field B7, Loss$ in field B8, the Win% in field G7 and the Loss% in field G8

On the spreadsheet you see a few further entry options:

• Account size<= / contracts. Here you can enter how many contracts you want to trade upto the given account size
• Min Gain/month: The spreadsheet will calculate how much you can make on average / month. But a payout will occur only, if you make during a certain month more than this amount
• cost BE trade: That’s just the amount you pay on a Breakeven trade. If you earn on average on your Breakeven trades, because you usually close them at BE+1 you could enter a +6$ here
• Random Lucky/Disaster Trades: We all know, not every trade goes according to plan. Sometimes you get lucky, sometimes the s**t hits the fan. Here you can enter how many of your trades will be a Lucky or a Disaster trade. Below you enter how much more than the regular win or loss such a Lucky or Disaster trade makes. As you see for me the Luck doesn’t pay as much as the Disaster demands, but that’s how I experienced it until today.

Now hit a few times F9
This will recalculate the Spreadsheet and you will see the Ending balance change. You will allso see the Payout/year and per month change as well as the Profit factor.

What does this mean?
The spreadsheet calculates 1200 trades to simulate one year of trading, if you do 100 trades/month every time you hit the F9 key.

Now contrary to most Money management systems (and also earlier versions of this spreadsheet) this spreadsheet assumes, you just have the necessary margin to trade your system in your trading account and every surplus is taken out of the account and transferred into your private account to live from or just do what all good consumers should do: to spend it

That means the Ending balance is just the amount which is in your account at trade number 1200. As you take money out of the account at regular intervals, it’s not really of concern to you unless it’s below the necessary margin to continue trading your system.
What is of interest to you is the Payout/Year and the Payout/month (monthly). This tells you what you were able to get out of your trading account per year and per month.For everyone comparing systems the Profit Factor might be of interest as well.

So far the spreadsheet is nice, but it doesn’t really help you, as every time you hit F9 you are presented with a new result.

Let’s clear the yellow Box (field A15), hit F9 and keep it pressed until field D17 (left of it you see the label: Runs:) shows 1,500

Now the results look a lot more meaningful:

You have tried your system 1500 times and you get the Maximum Payout/year as well as the Minimum Payout/year. This tells you, if you don’t change your current system and your numbers remain constant you can expect with the example system posted above to make 98k$ minimum/year and 141k$ maximum/year. Not bad I think. But what’s even better, the system not once went broke as you see no number right of the label Gone bankrupt. The column Paid months shows you how many payouts you got per year. The max should be 12 unless you set the Min Gain/mth (B9) too high, the minimum in this case is 11, so in the worst case you can expect a payment 11 months out of 12. The profit factor ranges between 2.66 and 4.42. The average monthly payout of this system is 9.9k$. Really not bad. And all by trading just 2 contracts, unless the account balance drops below 5k$.

If you don’t do 100 trades / month?
You will need to adjust the numbers in Row I

In field I120 you will see the number 1. Delete it and enter the number 1 in field I100, if you do 80 trades per month. Repeat this for row I220, I320…,I1220 and enter the number 1 in field I180, I260, I340…I980. Column A shows the tradenumber  so it shouldn’t be so difficult.

If you want pyramid or test systems which go bankrupt even in late stages of the system, just clear I20 downto I1220, just leave the number 1 in field I1220, so you get meaningful Payout numbers. Then increase the contract numbers in row 6 or change the account values necessary to trade multiple contracts. The minimum account size is necessary to determine when you went bankrupt. The system stops a run, the moment your account balance goes below the minimum, as then IB will not allow you to trade any more futures.

Relaxed trading and I hope you won’t go bankrupt once statistically.

Btw: When I started my chances to go bankrupt where about 30% and I was happy, when I brought this down to 10% and it remaind there, even if I just had had again a losing streak. It really helped me to see, that statistically I still had a good chance to make it, that it just was a losing streak. And the statistics proved to be correct, even if it took a change of the trading system to become consistently profitable.

Money Management - an overview

Every wise crack is telling you about Trade mangement and Money management, how important they are and that without them, you will have no chance to survive in this business.

Total BS I thought, when I found myself again in a trade being down 10 ticks and facing again either a loss of 125$ + comm or continue waiting for a move back-up to Breakeven + 1 tick. Can’t tell how many hours I was in such trades.

Still a presentation given by Sport a year or so ago in Woodies room got me thinking about the subject again.

Sure your options being a 1 contract trader are limited. None the less Money management rules apply to you as well.

Money Management means deciding based on your current account balance

• What instrument you trade
• What risk you can/should take based on your account size and
• How many contracts you trade

You need to know the risk inherent in every instrument you want to trade. Let’s compare the US 30y Bonds (ZB) and the S&P500 (ES).

The ES pays per tick 12.50$ vs 31.25$ with the Bonds. So if you want to trade the Bonds, even if they are highly trending contracts you need to decide, if you can afford the Stopamount the Bonds will cost you in case you are wrong. Let’s say you need on average 5–6 ticks to decide you are wrong in the Bonds, that your signal is not valid. This will cost you about 160$ to 192$/ trade. On the other hand on ES the same 5–6 ticks will cost you 65$ – 78$.

Based on your account size, you might have to decide, that even if the ZB looks nice, that even if you get the signals fairly correct, you can’t trade it due to the risk inherent in the high tick value.

How many contracts you can trade is first determined by the margin necessary to trade 1 contract. With a 10k account you could trade

• 5 contracts ES intraday
• 10 contracts ZB intraday

So the exchanges view the risk trading the ES a lot higher than the risk trading ZB. To determine margin the exchanges look at the average daily range the instruments do and apply a special formula to arrive at the necessary margin to trade 1 contract.

But I can guarantee you, that most of you reading this blog will be out of business within a month, if you decide to trade upto 10 contracts ZB in a 10k account.

So, how do you determine how many contracts you can trade with a 10k account?

Old traders will tell you, you need 5k to 8k trading 1 contract to be able to weather most storms the market will throw at you. I myself traded 1 contrat with a 2k-3k account for 2 years. But since I crossed the 5k barrier I feel better. Now I trade 1 contract with a 10k account and Scale-In a trade for eventual 2 contract trades, if I get them. 

An objective formula is to risk no more than 1–2% of your account size with any one trade.
So, if your average Stop is 150$, the account size recommended to trade 1 contract should be anywhere between 7.5k to 15k.
Btw: The reason, why I remaind for 2 years in the 2–3k range was simple: I was an undercapitalized novice daytrader, who had had huge swing trading losses. I could not afford a single loss and that means you get a lot of these. It’s just the way it is. But for me it meant healing from prior huge losses, it meant learning, what it meant to be a daytrader, it meant learning the necessary skills to survive.

I’m still usually trading 1 contract, because my Money Management spreadsheet tells me, that using this strategy I will have consistent profits.

to be continued…

The reasons behind this Blog

I’m reposting a comment I wrote to the Cheese, but as it tells a lot about the reasons, why I write this blog, I think it fair for those, who missed it on Cheese’s Blog to copy it here.

Reading this Blog, you might ask yourself, why I’m writing it at all?

Because I like to read my own ramblings? Sure not. I usually don't reread something I have written.

Because I want recognition and comments?
I think, if I wanted that, I would sit in a corner full of despair. I'm getting just a meagre number of comments in my blog and Cheese refused to give me the Ego-Booster, which would tell me how many people are reading my blog. (Even if I really asked him politly.)

No, I'm not looking for your comments, but I more than appreciate comments like Tack's or Racer's Edge on my Stop's or Scale-In article. They provide the answers to the unasked questions I pose with my articles.

I write the Blog to focus new ideas I got from others or had myself, to see if I have understood them, if they have merrit and if I have actually found something, which I can implement in my trading plan.

And if you decide to answer, taking my idea and showing me where the flaws are, I'm more than gratefull. You have saved me money, you have told me some old miners lore and decided to show me, why in your oppinion my idea will not work as I think it should. Sure I might decide I will try it none-the-less, but I'm forewarned. I know behind which corner you think the beast will be waiting and I can be prepared.

My defense article series brought me back to the old trotten path. I will again trade with Stops, but in the process of trading it realtime I started the first babysteps learning how to scale-in and manage a multi contract position. And it has cleared a lot of things, which were unclear just a week before. I couldn't have done it without writing the blog, without focusing my thoughts and without your comments asking the questions, which were nagging until I found an answer to be implemented in my trading plan.

But does it mean I recommend you follow my path, does it mean I think you can trade as I do and be successfull, sure not. Every trader has to develop his own system. You need to take responsibility for your own trading decisions.

As long as you trade someone elses system you will ultimatly fail (unless you have a successfull automatic trading system).

Cheese, you can't trade Kiwi's plan. But you could have made it your own and be successfull. But as long as Kiwi is responsible for your loss, you will fail.

So you lost 2 days in a row? You lost big time? Sorry about that. But maybe you should take a look at a longer term Euro chart and ask yourself, if you are made for this type of environment? Euro is vicious right now. We are eventually changing a midterm trend and the midterm bear traders are fighting the longterm bulls. And both sides are up to their own games, giving ground here, gaining ground there, attacking at one time, retreating the next second, when the batallions are not yet ready.
Either you are right or you will lose more than your shirt in such a battle of the giants. That's the beast you decided to trade. You don't know it yet, still you complain having lost 2 battles. Stand up and fight.

Euro can be a calm water at times, trending nicely, but it can run 100 ticks in 5min, it can reverse 80 ticks and continue another 100 in the other direction and it can stay in a 30 tick range for hours. That's the way it is. You need a lot more screentime on the Euro than the few weeks you have. You need to make your experiences, you need to learn when to go with the trend and when to fade it. But changing the plan will not help you in this regard. In a trend everything will work, be it a cci ZLR, be it a Stochastic sling, be it plain 50% Pullback trading. But you need to have a plan and then start trading it.
If you see flaws in it, correct them, if you feel unsecure with certain entries, take them in Demo and if your feeling proves to be correct look for and define a filter, if it's wrong, you have learned that you can override this particular feeling in a similiar future situation.

Make Kiwi's or any plan your own plan. But that's, what you need to do, that's your homework. Not throwing out the teacher, because his system gave you two losing days in a row.

Hope you will some day be able to say: "Yes this was really relaxed trading."

That's how I understand Marc Douglas, when he speaks about trading in the zone. You feel sure, you are relaxed and you just act to what the market is telling you.

Scale-In

I was trading the Defense last week and I was able to work it profitable. Still I see the dangers and being at the mercy of the market once a move against your position starts, isn't fun either.

 

And if you were caught long in this downmove no defense would have helped you. There were just not enough retracements to get you out.

 

I myself worked a defense the other day, when Euro made the double bottom at 1,2866 with entries at 1.2901 and 1.2981. It took quite some time to get out of this trade with a profit. It worked, but I can tell you, it got me thinking about the strategy again.

 

But maybe I’m looking at it the wrong way.

 

I’m thinking for quite some time now about trading a second contract. My account warrants it, the probabilities tell me it is time and trading the defense showed me I no longer have the “panic” feeling once I hold not one but two contracts in a volatile futures instrument. I can think in a clear, detached way, regardless whether the trade is at a loss or at a profit, so it’s time to take the next step.

 

But how?

There are different methods available of course.

• All in, All out
• All in, 1. Exit at 5–7 ticks and a Runner 
• Scale in once the trade becomes profitable, Exit at a target
• Trade 2 contracts with a Defense
• Scale in, if the trade goes against me, Exit at a Target or Scale out

All in, All out is the method most might use in these tighter ranges we see today. This method has the advantage, that statistically you can double the results you are currently seeing, as you just have to continue doing, what you do with 1 contract.

As popular is the method All in, Exit one at 5 ticks, bring the whole trade at BE+1 at the then lowered Entry price and let the Runner go as far as it goes. This strategy requires Follow-Through which we seldom see nowadays. But if it runs, it’s a great strategy.

Even more Follow-Through dependant is the Scale in at a profit method. You add contracts once the trade becomes profitable (eg. at every retracement or every 10 ticks profit add one and trail the Stop up). That’s a method most suitable for swing traders trading longer timeframes. If you go for a trend trade on the Euro for 110 ticks, you sure could add every 20 – 30 ticks and still have the Stop far enough away. But the Risk:Reward Ratio of this trade isn’t very favorable. Every time you add, your average Entry price goes up, making the risk on the whole trader higher in later stages of the trade.

Scale-In into a losing trade. That’s what the Defense (see my other articles about the strategy) is doing. But other than the Defense a Scale-In uses Stops under the position, so you can continue the other day. Where you put these Stops is at your discretion obviously, but contrary to the Defense you use Stops. Let’s examine that thinking.

I don’t expect to enter at a Top or Bottom. It’s nice if you enter and your contract never looks back, but how often does it happen? 1 in 10 trades, for me it’s more 1 in 50 trades. Usually my trade wiggles around my entry for a while before I’m proven right or wrong. And I want to enter with 2 contracts. So why not enter once I get my signal with 1 contract and put the entry for the second contract 10 ticks below for the Long entry? The Stop goes in at 15–20 ticks, which I usually use, when trading Euro.

Let’s give an example:

Long 1.2835, Add-On 1.2825, Stop for 2c at 1.2815

If we go, fine, I’m in with 1 contract not with 2, but the Signal proved to be worthy of my entry and I can expect a better move. If it goes 10 ticks against me, I’m in with 2 contracts, my average entry price is down another 5 ticks to 1.2830, which brings the position into the intrabar wiggle range again, giving me the high probability to exit the trade at Breakeven + 1, even when the signal should really be failing.

The Stop is at 1.2815 for 15 ticks on the position. (Had you entered All-In the Entry would have been 1.2835 with Stop at 1.2820 for the same kind of Risk, but giving Euro 5 ticks less wiggle room)

The Exit on the Add-On contract goes in at 10 ticks profit to make sure we have a winning trade once taken out. Of course you could instead decide to just put the Stop at BE + 1 for the whole trade. Still, if that Stop is hit, you are out for 2 ticks, while taking a risk of 15 ticks on the trade. No, exiting just one and trailing the Stop for the whole trade to 1.2826 to again give Euro air to breath, while still minimizing your risk on the trade is the better way to go in my oppinion.

What’s the difference to the Defense? The defense tells you to enter at multiple levels down to trade yourself out of the hole. If you have anything resembling a rangebound market even if you have wide ranges that’s fine. But look at the margin needed.

To trade a 5 level defense you have to have in your account for every contract traded at least 6 times the margin needed by the exchange plus safety level. So for the Euro to trade 1 contract with a 5 level defense, you need a margin of at least 20k, as in the end you will be Full-in with 6 contracts. If you trade 2 contracts, you have to calculate twice that amount of course and a Full-in Defense would mean a position of 12 contracts.

I want to trade 2 to 3 contracts, not 12.

The Scale-In with Stop instead does not take this risk. You scale-in into as many contracts you feel comfortable with. Be it 2, be it 3 or 6. You just take a position with as many contracts you like with a predetermined risk, as you have a Stop below your whole position calculated from the average Entry price for a defined number of ticks/contract. So you know in advance what risk you will take.

The only variable is, you don’t know how many contracts you will swing in this particular trade. But so what! This does not change the Risk parameters of the trade, actually it makes them smaller, if you swing instead of 4 contracts just 2, as it means the trade did not go all 4 scale in levels against you to fill your position.

But contrary to the Defense, you always know your maximum exposure. You always know, how much contracts you will trade at the maximum and you know where you will Exit the trade.

So for my comfort level from now on, I will no longer trade the Defense, I will scale into a trade, knowing that this gives me the best entry price in these lower ranges and often range-bound markets we see today.

But I will also know that at the maximum I will trade 2 or 3 contracts depending what I trade, which is within the safety margin levels I (actually my statistics spreadsheet) consider necessary to trade without the risk of going bankrupt with 1 trade.

Relaxed trading

Stops

Did I ever mention it?

I hate Stops!

I learned to live with them, a necessity to be paid, if I want to survive in this business.

But I don't like them, I'm not unemotional about a Stop.

 

I can observe this state I'm in and I can now place my next trade relatively calm and not influenced by the previous Stop. But that's not really true. The Stop is still there in my mind, it lurks and it still questions the next trade decision.

 

A Breakeven +1 Tick trade in comparison, is a lot better. Sure, if I let a 10 tick winner come back to BE +1, I get Stopped out and then it takes off, I ask myself. Hey you idiot, trading is a risky business and if you try to take all risk out, you won't make it. But if it goes against me 10 ticks, comes back, takes me out at BE+1 and then drops like a stone, ...I can tell you, I feel glad and a bit of a pity for the trader, who took me out at BE + 1.

 

As you can see, for me, Stops are not unemotional, are not just the cost of doing business. I tried it, I really tried it, but looking back the nearly 3 years I have a detailed trading journal, I always find these huge drops and then the slow and painful build-up in my account.

 

Did I mention it? Right before I started hearing about the defense, I had this Black Monday. More than 700$ down ( 8% of my account) on 3 trades. And unnecessary in hindsight. Not something like last Friday, just a

Let's run the Stops call of some of the bigger traders

Me, being a small guy, being a good follower of the, I trade only with a Stop maxime, got crushed.
And here comes Anti telling me, hey Chris what do you do there lying on the floor.

Oh me, yeah I'm a bit beaten up, got the S**t in the face and so. You know the routine. But it's just a week and I will be back from where I started. Usually it was then 2 weeks, because after such an experience the next day wasn't anything better, but worse.

Then Anti continues, hey, you know, I only use disaster Stops, so I know I will live the other day, but for the day to day business I do use the Defense Strategy.

Me, I dumbfounded ask him, what's that, Defense Strategy, never heard about it. And he explains it to me.

 

It is like someone switched on a sun in a dark room. Finally someone telling me, yeah Chris there is a way to avoid Stops, but at a price: You will avoid a lot of Stops using the Defense, you might be able to trade each and every one of your contracts to profitability, but if it goes against you, it will cost you really BIG time. If this happens after you applied the Defense for a while, that's ok, because you will have made enough to pay for this BIG hit, if it happens, when you apply the defense for the first time, ...well, that's bad luck.

 

Me, I say, getting hit BIG time now and then, I'm used to. That's what happens with my regular Stops as well. Actually my MoneyManagement calculation sheet, which tells me, if I have a chance to make it with my current numbers or not, has this BIG hit already build in, as it's such a common occurence in my trading carreer.

 

Only knowing about a way to avoid the regular Stop helped me to make these 700$ back over the next two days, not two weeks as it was just 6 months ago.

 

My Loss% rate is down from 20% to 11% in March, only because I give my trades more room, because I use the Defense as it fits me and my trading style. Actually I applied the Defense 3 times in the last 2 weeks, with all the other trades it wasn't necessary, as the Euro never went the 20 ticks against me to hit the defense.

 

Sure, I could have used Stops instead, but these would have been hit more often and after a Stop, I usually do not reenter in the same direction within the next 5 minutes. I just don't do it. 20 ticks, that's 250$/contract and that's a lot. OK, I could use 3 or 4 ticks Stops, I tried it, but I fared worse, it cost me even more at the end of the day.

So I was already back to bigger Stops, before I was introduced to the Defense.

 

Do I use the Defense in each and every situation? No!

 

First, you need to know the contract you want to use it in and out. You need to know it's quirks and the little games they play with it.

I use the Defense on the Euro and the Russel, I might use it on CAD and AUD as well. But it sure will take a long time, before I use it on the HSI. On HSI I trade with plain regular Stops, I might even switch to Stop Reverse orders in the future.

 

Second, you need to decide, how you trade the Defense. What do you want? A big gain, each and every contract at least a 10 tick winner, or are you content with a Breakeven +1 on the whole trade. Me, I have my winning trades, 55% at the moment, and 34% Breakeven +1, and I have decided, that until I know a lot more about the Defense, I'm content with the Breakeven +1 result on a defense trade. If I get more, sure, I won't complain, but it's not my goal. I want a BE + 1 on the Defense for the whole trade.

 

Do I propose, that you should use the Defense instead of the regular Stops? Sure no.

 

If you have no problems taking a Stop, if you are green at the end of the day, even if you took some Stops during the day, change nothing, don't think about the defense. You have my full and absolute admiration. You are one of the majority of traders for whom the old sage advise is true: Never add to a losing position.

 

Also, if you a struggling novice trader. Hands away from the Defense. It's just too dangerous. You can really hurt yourself using it in the wrong way.

 

So for whom is the Defense. Simple. For nobody else, but me. I have incorporated it now in my trading plan.

If you decide to use it as well, you need to find your own way how to do it. Same, what you have to do with every other tiny trading idea you find somewhere.

 

I wish you a relaxed trading week,

 

Chris

The Defense questioned

Tack said...

I question why you continue to promote this extremely dangerous trading strategy in a public forum ?

I think and write about it because there is more than one truth. It took me 3 years to learn that and I have started to question all these trading truths being told from generation to generation.

 

I have a trading friend, who trades something like the Defense strategy for as long as I know him with acceptable risk parameters. I told him, one day, one day there will be the big one, the one which will wipe his account. But 'till today he has weathered the storms quite fine.

 

And don't tell me you don't run this risk of the big bad one trade. You do everything to avoid it, but it is waiting out there and it might hit you real bad, if you don't use proper risk management.

 

I accept that the Defense is dangerous.

But let me tell you about my biggest trading loss ever: 5 years ago, daytrading stocks then, I followed the so secure method of adding to a winner in a biotech comp, which had gotten slashed to 75% of it's value premarket due to a bad earnings release or some other news. I took the first chunk at 5, added at 6 and added the third chunk at 7, then the s*'t hit the fan and a fund decided to dump it. Back we went to 4 in one or 2 minutes.

Me, being this idiotic trader I was then, had not seen the sign on the wall, when 7 .20 proved to be the high and no new highs followed for 30 sec or so. I did not cover at a still nice profit, when it was possible around 6.30. No, I was sitting there, not believing it and finally covered somewhere around 3. Sure a Stop would have saved me, but me being Mr. Wise Guy did not protect my profitable position by trailing the Stop then, because I wanted it all.

They have a term for it to explain it: “Trader Paralysis”

But this sure did not help me afterwards. I can assure you, I would have fared a lot better had I not used the oh so wise strategy of adding to winners.

 

Stops are worth an article, so I will not tell this story here. But Stops have their dangers as well. Sure you are flat again, but are you emotionally made to continue trading as if nothing has happened? A daytrader has to be, and if he can’t accept that losses are part of the business, then it would be best, if he left this profession immediatly! This article I mentioned earlier: Death by a 1000 Stops hit the nail on the head for me.

And how many emails did I receive asking:

"Chris, are my Stops held on Globex or IB, I think they know where they are. They hit them, take me out and continue in my direction. Could you make the Stops invisible, held in FuturesTrader only?

 

You and I know, there is noone out there running these specific Stops intentionally. But that Stops are run, before a major move can start, is something you see happen quite often.

 

You question, why I write about the Defense Strategy and don't keep it to myself.

Simple: Because a lot of people use it, but don't tell anyone, that they do it, as it is so dangerous.

 

I write about it, because this Blog is not the general truth forum, but a private Blog, which I use to write about my Trading path and which covers the emotional and strategic side and development of me as a trader.

 

I have noone to follow, I have had my share from gurus and I have learned, that I need to find my path alone. I can bounce ideas around and writing about an idea is one way to bounce it around and I'm glad it sparked your comment, so I had a chance to reexamine my thoughts and ideas.

 

I have my reservations how Anti trades the Defense Strategy, which is the reason I trade it in a different way, but I look at it, as it is deviating from the Trading Truth told to the daytrading community.

 

95% of all daytraders fail. Are all these guys and gals dumb? I don’t think so.

Are they just not made to become traders, maybe. It takes a lot more dedication and conviction to become a trader, than I ever thought possible when I started this way. But some of the old sage trading truths, when applied at face value, will just not work and be one of the reasons why some prospective new traders fail.

Relaxed trading,

Chris

 

Btw: I hope you did not miss Anti’s comment on Friday, that the defense as he applied it, was against his own rules. It went beyond the 66 tick exceed a countertrend is allowed to run, before you have to consider a trend change. I still wrote about it, because it happened in realtime, and Anti had the guts to say, Yes I made a trading error and I paid for it.

 

Teddys Trading Safari

I wanted to write about Stops and the Defense, and I still might today or tomorrow, as the reasons, why one trader chooses this or that trading path still occupies my thoughts. But when I came to my computer after dinner I saw this e-mail:

 

I just found your blog I had no idea you had gone to Teddys room. No one mentioned it in woodies but lots of the Euro traders asked where you were at the time. The morning session is like a morgue!! I have only been trading for about 6 months. I miss watching decent traders as I believe it’s the best way to learn. Is it worth joining teddys room?? For some reason I just cannot seem to make money trading woodies way, not in realtime anyway!! Although I use the CCI I am using other indicators now, especially to keep me in a trade and things are turning around.

 

and answered it with a letter I thought, might be of interest not only to the writer, who will remain anonymous here in the Blog.

 

Hi Anon,

 

yes it sure is worth joining Teddy's room. Most of the "old" traders are now there, and I would say, if you knew Woodies old Paltalk room, that's the atmosphere we now have in Teddy's room. You will like it.

I no longer use the cci (even if it is still on the chart on first glance, but that's just a Stochastic using the cci scaling, which I'm so familiar with) and have to say I'm doing better than in all the 2 years in Woodies room. That's not Woodies fault, he laid a lot of groundwork, but at least the last 6 months were lost. I did no longer develop. This has changed with Teddys room. Free flow of ideas between traders you know trade for real is all what is needed to get you big steps forward on your trading path. Reading my blog gives you an idea in which direction I have evolved. When I was in Woodies room I already traded S/R levels but was always feeling like I jumped the gun and saying ok see, this or that cci signal was just developping when I entered the trade. But that's just BS. Of course there is a cci signal, if the trade works and goes in your direction. But it's just not there in Realtime. It is developping and if the trade fails it will be just something else. EG a ZLR or Shamu. If the ZLR does not work, fine then let's call it a Shamu.

 

But when does the ZLR work and when does it fail. How do you manage your trade. Is there an alternative for being Stopped out. Only when you see all options you can decide which way is the right one for you.

In Teddys room I got the new ideas, the alternatives presented and I now can decide which way I want to go, which I feel comfortable with. Because you will only be successful, if you don't have to fight yourself. Sure a lot of the stuff discussed is beyond a new trader and I would forward these to the WCCI to learn trading, to learn the discipline necessary, but I'm not sure newbees still get the most important lesson there: Screentime, Screentime, Screentime

 

To give you an example of the new ideas which are bounced around, just take a look at Friday's log's and see how we discussed spread futures trading in the afternoon. Darth Sidious came up with it, posted and followed up on the trades he did and we started discussing it in earnest. It sounds absolutly intriguing. Still it took me 2 hours only to understand which side to short and which side of the leg to go long when I saw a H&S pattern on a Spread chart, which I would have shorted. Sounds stupid, but that's what I mean, when I talk about getting new ideas and being able to follow them as long as there is someone you can discuss them with. No restrictions. Noone monitoring, if you said something you should not have said or making a reference to a non cci indicator.

We for sure had such discussions in the WCCI 2 years ago, but that stopped, as you yourself might have noticed.

 

Watch and learn. You won't learn in 6 weeks to trade profitable, it will take a lot of hard work and dedication. There is just no shortcut.

But sometimes the way you are forced to go, is just not the way which would be natural for you, which would work for you, because instinctively you understand and accept as correct what you do.

 

Relaxed trading,

 

Chris

Last Man's Exit - A failed Defense

If you were in Teddy’s room yesterday you saw something remarkable (or something stupid, in case you follow the mainstream):

 

After Euro did his 100 tick stunt up to 1.3080 and retraced to the countertrend target range Anti went long 1.3032 expecting a trend reversal long.

 

 

 

 

 

 

 

 

All Eurotrader know what happened. Euro continued to sell-off. And Anti applied his Defense Strategy

According to the rules, the defense would have been appied as follows:

Add-on

at 1.3019

at 1.3009

at 1.2999

and at 1.2989

For a total of 5 contracts

No scale out was possible, before Euro hit the 1.2989 level

I don’t want to question the reasoning to go long right at the calculated countertrend target of 44 ticks. There are reasons to trade this way and there are reasons not to do it, but wait for a reversal signal. It’s a decision every trader using targets in his trading has to make for himself.

But being long 1.3032 you have to manage and you do it according to the plan. And this get’s you in the mess, you see above. But let’s see if -even theoretically– there is a way out, before Euro broke down really with the release of the ISM numbers.

Ok, at 1.2989 you are down on the first contract 43 ticks, on the second 30, on the third 20 and on the forth 10 for a total of  – 103 ticks. As you can see the 89 add-on could have been added and exited 3 times bringing the total down to 73 ticks in the red. (Shifting the frame down 1 tick so the 10 tick range was 1.2988 to 1.2998, the moment you saw the fierce resistance at 1.2999 could have given you 1 additional entry, but not more.)

So it stands, the defense was 73 ticks down, when Euro broke down to the 1.2930 level with the release of the ISM-numbers at 10am.

And here is the news spike:

Anti said he added at the 77 and 57 levels and scaled these also out for another 20 ticks. I have marked up something I call the Last Man Exit. It’s the last chance to bail on a trade, which was downunder for quite some time and which comes up to Breakeven or around breakeven, before it goes really down under. In my career I was in a few such trades and have seen this Last man exit offered to me in most of these trades. When I refused to take it, the trade usually cost me huge. This led to my current strategy, that a trade which was downunder for some time, will be exited at Breakeven +1, usually regardless of the then prevailing chart conditions. I will reconsider the market situation when flat and reenter in the same direction if warrented. But once you are flat you can be sure -as far as this is possible– that you are again objective.

The Last Man Exit offered to Anti was 1.2997. At this point, he had made another 20 ticks from the already scaled-out Defenses DS5 and DS6 and was still Long 5 contracts from 1.2932, 1.3019, 1.3009, 1.2999 and 1.2989. The whole trade was down 35 + 22 + 12 + 2 – 8 = 63 ticks versus 50 earned with the defense.

Could you have exited at this point? I don’t think so, as you wouldn’t have known in realtime, that 1.2997 was the Last Man’s exit. But having traded it and looking at a 100V chart a reasonable exit, which was achievable was 1.2990. The Stochastic was breaking down fast, and it was a trade which was really deep downunder before, so I hope, I really hope, I have the guts and nerve to exit such a trade at 1.2990 for 42 + 29 + 19 + 7 – 2 –50 = – 40 ticks.

Writing about this will hopefully enforce this thinking.

But let’s take a look at the picture above. Was there a way to get out of this mess at Breakeven or a Profit, without violating or bending the rules too much?

The rules say DS5, DS6 and (in case you use it DS7) are added at 20 tick intervals. Now let’s make the profit targets of these 20 ticks as well.

This gives us on the spike up to 1.2997 instead of 20 ticks 40 (with DS7 60) ticks on the profit side. The Last man exit was 1.2997 and the trade at 1.2997 was down 35 + 22 + 12 + 2 – 8 = 63 ticks versus 70 (90) earned with the defense. 

So if you did not apply DS7 your breakeven level was 1.2996 and you got offered a real Last Man Exit for a Breakeven +1 tick trade. Knowing about the Last man Exit, I hope I would have placed my Limit Sell at 1.2996 or more likely 1.2997 for the remainder of the trade.

If you applied DS 7 the Breakeven level was 1.2992 for the trade. I tell you what, after such a turmoil I can guarantee, that I would have placed my Stop at BE +1 the moment the trade was 4 ticks in the profit. How you ask? Just by letting it done automatically from FuturesTrader. No other way to be fast enough, as it was a Spike upto the Top at 1.2998.

As it turned out Anti held his contracts, traded some back and is down about 250 ticks net on the trade at the close on Friday.

What was the really astonishing thing and the reason why I still will continue to trade the Defense: Anti told the whole room, yes I’m still in and yes I’m down 250 ticks. It’s the way it is. The Defense failed in this case and I made an error not switching to the Short side, when euro exceeded the 66 ticks from the Top to the Downside.

The Defense Strategy is no Holy Grail, it is not 100% fool proof and there will be days like yesterday, where you get hurt badly.

I myself, trading Euro from the Long side from 1.3009 applied the defense as well and using my Fallback Defense added to the trade at 1.2989, which brought my average entry down to 1.2999. I exited 1 contract at 1.2999 according to the plan and set the new addon level to 1.2979 (not 1.2989 which anti would use and which makes the difference between his and my application of the Defense, as I have the intention to bring the average entry down 10 ticks with every addon, to get me a better entry level for the initial contract, once the market turns in my direction). So I stayed long 1 contract while Euro bounced in the 1.2985–1.2999 range. The first time Euro broke up above 1.2999 it was sold down so fast, I could not punch in my exit order. (Realising, that there really was no follow through above 1.3000 just took too long.)

But I took the second break above 1.3000 as a hint to place a Stoporder at 1.3000, when 1.3002 printed. It was, as it turned out, a really wise decision, as for me it was the Last Man’s Exit for a breakeven +1 tick trade.