Saturday, June 11, 2005

Risk vs Reward

What distinguishes a normal trader like you or me from the super traders?
Have they found the Holy Grail? The 100% winning method? Sure not!
What they do is being able to take extraordinary risks to gain extraordinary rewards.

Most of us have at one time or another looked at a tradingscheme like this one:
How to be a millionaire in 30 days, when you start with 5,000$ trading the ES:


Looks good! But we all know this system has just a tiny flaw. It’s not being able to do 6 trades a day for 2 points ES / trade. This is sure posible, even on a consistent basis. And if you don’t see it in the ES, use the Euro currency futures instead with an average 80 tick daily range minimum, each tick 12.50$ and according to our example you need to do just 8 ticks/trade in the Euro, as this corresponds to the 2 points ES.

The problem is the extraordinary risk this system takes to get the maximum reward.
You think you can swing 6 contracts? Yes, I think so. Even when you experienced a drawdown of 3 losing trades in a row and see your account down to 4250 (10 tick stop assumed)

10 contracts, ..25 contracts, ..100 contracts, meaning 1,250$/Tick? You start to see the problem. On the Euro you might be able to swing 300 contracts max, without the risk of not having enough liquidity from the marketmakers. On ES you should be able to trade 1000 contracts or 12,500$/tick.

But are you made to do that? Are you able to sleep well, if you lost in 3 trades on a 10 tick stop with 100 contracts, or 37,500$, make that 375,000$, if you trade 1000 contracts. And 10 ticks is no extraordinary stop on the Euro.

You will tell me, Chris, I have 5,000$–20,000$ in my account and I’m trading 1 to 3 contracts max. I’m not looking for this 30 day scheme. Correct, but if you don’t think about it, you will never be a super trader. If you can say I’m consistently profitable, I can support myself, my family with my trading. I won’t get rich, but it’s ok, then you are already within the 15% elite of the people trading for a living.

None the less, think about trading a bigger line, once you are consistently profitable. It’s a lot easier to do what you do right now with more contracts, than to invest time and worry into squeezing out another 1% out of your already winning system.

Just make sure, you can afford the losses without losing sleep. This means a good trade and money management system.
This means being able to pull the stop, the moment your Stop has been hit and not freezing, because you see yourself down 2,500$ on 20c and a 10 tick stop.
I don’t say trade with a 10 tick stop. I don’t say, use any hardstop at all. Have a disaster stop in place for sure, but if you use a hardstop or if you wait until the chart tells you your setup is no longer working, is a tradesystem decision you make before you take your first trade. Just don’t screw around with it during the trade. Once the trade is open, you have to know what you do. Where is your stop, or what will tell you on the chart that the trade is no longer working. Where is your exit. What will trigger an early exit in case the intended exit is not reached. When do you move your Stop to Breakeven plus 1 tick.

Learn doing the right thing with 1 contract. Once you can do it, increase the line to 2 contracts, then 3, then 4, then 5 and continue doing the right things, the things you always did, the things which made you profitable trading 1 contract. If you start losing sleep, if you get squirmish in the trade, take a step back. Trade less contracts, take a break. Once you feel well again, return to the screen doing the things you always did and increase the number of contracts again.


cantgetadecentnick said...

You posed a series of extremely valid questions. My summary is this.

Do I want to be in the top 5-10% of the 5-10% who make it doing what we do?

If so, then can I handle all that goes with moving size to the level that you talk about?

Well Chris. These are your questions. You have posed them to an audience that may or may not take them seriously; may not even exist (except for me); may or may not even understand them.

So why have you asked them?

Are you really interested in what anon may have to say about these matters?

Are these questions merely rhetorical so that you can appear knowledgeable?

Do you see yourself as an educator?

Do you see yourself as an analyst of market psychology?

Is there a deeper reason?

This blog is your mirror. The only real person answering back to you, is yourself.

Let us know what you see in the mirror.

Does your image conform to the one you described?

Can YOU make the transition to that level?

If yes, then how. If not, then why not? If you don't wan't to, then why not?

Let us know what you see in the mirror ... more importantly, let yourself know what you see.

best wishes

jasmine said...

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mia said...

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natalie said...

Great job on your talk on currency trading. I have a currency trading secrets blog if you wanna swing by my place!