Wednesday, February 18, 2009

Next Step: Discretion

I've been trading in a way in which I take EVERY signal that fires. I've done this for a couple reasons. First and foremost, I didn't ever want to be "missing" signals. Back in the day I used to psych myself out of trades by looking for anything and everything to say "Nope. Be a pussy. Don't take this setup". Problem was then I was passing on EVERY setup. So to fix my fear problems I would just take everything that came down the pike. And while that did help cure my hesitation and fear issues now that i'm over that part of my trading its time to move forward and use some VERY basic discretion in my trades. We're talking a effin' trendline simple. Many of the losing trades I take all share something in common. Because i'm taking pullbacks into a trend sooner or later that trend will end, i'll take the pullback and i'll get stopped out. Well it turns out something as simple as a trendline can be a powerful tool for this type of pullback trading and so i've decided to start implementing a straight forward discretionary trendline analysis into my setups.

The thing is - the break away trades from consolidation aren't affected, my reversal setups aren't affected, but those trades that are in a trending environment and start breaking support and resistance are the ones i'm going to pass on. Yesterday for example, using this simple idea I could've filtered out all trades the 11 trades taken in the ES down to 7. 5 of which would've been par's or winners, and two losers. Changing the outcome as follows:

  • Win Rate: 54.54%
  • Net Profit: -137.50
  • Win Rate: 71.42%
  • Net Profit: +125.00
This should have a couple of impacts. First, less trades which will reduce commissions and overall market risk. Second, it should boost win rates and overall profitability. Is it perfect? No. Do I expect this change to give me overall 71% win rates? Of course not. This method will still hit lower win rates but what I am trying to do is filter out the setups that already are experiencing a transition of market bias and keep those that are free from confusion. Will I miss winners? You bet. But i'm betting on the fact that i'll miss more losers than winners which will help keep money in my pocket and moral high.

I applied the same ideas today and was again able to AVOID losing setups that would otherwise be valid. Did I still lose on some? You bet. But I was in on setups that had a much better chance of success and it was reflected in my profitability on the day.

Trade Results:

ES: -12.50
NQ: +80.00


E-Mini Player said...

I sense progress! Btw, how many points of 'guru street cred' do I get today? Told you that shit was weak! :D For anyone else reading this comment not knowing what I'm talking about, Matt and I endure each others real-time market commentary on Yahoo messenger. Sometimes we're even on opposite sides of the times :)

E-Mini Player said...

Have you considered trading just the NQ for a day, and see how you do? You're doing better on NQ and at the end of the day, a profit is a profit; doesn't matter whether you made it in ES or NQ.