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Hey everyone, I've been thinking about something that I think could draw a positive discussion. I guess I'll start with the main question: Does your trading style involve trading just a few very specific setups, or is it more based on trading what you see / using what you understand about the markets? I'm asking this because I found trading strict setups to greatly increase my win rate (sim). The way I used to trade was I would use what I know about the markets (market profile, price action, determining trend, etc) with mixed results. I would have weeks where I would do very well, only to lose a lot of it in a couple bad trades.
The way I see it is that win rate is only one, somewhat arbitrary, component to success. It makes sense for success to be a ratio between risk reward and win rate. With a 1:1 risk reward ratio, one should technically only need a 51% win rate to be profitable, and use leverage to make more money.
The way I trade now involves sitting at the chart (ES) and waiting for very specific setups to appear, only trading what I see. I still use what I know about how markets work to determine the current trend direction / strength. I then use a fixed 1:1 risk reward ratio (2pts) and a limit order entry. This has made me a much more consistent trader, but there are times when I spot large moves and think to myself that I could be profiting more just by 'freestyle' trading so to speak.
My current plan is to continue with my few setups and go for consistency (slightly over 80% w/l currently; I'm expecting this to change as I collect more data), and gradually increase position size as my account grows. I found this approach to take almost all the psychology out of trading as long as I stick to my rules.
How many of you trade this way? Is having fixed targets a hindrance?
Perhaps similar topics have been discussed before but I want to know how many traders are doing this.
Thanks for reading
I find that for me it's a mixture of rigidity and freedom to deviate some. In my circumstance I have found that I must have some type of structure or framework that I am using to understand the market. That structure could be setups, levels, volume profile, ect . . . or any other tools that I have or am learning. The more tools I have in my tool box the better prepared I am to grasp what's going on. That said there is no way to be 100% certain of any move in the market and that's where a risk management comes in.
For me I have lots to learn but with the few tools that I am slowly getting better at I am able to grind out some profit most days, as long as I don't mess up my risk management. Some tools work great for long periods of time and others only for short stints, while some that work for others never seem to work for me. The more I can learn and understand the more freedom I think it gives to trade in the market with some type of repeatable edge as long as I recognize the state of the market and my state of mind.
I have been trading with discretion in the way you described for a long time, but I am putting things on pause to (hopefully) develop some statistically verified automated systems. I usually will trade any setup that I have mentally determined as higher probability (stupid, yes), but just as you discovered, it can be very hit or miss. I don't think I have the patience to manually wait for a handful of specific set ups to arise, so I am turning to automation.
For me this decision is influenced by a variety of factors:
I have a full time job and don't have the time/energy to devote to staring at charts all day.
I don't really enjoy staring at a bar chart waiting for things to happen. It creates a mixture of anxiety and boredom that can be emotionally draining. I would rather use that energy to create new strategies and further educate myself on the markets.
I really like coming up with new ideas and strategies, but have been lacking in the ability to sufficiently test these ideas.
Many times, trades that I would have taken occur when I'm asleep.
I watch about 15 different markets. Again, day job, time, etc.
Although I can often forecast what is going to happen in near term, I often don't stick to my plan due to the price action of the day. My decisions made in the heat of battle are often not as good as my initial game plan. Trades that would have been profitable if I had just walked away after entry get sabotaged by last second decisions.
Proving that a method works with statistics gives you the confidence to stick to that plan.
Building a money machine that doesn't require a human operator to be present as it runs is just really cool.
I want to learn to code more anyway. It will be fun.
I feel like having about 10 different strats running at all times in many markets will cast a wider net and hopefully yield more profits than what I have the time and concentration to pull off manually. However, that will be something to work up to because there are capital limitations to how many simultaneous trades I can put on.
I still plan on turning things off as upcoming news dictates, so there will be that element of discretion.
The above is a classic mistake new traders make when assessing how 'easy' trading is. You have omitted commissions and adverse slippage, and underestimated the use of leverage.
A $5 RT commission with 1:1 on 2 ES points is 52.5% to breakeven.
If you add in a tick negative slippage on half your trades then you are up over 55%
If you have a limit order on your target, then price has to travel further in your direction, which is even more difficult again.
Starting from a small account, and building it up sufficiently so you can actually take drawings and live, will require even a higher win rate.
Leverage is not linear. You won't behave, nor get the same fills on 1 contract, as you do on 50. And risking (and losing) 1-2% of $10k is less damaging to your mental health than a string of losing trades of 1-2% of $100k.
To answer your main question, I like to run the numbers on a system, and get the confidence to trade it that way. I think the potential return on risk per system is lower than a descretionary trader could achieve. But, the ability to have multiple systems running, over multiple markets, and execute consistently over time more than offsets this lower return per system. More systems = diversification, which is often quoted as the holy grail of trading.
More systems means you can get the same income, using a lower % of equity risk per trade - which means a lower max% drawdown and a lower risk of ruin, as well as improving a host of other portfolio metrics.
In terms of fixed targets, I assume you mean volatility adjusted fixed targets. i.e you aren't aiming for 2 ES points when VIX is 10, and also when it's 30. I haven't been successful in developing exit strategies which improve profitablility, which probably means I haven't tried hard enough. However, I'm comfortable with the fact that basic trailing stops, move to BE, 'x' bar stops if price hasn't moved 'y' in my favour etc - aren't useful. They add complication and simply setting and forgetting, and exiting EoD if nothing is hit is what I chose to do. Often large targets, relative to risk i.e 10x + which usually end up being EoD exits often ends up being the best option. It is of course moral crushing being a point away from a decent target, only for the SL to be hit.
Large R:R naturally have very low win rates, and very lumpy returns, with longs strings of losses. Thus to improve your odds of mentally surviving you must have many systems, and a low % risk per trade.
