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!!
Here's the chart that accompanied the above email:
I'm not sure where Rein took profits. I hope it was near the top in the vicinity of the double shooting stars!
But either way he raises a great point here. That while fate may often provide us with a bad beat every now and then, it also serves up a fair share of good luck as well.
I don't tend to get many of the "entering just before news" trades any more.
But I still receive my share of luck in the markets.
Here's a recent one:
A decision was made to take a wholesale entry short and then to consider reversal if the market fails to move in this direction. The market stalled for two minutes after the entry short. It could not break the 21650 level (dashed line). The trade was scratched to allow an objective reassessment. A decision was made to reverse my bias and enter long, following the fourth test of this 21650 level.
Subsequent to entry the market did crack through the temporary support, reaching within two ticks of my stop before reversing and rallying higher.
Looking at the profits with hindsight it appears on the surface to have been a great decision. And in terms of recognising a change of bias it was. But in terms of execution I was very lucky. Having broken the 21650 level, orderflow could well have triggered sufficient stop orders to create a cascading effect and drive price back to retest the prior lows. It could very easily have triggered my stop.
It could of course be argued that there is no luck involved at all. That the fact my stop was not hit was simply a function of the orderflow at this point having a net bullish effect. And that's fine. But there was no way I could know that at the time. I was positioned in the market in such a way that, upon breaking the 21650 level, there was quite likely greater than even odds of being stopped out. Whether it would or not was beyond my control. And so the fact that it didn't, in my opinion, is simply good luck. I was in a low odds situation and it worked out for me. I was on the winning side of what had developed into a bad beat scenario.
Whether you want to call it luck or not, the fact is that your equity curve will be comprised of a number of trades that lose, despite having statistically high odds. And it will also comprise a number of bad trades (or good trades poorly managed) which somehow end up winning against the odds.
Good luck and bad luck… it's all just a part of trading.
You're going to have both!
The important point then is nicely summed up in the following quote by Toba Beta:
- "Risk means 'shit happens' or 'good luck'"
The fact is that when we take on risk through an individual trade, we cannot know with certainty what the future orderflow will provide. All we can do at that time is to manage the risk and opportunity to ensure that any downside is minimised, should it eventuate, and that any upside is maximised, should the trade offer profit potential.
Had the above trade stopped me out, it would not have been of any major concern. Loss would have been kept to a 1R loss, slotting onto the negative side of my expectancy equation. And I then move on to the next trade, confident in the fact that when I do get a good winner, it's multiple-R profits should more than compensate for these earlier losses.
Focus on good trade management. Maximise whatever opportunity is provided to you. And trust in the long-term stats.
So let's wrap up with a repeat of last weeks closing statements, that are still very applicable to this discussion:
Individual trade results do NOT matter.
Win, lose or draw… it's totally irrelevant.
What matters is the combination of your win% and win/loss size ratio, over a longer-term sample of trades (20+).
In terms of worrying about wins or losses… that is where you should be focusing… on your longer-term stats.