Findings from review of October 2014 trades (focus on position management)

WordPress just informed that this was my 350th blog post!!!

I had planned to trade this afternoon.  However I am still extremely knackered from hopping around on crutches so got some rest on the couch instead.  Aside from not being in top physical shape – and thus probably not being able to attain good concentration (moving the odds against me!) – I wasn’t to keen to put on trades a few hours in front of tonight’s FOMC statement.

Good news – I finished the analysis of the October trades!  I have come up with 5 ways to enhance my position management technique.  I have listed these below in order of importance/expected impact.  This should be seen as a refinement/adjustment to the position management techniques that I listed in an earlier blog post.

1. Quality of setups and timing of entries

With the benefit of hindsight I would say there were 20/64 trades that were either based on an invalid setup, or were entered too late (meaning too much time and/or too much price movement had occurred from the trigger candle).  Of course, it would seem very natural for me to have a strong bias when reviewing the trades.  You would think that I am much more likely to label losing  trades as having bad setups or entries, than to label winning trades as having bad setups or entries. It is difficult to analyse this objectively in retrospect. For that reason I reviewed all the trades for a second time, but even then, only made adjustment in 3 cases.  This issue is similar to when one optimises and curve-fits a new trading strategy during backtesting.

Bearing this issue in mind, the analysis showed that out of the 64 trades that I took, 10 actually had invalid setups, and a further 10, although having a valid setup, were entered either too late or too far from the trigger level.  The net result of these 20 trades was a loss of 6.8R (or 0.34R per trade) – the majority of the losses came from the bad setups (5R), and a smaller portion (1.8R) from taking bad entries.

The action to implement from this is to

  1. take only valid setups (that’s rocket science right there for you!)
  2. to take the setups promptly – this will require good concentration – particularly when trading from the 1M chart
  3. to close trades quickly if I realize that I have violated either one of the first two points.   Strangely, in these cases, my habit has actually been to let the position run to a full 1R loss – I have done exactly that in no less than six trades – a rather expensive habit!!

Although I am not able to say how much of an improvement in results I should see from making these changes, I would definitely expect a positive change.

2. Better usage of targets and 3BBO tactic

Identify important levels at the time of entry – noting whether price has approached those levels earlier in the session or not – how far the levels are – and using this information to determine how aggressively to manage the position when price gets to, or near, that level.  Most of the time these levels will comprise prior highs/lows of the session, round numbers (e.g. ’00 level in forex, ’00 levels in the DAX or other indices, ’00 levels in oil, 0′ levels in gold) and supply/demand zones from higher timeframes.  Pivot levels, in forex, to a lesser extent.

Without going into all the details, the crux of the idea is to do away with partial position closing and instead trying to assess whether price will likely be rejected or push through the identified level – and then manage accordingly.  Trailing the stop above the high/low of preceding 1-3 bars and/or identifying 3-bar consolidation patterns and closing on a negative break of such consolidation (hence the term 3 Bar Breakout or 3BBO) will be the key tactics – 3BBO is something my coach Paul Wallace taught me.

The second point is to forego trades where price is too close to the important levels at the time of entry.  Entering trades close to these levels is essentially betting on a breakout/breakthrough – which change the odds of the trade working out.

I have used levels in the trades thus far, but will place greater emphasis going forward.  On the whole, such tactics are likely to improve the overall P&L – based on the completed analysis.

I also noticed that being aggressive around those levels often pays off.  In many cases, price retraces and then gives rise to another setup.  Thus, trading aggressively could result in two winning trades rather than just one.

3. Give trades breathing room

This concerns trades that move into profit and stay there or retrace into a small loss area for the trader.   For trades like that, rather than tightening the stop aggressively, it seems better to keep the stop at a distance to give the trade some breathing space.  This does not apply if price has retraced or bounced off an important level (see point 2 above).

4. Cutting losers quickly

In cases where price has moved against me very quickly right from the outset, to the extent of 0.5R to 0.7R, I should be willing cut half or all of the position very quickly – because in most cases the trade does not seem to recover.

5. Avoid over-generous stops

In some cases stops were placed unnecessarily far from the trade entry level.  Being able to use a tighter stop successfully will result in much higher reward-risk ratios.

LAST BUT NOT LEAST…SUNDRY OBSERVATIONS

Strategy Effectiveness

In taking only valid setups, it seems that the anticipated move occurs about 50% of the time. In other words the strategy produces a hit rate of around 50% – just like a coin flip.  However when the anticipated movement occurs, the average return is +0.68R – whereas the average loss for the non-working situations is only -0.33R.  Thus, it’s like flipping coin – each time you hit heads you win $68.  If you lose, you are down $33.  That would be a very fine game.

This implies a RR ratio of approx 2:1, with a 50% hit rate, which would be fantastic.   In terms of edge that would be 17% if using 1R (the amount of initial risk of the trade) as denominator and 53% if using -0.33R (the average loss) as denominator.  17% or 53% – either one is very big.

Psychological impact of leaving money on the table

There are  two specific instances are worth mentioning:

  • Trade #305 – a winning trade DAX that was closed way early without any good justification. As opposed to the actual gain of 1.25R, a much bigger gain of 3R could have been made with simple SL management.  The subsequent trading comprised 3 DAX trades all at full loss of 1R – two were invalid setups – all of them I let run against me to the fulll stop loss even though it was getting quite apparent that the trades were not working.
  • Trade #314 – a scratch trade, where a second setup was not taken – the second setup would have likely resulted in a profit of 3-4R (which would have made a big change to my P&L). The rest of the trading session produced many losing trades, and finally two compulsive trades leading to a trading suspension.

It seems that cases where I leave a lot of money on the table, adversely impacts my subsequent trades.  Presumably there are some negative emotions at play.

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One Response to Findings from review of October 2014 trades (focus on position management)

  1. Pingback: 19/2 – &*%%(@##!! Oil Trade %%^^$##@ – missed target by 3 pips & then turned into a loser | George's FX trading blog

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