Quote from tlow:
Do you have a min risk:reward ratio you work off of? After going thru my previous trades and doing some backtesting, 80-90% of the time with my breakout trades, the trade either works right away or it doesn't. Back to NoD's comment yesterday, it seems just giving that 1-2 points of wiggle room (or whatever wiggle for the day's volatility) is all thats needed.
If you have a 2 point stop with a 2 point target, not a great R:R but if the set-up there, is it worth taking? I guess I will have to go back and do some more backtesting with taking these 1:1 type trades and see what the win rate is.
Yes, determining a good R:R for your method(s) of trading is all about the win rate. If you have a 50% win rate, then a 2:1 R:R should keep you profitable; if you have a 60% or better win rate, then a 1:1 could work well.
I've been trading one thing for so long now and studying the price action every day live and then bar-by-bar after the close, that I've developed different trade management strategies for different methods, for various price action moves, for micro-trends within different macro pictures, etc. Breakout and counter-trend trades, for example, I handle differently from other trades: I move my stop to b/e very quickly and I look for solid follow-through, targeting a specific minimum move, but willing take more if offered.
All this will come with time, but the first step is to find one or two absolute best setups and master them. That means learn to set a stop and target, move your stop only after a specific move in your favor transpires and then allow your target to be filled without further micromanagement.
I had a "Trading 101" ES trade today. Often a day's early low or high gets tested later. ES worked hard to test the news-induced high and struggled, producing a double top @ 1157.50. I wanted to get short for a possible test of the news-induced low. I saw that the nearest support pivot whose break would also break the 20-bar EMA, was 1154.00. I didn't want to fall victim to a 1-tick false b/o at the 20 EMA, so I added confirmation to my entry by placing my sell stop @ 1153.50. Nothing happened for a while, but price failed once more to break 1157.50 and my order was triggered on the pullback. So I noticed a potential setup, decided to enter only on confirmation, not earlier, placed my order in advance at a level that would help protect me from a bear trap, and used a stop order so the price momentum itself would take me into the trade.
My R:R with ES is 2:1 and my stop is almost always 2 pts. I targeted a test of the low, moved my stop to b/e at 2 pts profit and was stopped out.
This was a basic setup, basic R:R, and basic trade management by the rules. Find 1 or 2 basics like this and practice trading ONLY those setups, strictly by the rules.
I like to keep my R:R at least 2:1 on all trades because that allows me have a bad day and screw up my entries and trade management and still have a recoverable loss. This happened to me yesterday when I started the morning down nearly $300. By limiting my losses, then stepping away from the trading platform to locate my sanity, I recovered pretty quickly.
If I start cheating and taking profits too soon, or moving stops to b/e too quickly, I limit the "reward" side of the equation and lose my cushion against periods of insanity.
Quote from Matcha:
My insanity is to "make assumptions". Nodoji has been warned me over and over "trade what you see"...
Matcha, the trade I describe above is based on just that. There was an internal double top at a lower high and I ASSUMED price would go down. But what I SAW price was above the 20 EMA and 3 higher lows put in. The bulls were in control, so I only want to be a bear if the price action (what I see) places me in the direction it's more likely to go.
It's more difficult to accept an entry price that's 2.5 points worse than where price is when an assumption is made (when I first noticed the internal double top was put in), but in the long run, I save myself from many losses by being patient. I could've shorted the close of the 9:50am ET bar @ 1156.00, but at that point the chance of price immediately running back up through the 1158.00 level and beyond was still high.
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