Tag Archives: Money Management

Fighting to Regain Losses

 

I had an interesting email exchange with a trader a couple of weeks ago, who is struggling with occasional massive losses.

email excerpts

email excerpts

I've had the opportunity to speak to a LOT of traders over the last 8 years of writing these articles. You'd be surprised at how common this problem is.

We discussed several options to investigate further, related to money and risk management, strategy, and of course psychology.

What I wanted to share with you all today though, was just one simple concept that might help, should you ever find yourself suffering from a similar problem.

It's just a slight shift in mindset. It may not be easy. It certainly won't be the full solution. But it could well play a part in overcoming the problem.

Here is what is happening right now:

The current plan

I get it.

Losing sucks. We don't want to lose.

And even more than losing, we don't want to admit we were wrong.

So we fight! We double down on our earlier decision, hoping, wishing and praying that the market will turn. Just enough to get us back to breakeven.

There is a problem though.

IT'S NOT WORKING.

You said that yourself!

But it's not working!

Sure, sometimes it will work out just fine, but it's only a matter of time till the market provides another extended drawdown which takes you out of the game.

Your current money and risk management plan provides you with NO EDGE.

And here's a key part of the problem:

Here is part of the reason why...

Let's repeat that for effect!

  • When you FIGHT to get back to breakeven, you're doing so at a time when the market environment is NOT working in your favour.

 

Seriously!

You're fighting against a strong and persistent trend!

I'm not saying don't fight. But if you're going to fight to get back to breakeven, let's see if we can do it a bit smarter. Let's rethink this concept.

Let's break the current plan into three stages.

The current plan (in stages)

What if we planned our fight differently?

A better plan

Use HOPE as the trigger.

Any time you find yourself HOPING that an extra "unplanned" entry might just help you get out at breakeven… EXIT.

Take some time out to clear your mind.

And resume the fight at a time and place when the market movement and price conditions are IN YOUR FAVOUR.

Don't make this game any harder than it needs to be. Fight to regain losses at a time and place of YOUR CHOOSING.

It's the same challenge; taking a drawdown back to breakeven and maybe even positive territory. But you're doing so when the odds are more in your favour.

And even if four out of five times the market would have got you out at breakeven, had you just entered one more time, ignore it. Remind yourself that averaging down has proven to have NO EDGE. Because the fifth time will not only blow out to a huge loss, but will also take away all these previous gains.

If you're going to fight to regain losses… do so at a time and place of YOUR CHOOSING.

Step aside. Clear your mind. And resume the fight at a time and place when the market movement and price conditions are IN YOUR FAVOUR.

It's just a slight shift in mindset. But it can make a really big difference.

Good luck,

Lance Beggs

 

PS. A pro-trader will NEVER EVER let a single trade, or a sequence of trades, take them out of the game. Always, before any other goal, your priority is to survive to trade another day. If your current money management plan involves adding to positions just based out of hope and fear, then your money management plan sucks. Fix it. Or you're unlikely to last long in this business.

 


 

Two Attempts – Then Reassess

 

I see far too many traders destroy a session through fighting the market. Again and again and again.

Stop fighting the market

You need to break the pattern.

Try implementing this rule:

Two Attempts – Then Reassess!

 

After two attempts at a trade idea, if it hasn't worked, it's clear that something is not right. You're not in sync with the market.

Either:

  • You have misread the situation and you're wrong, or
  • Your timing is out (which still means you're wrong).

 

Break the pattern!

Two Attempts – Then Reassess!

Confirm your position is flat.

Step away from the charts.

Clear your mind.

Then reassess from first principles.

Try also to see the picture from the perspective of someone who might have the opposite bias to you. What are they seeing? Could they be right?

You may choose to get back in for a further trade (assuming session drawdown limits are not hit).

But you may also have prevented a meltdown; stopping a good trade idea which didn't work from turning into an absolute mess of a session.

Here's a recent trade sequence where I implemented this rule – Two Attempts – Then Reassess!

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Your Number One Priority… Survive the Learning Phase!

 

Before you even think about strategy…

Reduce the risk of single trade catastrophic failure.

Stop losses are essential. If you think you can operate without them, leave my site now. Unsubscribe. Professional traders respect the risk within the market.

If your platform does not allow for automatic submission of stop loss orders when your entry order is filled, then get a new platform.

And keep single-trade risk to acceptable levels (see Chapter 8).

 

Reduce the risk of single session catastrophic failure.

Ensure your plan contains a session stop. That is, the dollar or percentage loss that will trigger a decision to HALT ALL TRADING for that day.

If you're out of sync with the market, get out of there.

Survive to trade another day.

And if you do not have the ability to stick to this decision then find a broker who will implement it for you, preventing further trades once the session stop is hit. They're out there. If you need this, find one who offers it.

Swing traders… you might wish to extend this to a weekly stop. Or monthly stop.

 

Reduce the risk of a slow-bleed loss of account over time.

Implement a maximum drawdown stop.

Your trading is clearly not going according to plan.

It's time to stop. Take a lengthy break. And then reassess.

Take this trading halt as an opportunity to review your trading plan and your trading performance, with the benefit of hindsight.

Return to a simulator environment until such time as (a) consistent profitability is again proven in that environment, and (b) the account balance has been replenished via other sources.

 

Always remember – your number one priority is to survive the learning phase.

Happy trading,

Lance Beggs

 


 

Trading a Small Account with One Contract (Part Two)

 

Last week we discussed my thoughts on trading a small account with one contract.

See here if you missed the article – http://yourtradingcoach.com/trading-business/trading-a-small-account-with-one-contract-part-one/

We finished up by stating the following:

  • It doesn’t matter which management style you choose; a higher probability smaller win target (like my “part one”) or a lower probability larger win target (like my “part two”).
  • Both management styles will incur psychological challenges during periods of underperformance.
  • Both have the same goal – building your account to the point where it allows multiple contracts.
  • Both will achieve the goal if your edge is real.
  • Both will fail if your edge is not real.

However, having said all that, there are other options.

1. Your chosen trade management style does not need to be a “one or the other” decision.

You don’t need to choose just the close target or the further target and stick with that forever. You may decide to use both at varying times.

You might decide to target the first potential opposing orderflow (the closer target) as the default option, switching to the further target whenever the market context suggests the potential for runner.

When does market action suggest a potential runner? Your market structure journal will help you find these situations. But for starters let’s consider the following:

  • Volatility contraction leads to volatility expansion – as a period of contraction tightens into the apex you might consider holding any entry gained within that contraction for the multiple-R wider target, should the contraction break into expansion. And of course the same applies to any pullback which retests the point of expansion.
  • Compression of price against an area of S/R can lead to multiple-R expansion. This will often display as a form of volatility contraction, but that’s not always the case. A short-term ledge pushing against resistance can offer great opportunity, either with a pre-break entry or again the first pullback after confirmed break.

Let’s “borrow” some YTC Facebook posts showing examples where a wider target may be the wiser option. (The text on the images will not relate to the issue of trading a small account with one contract; look to the price action and market structure to identify the multiple-R potential. And if you don’t follow YTC Facebook, consider liking the page if you want to get new images like this every couple of days!)

In this first example we see a long-term volatility contraction. As price approaches the apex, any trade opportunity within the contraction could be held for it’s potential to break the structure and provide a larger directional expansion. If missed though, further opportunity is available on the first pullback after the break of the structure (at point C).

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Trading a Small Account with One Contract (Part One)

 

When I receive two questions on the same topic within one week, I know that there is a topic I’ve neglected to discuss in sufficient detail (or at all). So it’s time to address the issue of trading a small account with one contract.

Question from NJ:

  • Quick question: Can you touch upon the pros and cons and Trade Management and Emotional Challenges when trading only 1 contract vs. multiple contracts? Thank you, NJ

Question from AB:

  • I like your 2 part trade management ideas but they won’t work for me. My account is small and I can only trade one contract positions. How should I manage my trades? How should I choose a target?

I like to trade a multiple part position because it’s a good fit for my personality and mindset.

Entry is usually All-In. Exit is usually scaled out in two parts. “Part One” trade management targeting some quick profits (ideally 1-2R), providing a free trade for “Part Two” which targets a bigger win.

Part one – higher probability with a smaller size win.

Part two – lower probability with a larger win.

It’s certainly not the only way though. There are traders who operate with an All-In/All-Out trade management approach, which is essentially what you’re forced to do if you trade with only one contract.

Given that you said you like my two part approach though, my primary suggestion would be to either:

  1. Remain trading in a sim or demo environment while working to increase your account size to the point that it allows you to scale out a two part position;
  2. Consider whether reducing timeframe is an option, so that individual position risk is smaller and it will allow a two part position (assuming that your problem is not simply a margin issue); or
  3. Consider changing markets to one that allows smaller account sizes (forex for example offers micro-lots which allow for incredibly small accounts).

But let’s assume that these obvious solutions are not an option for you, for some reason, and you do wish to remain trading in your current market with your current account size with only one single contract (or mini-lot).

And let’s answer the questions, “how should I manage my trades?” and “how should I choose a target?”

We’ll start by looking at a recent sequence of price action.

 

Trading a small account with one contract - let's examine a recent session

 

This was traded with two part positions (that’s how I like to trade).

But for the purposes of this article I want to break each into their component parts, as if part one and part two were separate positions with different management styles.

The chart below examines our part one trades.

 

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Trading with the Right Expectations

One of the most common themes I see in emails is a tendency for traders to focus too much on the individual trade.

Every day… "I can't believe this trade lost. Can you tell me what I did wrong?"

Never do I get the following… "Looking at my longer term stats as they relate to my last 20 trades, I see my win:loss size ratio down quite a bit compared to the average across all samples of 20 trades. I have assessed the following probable causes and solutions. I'd love to know your thoughts!"

This is not a game of individual trades.

This is a game of longer term results.

We've touched on this theme a little in recent weeks.

But the emails continue… so let's examine the idea one more time in a slightly different way.

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Session Management – Should We Use Daily Profit Targets or Not?

Email Question:

Hey Lance,

I have had argument after argument with people about whether it is the right thing to do, to have a daily/weekly profit target where you walk away.

I don't think it's correct to do, as long as you can maintain focus. I tend to subscribe to Mark Douglas's way of looking at it, like you're the casino, and you want to take every edge you can. But other's make a valid point that we are not a casino, and the analogy may be a bit flawed.

I want to know what your thoughts are, because I think so highly of your opinion. What do you think is technically correct?

I will say that most of my days do, in fact, end on a high watermark for the session, but I have no set target. I take what the market gives me, and also like to end the day on a nice winner.

Looking forward to hearing what you have to say,

Response:

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The Role of Luck in Trading

In our article last week (read it here if you missed it) we discussed the concept of the bad beat.

A bad beat occurs when you correctly identify, enter and manage a valid trade setup, but are still left with a loss or missed opportunity.

The fickle hand of fate cares little for your high probability trade, nor for your good planning and decision making. And it often seems to take great joy in stopping you out before moving on without you, or even failing to fill your position at all.

But I was reminded during the week of the other side of the bad beat, through email exchange with a YTC newsletter reader:

Really useful advice, Lance.

I tend to forget about probability when I sit in front of my platform focused on my active trading. Of course, probability only works for the consistently profitable traders, we beginners should not forget.

Let me show you what happened to me yesterday, Friday. Since I’m currently in Europe with a 6 hour time difference I was completely oblivious to the 8:30 EST news (although I should have, I use the US time on my platform). I entered one bar before the news broke, and price took off like a rocket. Admittedly I wasn’t proud of the late trade entry, but while the expert sometimes faces a bad beat, the novice can enjoy the luck of the Irish! So don’t mention how probability will hurt him in the long run!!

Cheers,

Rein

Here's the chart that accompanied the above email:

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7 Steps to Surviving a Trading Slump

7 Steps to Surviving a Trading Slump

 

“How you think when you lose determines how long it will be until you win.”
… Gilbert Keith Chesterton, 1874-1936

 

As if learning to trade wasn’t already hard enough…

If you’ve been in this game more than a few months you would quite likely have experienced a trading slump at some stage – a sudden or gradual loss of form which lasts well beyond what should normally be expected.

Missing setups entirely due to lack of focus… hesitation at entry … holding losers past their stop… all the while to a mental backdrop of doubt, frustration, anger, confusion, and  continually negative self-talk.

Peak trading performance requires the trader to be in an optimal state – confident and focused, operating in sync with the market, with the ability to execute trades without hesitation.

What makes a slump so difficult to overcome is not just the fact that you’re in a sub-optimal state, but that the normal human reactions to the slump tend to maintain it or even worsen it. Continued drawdown can undermine your confidence and your motivation, leading to increased anxiety and continued poor performance. The process is self-perpetuating.

The markets are an unpredictable environment. Trade outcomes are never certain, and this naturally creates an environment of stress. If you’ve traded long enough to have some degree of success, then you will have developed ways to manage this stress and in fact may find it motivating. However when the stress increases to the point at which you start to doubt our ability to meet the demands of the trading environment, or to meet your expectations, you can find yourself very quickly digging yourself into a hole of despair, and a trading slump which if not addressed quickly could prove both financially and psychologically damaging.

So, what can be done to help us out of the hole?

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