This is a chicken and egg thing with me. I can't gather statistics until I define the setup, and there's no setup without the statistics. What I'm finding is that as I try to define context and filters, I see trades that would have worked with a different condition, so I loosen up the constraints only to find trades that don't work with the looser filters. Perhaps my rat brain is trying to, as you say, find some magic combination that excludes all losers and includes all winners. I know this is nonsense even as I type this, but the attraction to do so is almost like a drug.
Perhaps I need to just pick one constraint, gather 100 trades and see where the cards fall. Then go back over those same trades and add a different constraint and see if the results improve. Then try combinations.
Thanks again for your help. The struggle continues....
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What worked for me was to define a basic setup, then gather stats surrounding the setup with no regard to context. I gathered stats for the pattern in isolation. My initial stats were based on my desire to avoid any loss greater than 20 ticks. So I had a basic pattern in mind, but I had no filters at first. I assumed a stop loss no greater than 20 ticks and then compiled stats in a spreadsheet for MFE and MAE. My MFE column wasn't in fact the full favorable excursion, rather it was a specific S/R-based profit target. If price traded through that target price I noted the amount of the gain. I also kept a column for a fixed profit target and yet another column for the result of moving a stop loss to break even after a favorable move of N ticks. Out of this I began to see certain patterns in the trade results that led me to applying contextual filters involving such things as the range of certain bars, proximity to a 20-bar EMA, percentage of retracement underway from a day's low to a day's high (or vice versa), etc.
This research made for a net profitable core plan and over time I continued to hone the plan in terms of more precise methods of entry, but I still trade the core plan and have only added one new setup to the plan after nearly 3 years. Now, there are other setups I've tested and randomly trade them at times, but they're purely discretionary trades because I haven't done enough detailed research to officially incorporate them into my plan.
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Tiger, listen to this lady. She knows what she's talking about. She is very successful and very generous with her knowledge and experience. I am one who listened and heeded her advice about using a single setup. I could copy and paste your story here and it would be the same as mine. I, like you, had been trading for 2-3 years and was basically churning my account and trading from a sea of confusion with no setup, just taking trades because I "thought" price was going to do a certain thing. Sometimes successfully, sometimes not, but definitely not overall successful and with no confidence that I could replicate any success the next day. I was in a fog, going to bed each night distressed because I didn't know what I was going to do the next day.
Ruby advised me to trade a single setup, just one thing, and master it. She said if I chose one thing and could trade it successfully for several months, I would begin to notice other things and could eventually work out rules for something else. I did that. I looked at months' worth of past charts, made a spreadsheet, and looked for that one setup. Once I had seen several hundred instances of that setup, I had it ingrained in my head exactly what I was looking for. One I saw that over a number of trades, if I took every trade that came along (which is still difficult for me to do), I would be very successful.
For several weeks/months, I did just that. I blinded myself to anything else. Some days there were no trades and some days it was an ATM machine. In the meantime, my confidence and discipline grew. Just recently I have begun to notice something else and started studying it. I have difficult days, like yesterday, and begin to feel confused; however, now when I feel confused I take a step back, rely on my one setup that I have utmost confidence in, and know if I do that I will still be successful. Then at the end of the day I can look back through the chart and see why or why not my new setup did or did not work, but it doesn't really matter, because I still have my one.
If you are struggling with a setup, Al Brooks' (the original) book is a difficult read but with a plethora of information that will guide you toward something that works for you.
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It sounds perfectly logical and it often feels like the right thing to do when you’re in a trade. Taking a small profit as soon as the market offers one, or tightening a stop loss to prevent a small profit from becoming a loss seems like the key to success! In reality, this bad habit can turn into a compulsion that destroys any chance of success. In fact, you can go broke rather quickly by doing this, because you skew the favorable odds of a solid trading plan.
If you’re familiar with “law of attraction” philosophies, then you’ve heard about the concept of attracting what you fear or what you don’t want. There’s nothing “woo woo” about this; it happens in a perfectly “scientific” manner. Our fears and our pain avoidance mechanisms are designed to protect us from harm. But under certain conditions and in certain environments, they can cause us to behave in ways that bring about the things we fear or want to avoid. The market is one of those environments.
I worked with an aspiring trader a few years ago who fell prey to this compulsive habit of “loss prevention”. He came to understand a certain price action scalping strategy that had positive expectancy and, if followed diligently, produced profits that exceeded his minimum income requirements. He could recognize the setups at the hard right edge and he knew what to do when he saw them. The problem was that he was trading a very small account and his fear of loss overwhelmed his ability to stick with the trading plan. He was obsessed with how little he needed to make as a trader and how easy it seemed to be able to accomplish that minimum goal by taking small profits and avoiding losses.
If a trade immediately moved in his favor he would either move his stop loss to break even or he’d scalp a very small profit (usually less than half the minimum profit target required for positive expectancy). If a trade moved against him and then turned back around and became profitable, he’d immediately move his stop loss to break even, which took him out of nearly every trade in which this occurred. He never cut a loser short, though. If a trade moved against him and never became profitable, he held it until stopped out for the full loss.
As you can see, his fear of loss caused him to mismanage every trade that would’ve hit or exceeded his minimum profit target. He was pulling his garden plants as soon a flower bud appeared, while allowing the weeds to grow full size. As a result, he had nothing whatsoever to harvest and “starved to death” as a trader.
In trading, the market rewards that which is difficult. Following a positive expectancy trading plan can be quite difficult because there is a random distribution of wins and losses, which means we must act in ways that feel “wrong” and we must endure "pain" on a regular basis. The overall odds of a solid trading plan are favorable, but there’s no way to know in advance which trades will be winners or losers. By trying to outsmart a solid trading method, we usually end up losing money or treading water at best.
Learn to sit with the discomfort of good trading so you have the opportunity to experience the rewards. It gradually gets easier and easier to trust that the favorable odds will take care of your earnings and you'll accept the fact that there’s no reason at all to try and prevent losing trades.
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A while back I listened to an interview with Mark Douglas, author of The Disciplined Trader and Trading in the Zone. I liked what he was saying so much I took notes and will share them here, because I thought he really laid some foundations of consistently profitable trading:
"There’s no way to know the sequence of wins and losses. If we want to be able to trade our methodology in an effective fashion, to be able to utilize this methodology in a way where we can extract the maximum amount of profit that it makes available to us based on the pattern that it identifies, we have to do it in certain ways. Our mind has to be free to be able to execute these trades without making trading errors, and the trading errors come from believing that because the pattern is present, that it’s going to give me a winning trade on this one; this trade is going to be a winner. You can’t think that way. That’s the way the typical trader thinks. The typical trader thinks ‘I’m not gonna put on this trade on unless I think it’s gonna be a winner or why would I do it?’”
“Trading a technical methodology or a technical pattern does not have anything to do with being right or wrong. It’s just an odds game. You’ve got to be able to take every single trade because you don’t know the sequence of wins and losses. You’ve got to be able to identify what your risk is, and that’s simply ‘How much am I willing to spend to find out if other traders are going to come into this market and bid it higher than my price or offer lower than my price if I sold?’”
The solution, he says, is to change your mind, to change the way you think.
“[You’ve] got to eliminate the potential to think that the market’s going to disappoint you. And the way [you] eliminate the potential is by understanding that trading is not about being right or wrong. It’s a probability game.”
“When you put on a trade and it doesn’t work, all it really means is that some of the traders didn’t come into the market that had the same belief that you had, or the same conviction about this market doing whatever it is you thought it was going to do. You have to learn to walk away.”
He reminds us that we can’t predict collective human behavior.
“The methodologies that we have access to, these mathematical formulas, do that for us. But you have to understand that there’s no possible way that these mathematical formulas can predict the outcome of these patterns on a trade by trade basis, only on a series of trades. So when I get a signal from my methodology, at the most fundamental level what this is telling me is that the odds are in my favor that somebody is going to come into the market (this is what the pattern means) and bid it higher than here if I bought or offer it lower than here if I sold. That’s all that it’s saying. Now they’re either gonna come or they’re not, and so as a result I don’t look at this as being a ‘right’ or a ‘wrong’; I look at this as ‘How much distance am I going to give the market to move away from my entry point to tell me that they’re either going to come or they’re not, and any further is not worth the cost of finding out.’”
Traders look at their sim trading results and think, “This is where I’d be if I could trade from a carefree state of mind.”
Once you shift perspective, everything changes. “Don’t think, there’s nothing to think about. When the pattern presents itself, there’s nothing to think about.”
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If you haven’t yet narrowed your focus to one or two key ideas, and done the statistical analysis necessary to distill a combination of win rate and risk:reward ratio that produces profit after commission and slippage over an acceptable series of trades, I recommend doing that before trading a penny of live money. Many people can trade by the seat of their pants with success for quite a while, sometimes for years, but the risk of eventual ruin is high without some sort of framework and self-imposed boundaries, because the only boundary the market will enforce for you is a margin call.
The traders that I’ve observed making consistent profits over time through various market conditions had one thing in common: the rare ability to separate their opinion from their trading.
A frustrating situation faced by most traders once they have a fully tested trading plan is a confounding inability to follow it in a disciplined manner with a live trading account. Lapses in discipline generally consist of the following common mistakes:
1. Hesitating and missing out on a profitable trade
2. Hesitating and chasing an entry at a price that either requires unacceptable risk or unacceptable odds
3. Jumping the gun (entering before price signals a valid entry)
4. Moving a stop loss to break even before the trade has a chance to prove itself
5. Taking a profit too soon
6. Moving a stop loss further away to avoid being proven “wrong”
7. Adding to a loser to try and manage a break even exit
8. Overtrading (revenge trading) because of the negative results of any of the above
The core cause of every one of these mistakes is an overwhelming belief that you somehow know what’s going to happen - or not going to happen - next. While you may know intellectually that the positive expectancy of your plan will take care of your profits without any need to know the outcome of individual trades, the ego loves to be right and believes it’s quite clever. In the “heat of battle”, the ego pushes aside the sensible and well-intentioned trader, and takes over. If you’ve not yet learned to take specific action when this “shift” occurs, the result can be disastrous.
Both of the above programs are based on action. You can’t read about them and expect changes to occur in your behavior. In fact, you can read self-help books and trading books all day, every day, and positive change will only begin when you begin to act your way into right thinking.
An effective way to change destructive behaviors is to have a specific action step (or steps) to take when the trigger for the behavior appears.
First learn to recognize the trigger.
Then take the action step(s) to replace the destructive response to the trigger.
If you’re a trader with a solid trading plan, yet you’re struggling because of the mistakes listed above, first identify the trigger(s) for making the mistakes. Keeping a journal or recording your thoughts while trading can be quite helpful for this.
Then choose the steps to take as soon as the trigger occurs.
I had a habit of moving my stop loss to break-even a few ticks before the price level at which my rules allowed for this. In doing my post-trade analysis each day I realized that I was choking off significant profits with this habit. I compiled stats for a period of time and discovered that for every losing trade I prevented by doing this, I was cutting off four profitable trades!
I realized that when price moved quite a few ticks in my favor, I was having two simultaneous thoughts, “If I move to break even now, I can’t lose any money” and “I’d be an idiot to let that nice little profit turn into a loss.” The first thought was pain avoidance and the second thought was pure ego. These thoughts were my trigger to move the stop loss too soon.
The actions that helped me become patient with my trades was to first practice daily visualization of trades moving nicely in my favor and then retracing back through my entry price. In my visualizations, I imagined the favorable excursion as a flower that just blossomed and as price retraced, I’d remind myself that the petals must drop off (price will retrace) before the fruit can appear and ripen. I did this visualization as often as possible so the wilting flower = ripe fruit became a natural reaction to a price retrace. As a result of this practice, I became more patient with my stops, and my trading became more relaxed and more profitable.
Feel free to share the action steps that helped you overcome destructive trading habits.
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“I’ve done my research. I’ve made a trading plan with rules. I’ve backtested my rules on hundreds of trades and the plan has great positive expectancy. I’ll be making a six-figure income in no time. I can’t wait to start!”
Several days/weeks/months later: “How do I get over this fear of pulling the trigger? I hesitate and miss great trades, then I make a mess by trying to get back what I missed?” Or, "I hesitate, chase an entry at an awful price, hold through more heat than my plan allows, and bail as soon it comes back to even."
When analyzing charts, we see everything in hindsight. In fact, we are prone to subconsciously skip the failed results of our particular setups if we “eyeball” the charts. If we don’t take the time and effort to apply our rules to every appearance of our chosen setups, bar by bar, we won’t have the proper foundation upon which to build trust in our trading method. A thorough statistical analysis of a large sample size of trades is crucial during plan development.
Once that's done, we have to deal with the fact that price doesn't go directly from here to there, nor do our setups look all pretty like they do when they work and we see the chart at the end of the day.
In real time, it’s often hard to imagine price can manage to go from where it is right now to a technically reasonable profit target way up (or down) there, especially if you buy/sell pullbacks in a defined or potential trend. Conversely, counter-trend traders who position early before a valid reversal signal appears, learn the hard way how easily price can go to where that disaster stop loss says it surely can’t!
What was most helpful for me in learning to pull the trigger without engaging in “paralysis by analysis”, was to capture screen shots before and after. I included a variety of screen shots of each setup at the hard right edge (before), and after-the-fact (win, lose, or draw). Sometimes the setup appears very “textbook clean” and I have no trouble placing an order immediately. But more often, things look fuzzy at the hard right edge and my busy brain will feed me all sorts of bull/bear arguments as price bounces around in real time..
Capturing a wide variety of each setup this way (before/after) and studying them regularly can give your confidence a real boost when you need it most. The market rewards what is difficult. The best trades very often come out of the most uncomfortable-feeling places.
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Today I experienced fear of pulling the trigger again. This is similar to the fear I felt when I had my P & L visible, and I was afraid to give any money back. Removing the P & L like you suggested helped a lot, and seemed to have solved that problem, however today it came back. This is the first day that my trading plan yielded no losing trades, and after 6 winners in a row, I just couldn't believe that it was a good idea to take another trade. Each trade was harder and harder (I actually didn't take the first 3 winners because I talked myself out of it, but I did take the next 3). Also, I was afraid of giving back the sim bucks I earned. Removing the P & L didn't help, because each trade hit my target and I new I was up.
I know I'm not going to get many days like today, but I also know they're important to my weekly average. I need to learn to take what ever the market is willing to give and be happy about it, whether it's liver or filet mignon (sorry, I know you're a vegetarian, but you get what I'm saying).
On my post-market analysis, I have a section on my journal where I calculate the ratio of trades that I took vs. all trades I should have taken. I call this the Consistency Ratio. I'm not doing very well in that department (50% - 65%), so I know this is a problem in general, however I've never experienced a winning streak like this before and I was a little taken back by it.
What can I do to be more mechanical in my trading?
Tiger, since you’re practicing your plan in a demo account, it’s critical to follow your plan with as much discipline as the market (speed and momentum) allows. You may get nasty slippage, you may be unable to place an order quickly enough if price bolts out of the gate as soon as a trade is signaled, but barring those instances, you want to have a consistency ratio in sim that’s at least 80%. (There’s no way you can avoid breaks throughout the day, so some trades will be missed.)
If you struggle with pulling the trigger in a simulated environment, most likely you’re either still struggling with accepting the uncertainty of trading (Douglas’ random distribution of wins and losses for any given set of variables that define an edge), or you have a subconscious fear that if you follow your plan with absolute discipline in real time and it fails, there’s no longer the hope that you have a solid plan and you’ll have to start over. As long as you end the day with excuses for sub-optimal results, hope lives on. It might be a combination of both of these things.
In a sim account, you have absolutely nothing to lose (except hope). So it’s important to master your trading plan in this environment until you hardly think while you trade. You see the setup, and if all contextual conditions are met, you instinctively place the order and manage the trade by the plan. Once you can do this without thinking in a sim environment, you’ll have the “muscle memory” and trader’s mindset in place to take it live.
It will likely be difficult to trade live at first, because suddenly there is something to lose. You can probably walk across a beam suspended a foot off the floor again and again without falling, but once that beam is 20 feet off the floor, everything changes. Suddenly the outcome (safe passage) becomes your obsession, when in fact the process (relaxed, confident execution) is what makes the safe passage far more likely.
Here’s a way to help keep yourself on task with your plan: Talk out loud as if you’re running a live chat room and teaching a group of beginners how to trade your plan. The more you talk, the more focused you’ll be when a setup appears. Tell the “class” why the setup fits or doesn’t fit your plan’s criteria, and if it fits, tell them how to enter a position, where the stop loss goes and where your minimum profit target zone (or fixed target) is.
The moment you tell them this, you place the order.
Hope this helps!
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