Failure is not an option :)
Ok, here is the deal: if you are doing any kind of short term trading (day trading or swing trading) chances are you are using some kind of Technical Analysis. Am I right? If yes, then, chances are that your trading set up doesn't work all the time. Listen to the fact from a veteran, who have forgotten more trading strategy than most 'professional' trader ever learned. Even the best trading strategy based on TA has about 60% success rate. Most of them have less, some less than 50% success rate. This means most TA has a probability of success of less than a flip of a coin, over a large number of trades! Yep, it is true. Anyone who is telling you otherwise, is probably lying or telling you half-truth.
So you say, alright Mr. Smarty Pants; if a TA has a less than 50% POS (probability of success, not not "piece of shit"! :) ), how can that is even a strategy? It can be. It is all about trade management. If your Risk-Reward ratio is about 2:1, technically a 45% POS strategy can give you positive return, in theory. Keyword here is "trade management"; which you will see a much more important thing than generating a trade idea, or getting into a trade.
Today, I will show you a trade where, I messed up. I was completely wrong in identifying the short term direction of the market. I failed. Got stopped out, and LOST MONEY!!
By the way, how many traders out there show their losses? The ones who are asking your money for training that is.... LOL. Don't answer that ;)
This is a 15-min chart of the ES December 2020 contract (S&P 500 index futures). I was looking at it in the morning before going to work. Right before getting into the car, on my way to my day job, I saw the market was trading near VWAP/and EMAs. During the previous Asian session it rallied off the lows, so I thought things are ripe for a quick long trade as the US markets open at 8:30 AM CST. At 8AM as I was pulling out of my garage, I entered a long position. I put in a limit order at 3485. I got a fill immediately. Since I was quite distracted and entered orders from my phone, I put in 1/5th of my normal position (only 1 contract).
As I got into my desk, which is only about 7 min later. I double checked my target which I set at R1 area at 3495, and a stop at 3475. You see this is bad already, that is a 1:1 Risk:Reward trade. This is something I will never do during a normal full position trade. But I thought, oh well, for this little trade, it doesn't matter, the most I will loose will be $500. Market is looking healthy, it will work out! LOL! WRONG!
Look at the chart above. Yellow arrow is my entry, with a green arrow my target! Yeah... it didn't hit. The market turned around half a point below! This has happened to me so many times, that I always have a good laugh. As I was checking my work emails and getting a few basic things done, I heard a ping from my phone, I looked up that chart. Yep, I was toast! I got stopped out!
So, You Failed on a Trade! Big Deal?
Nah! Happens all the time! My long term POS is barely above 50%. So I am telling you almost half the trades I do, I loose! Hey! I am still here ;) So? You ask... Watch the next chart!
Failure is Often Trader's Friend
I saw big volumes coming in. The speed at which I got stopped out tells me I was WRONG. I saw the market trading firmly below VWAP now. Red candles are getting big! Well, today is going to be a down day! That was my immediate conclusion. On down days, we short the market! Yeah, it sounds simple, but I have seen so many people consistently stay on the wrong side of the market! Hey even, I did. But I never stay long enough! That's the difference. Trend if your friend folks, never fight a trend on the financial market. Fortunes are lost doing so. It is just easier to swim with the current...
So once I understood the direction, rest was simple. Typically you do not short the market at the bottom of the pit, you wait for a rebound and short at the pre-meditated location on the rebound. Usually a downtrending EMA or a VWAP is a great location to do so. Today it was perfect! It doesn't work this good all the time! Since the market is moving fast, and I was expecting a trending day, I switched to 5-min chart (this helps to fine tune signals but also generate more signals, so handle with care). I put it an entry order at VWAP; 3485. I put in a 10 point stop and 20 point target. This is ideal 1:2 Risk:Reward. I like to trade ES with 1:2 R:R. This time it is perfect. Market gets my order and promptly sold off quickly. Seeing the velocity of the fall, I took my target off immediately... and modified it to S1, which is a 40 point target. Well, when things are working your way, you should push it. I should have pushed it further as you can see on the hindside. Market not only hit S1, it went through S2. I took my 40 points at S1, and I was happy as a clam!
Moral of the story
It is okay to fail on a trade. Try to understand why you failed. See if there is an alternate opportunity at the failure. If it is there, grab it. Remember: Market is always RIGHT! You are often wrong.
Today was a day with 85 point daily range on the ES market! These are pure gift. On a 85 point day, it is easy to make 20-30 points, which is a lot of money for an ES day trader. Into the general election in the US, days like this will be more frequently. Therefore in the next 20 trading days, there will be oppotunity to have a year's worth of profit in the US market. Grab it guys!
Disclaimer: This is NOT professional advice, this is all just my own opinion and experience. I am NOT a Certified Financial Adviser. Consult professionals for any financial, accounting or legal related questions you have.
Charts are created in Tradingview.com, which is a free service.
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Great quality content as always, Azircon.
The biggest misconception in the minds of most retail traders is that they think they need to have a high winning percentage. However, my experience working for brokers says that the most successful traders actually have low winning percentages and instead focus on letting their winners ride.
This is a concept I try to implement into my own trading. Cutting losers short and at least putting myself in a position from time to time that allows me to potentially hit huge home runs.
I do this by taking trades with tight risk:reward ratios and by leaving winners at the end of profitable trading weeks open. If I can turn a 1:3 risk:reward trade into a 1:20 then that's just about an entire month's profit made in 1 hit.
So having said all that, I definitely agree with the moral of your post. It is okay to fail on a trade, just make sure you're putting yourself in a position to take advantage of the big winners when they're presented.
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hi @azircon, great reading the breakdown of your trading. looking at your first trade I wouldn't have traded it any different if I had to leave a trade on and go. reduced trade size and as long as you are aware of your $ risk and ok with it. I do that but mostly at the end of the day by which time iv a good understanding of the day's volatility and direction, and also how the day has been. I trade mostly Nasdaq futures. I have a few rules I don't break, one of which is trading only in the direction of VWAP and on pullbacks. strangely iv an article in draft called 'losing is not a bad thing' which iv been procrastinating on specifically around the phycology which I think is the biggest hurdle to conquer... thanks for sharing.
Trading on the flat VWAP days are difficult,eh? Like today for example.... when price goes on either side of VWAP all day long ;)
yes yesterday the NQ stayed within the previous day's range, indeed flirting on either side of the VWAP on the 15min, .. the opportunities were there on the 1min which I trade, but defo prefer the trend days.
Good story and content here!!!
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Wish you luck!