Tag Archives: Risk Management

Order Entry Error – Immediate Actions & Working an Exit

 

I thought it would be good to expand upon some of the ideas discussed on YTC social media last weekend.

Here are the three social media posts first…

26th March:

Order Entry Error - Immediate Actions - Post 1

27th March:

Order Entry Error - Immediate Actions - Post 2

28th March:

Order Entry Error - Immediate Actions - Post 3

There are two main points that I'd like to examine in a little more detail.

  1. Immediate Actions
  2. Working an Exit

 

Immediate Actions

So let's say you've traded the sequence above, and just recognised the entry error. What are your actions?

The obvious advice is to scratch immediately. It's what most educators will suggest. And often it is good advice. Immediately take responsibility for the error and take your loss.

I won't ever have a problem with someone who does this.

Especially in the following cases:

  • Your trading session is in drawdown and has reached your daily loss limit. You're clearly not in sync with the market today. Take the loss. And get away from the screen for a while.
  • Your mindset is already a mess. You're frustrated! You're angry! Whatever the reason, take the loss. And get away from the screen for a while.

 

For these occurrences, immediately scratching is likely the best option. Take the loss. And review the whole session at a later time (or even the next day) when it can be looked at with an objective and clear mind.

But in all other cases, I think we can improve on this.

Here's the thing… there is often no need to panic.

You will often have sufficient time to make a quick assessment and determine whether or not the position is an immediate threat… or not.

That is… does the current situation have a high probability of rapidly getting worse? Or is it maybe not so bad? Can you maybe even recover the situation?

Let's change the context a little. We'll start with some very simple examples.

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Defining “No-Trade Zones”

 

Let's look one final time at last week's trade sequence.

The problem we attempted to address was one of continual attempts to fade long and extended price swings, finding that instead of timing that entry to perfection we more often than not end up with two to three stop outs, and a mindset destroyed for the remainder of the session.

Check it out if you missed it – http://yourtradingcoach.com/trading-process-and-strategy/let-it-turn-then-find-your-entry/

This was the sequence on the "trading timeframe":

The trading timeframe view

This was the "lower timeframe" view of the challenge we face in trying to time the entry short:

The lower timeframe view - "what we don't do"

This article seems to have resonated with a number of readers, who felt as if it was written personally for them and their circumstances. Here's one example:

Great advice, Lance! As always. I really loved your explanation “Here’s what we don’t do” in the article. It’s so true. It's totally about me in the recent past and so funny to recall. How many times have I found myself trying to get short below every upper-tail candle somewhere in the vicinity of “here’s a support, it goes down now”, only to get stopped out. A daily and weekly review process helps me to get rid of these dumb trades now, but it's really cool to refresh this experience by reading your article.

My reply:

Thanks! Glad you enjoyed it. "Getting rid of dumb trades" is a great plan for driving progress. I still do dumb trades. We all do. But if you can identify over time those dumb ones that you always seem to repeat… they're the ones you can work to get rid of to provide a big boost to your edge.

The solution last week was simple. Stand aside during the long and extended price swing. Wait for the market to turn. Only then should you seek entry.

The solution - let the market turn - then seek entry 

So this led to a different kind of feedback, in which people asked, "how do we know when to stand aside?"

Great question!

Let me answer first based upon this particular sequence; and then we'll wrap it up with some general guidance for when to stand aside.

So… why did I decide to stand aside during this sequence?

It was the strength in the candles as price rallied to the resistance level.

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You’ve GOT to Target Multiple-R Winners

 

Most trades will typically fall in the range from -1R to +1R… hopefully more on the positive side of that range.

But for most of us this does not mean you should be targeting 1:1 trades all day, every day.

By all means take them if you assess them as being a higher probability play. But you'll need to maintain a 70% or more win-rate if you want to achieve any decent long-term profits with ONLY 1:1 trades.

That's a tough ask!

It's far better, in my opinion, to aim to break up that stream of -1R to +1R trades with the occasional large multiple-R profit.

When market structure and price action suggest the potential for a multiple-R trade, target those higher returns.

 

You've got to target multiple-R winners

You've got to target multiple-R winners

You've got to target multiple-R winners

 

So the obvious question is, "When should we be more patient with a trade and hold it for a larger runner?"

There is a recent amendment to my pre-session routine which can help answer this question.

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Professionals Traded Here! What Were They Seeing That You Couldn’t See?

 

We've talked in previous articles about the fact that the best opportunity is found close to the edges of the market structure.

Or another way to express the idea… "Confirmation is risk!"

Typically when posting these sort of articles I get a comment or two of the following type:

But again, let me come back to the comment provided in last week's article, "Confirmation is Risk! (Part 2)"

"Why shouldn't we try to pick tops and bottoms? That's where the risk is smallest and the profit potential is greatest."

Standard TA won't make you money! You can't just do what everyone else is doing. You need to be smarter than the crowd.

You have two choices.

1. Look at a chart at a point of reversal and say with stubbornness:

  • "It's not possible to enter there."

2. Or look at the same chart with curiosity and say:

  • "Professionals traded here. They didn't wait for confirmation. So what did they see that I was missing?"

Curiosity and it's associated growth mindset will get you a lot further in this game than stubbornness and a fixed mindset.

Let's look at a few examples, from different markets and timeframes as those offered in the earlier articles.

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Confirmation is Risk! (Part 2)

 

I don't recall who said this… and I'm paraphrasing… but I absolutely loved it when I heard it and it's stuck with me ever since.

"Why shouldn't we try to pick tops and bottoms? That's where the risk is smallest and the profit potential is greatest."

(If you recognise the actual quote can you please provide me with a source so that I can provide appropriate credit! Maybe Sam Seiden… it sounds like something he'd say!)

So yes… I try to pick tops and bottoms.

And that freaks some people out. I know… they send me emails. And they're not always nice!

But the fact remains… the tops and bottoms are definitely where the risk is smallest and the profit potential is greatest. Someone is trading in those areas, selling at the tops and buying at the bottoms. If it's not the retail trader, who typically waits for confirmation, then perhaps it's the professional. Maybe you should be ask yourself how you can see what they're seeing?

Last week we re-explored the concept of confirmation being risk. Real opportunity is found as close to the edges of the market structure as you can get. Where the risk is smallest and the profit potential is greatest.

Is it easy? No. It requires greater skill at reading the sentiment within the price movement.

But is it worth exploring as a means to improving your edge? Absolutely!

This was the trade we examined last week:

Confirmation is Risk

See the prior article here if you missed it: http://yourtradingcoach.com/trading-process-and-strategy/confirmation-is-risk/

As mentioned at the end of that article, this session went on to provide some further, very similar, opportunity. So let's explore them today.

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Confirmation is Risk! (Part 1)

 

(Note: Not for beginners! This takes a bit more skill and experience. File it away for now… or practice on the sim… if you're not ready for this.)

We looked at this idea previously, that confirmation is risk:

However, it's been well over a year since that article so I thought it a good time to revisit this concept.

Confirmation is Risk

Confirmation is Risk

Confirmation is Risk

Confirmation is Risk

Confirmation is Risk

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Is This a Stupid Trade?

 

Email from a YTC reader who I'll leave anonymous!  🙂

Hi lance. How are you? I wanted to ask you, do you use hard stops or mental stops? I had a trade today go wrong on me because I think either my stop was too tight or I shouldn't have used a hard stop. I'll attach the trade. Thanks!

Here's the attached image:

Is this a stupid trade?

NB. The horizontal white line at 32.78 is not an S/R level. This is simply the last traded price.

What I find most concerning here is (a) the trader referring to the trade as "stupid", and (b) informing me that this left him feeling out of sorts for the rest of the day.

My reply:

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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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