Means that when I exit the trade I didnt have a mechanical system. Whether it be a hard target, trailing stop, volatility based, etc. I just exited based on myself trying to micro manage the trade.. and use pure gut and instinct. --MIKE
Besides gut instinct and intuition, I would include under the discretionary approach: reading chart formations, watching sector rotation, relative strength/weakness, bond market, currencies, end of quarter window dressing, earnings news, etc. Now if your target is 5 es points with a stop of 2, then you're definitely better off putting the blinders on and just focusing on the tape/chart at hand. Otherwise, some ppl like K.I.S.S., others don't.
I have been getting a few emails that ask me this same question, I would like to share this: "What is it that separates successful traders from unsuccessful? " --- There usually is always 2 types of traders. Trader #1 has high % winners.. but their gains are minimal. And trader #2 is averaging over 2:1 profit/loss and is right under %50 of the time. The other factor in this equation is frequency of trades. Assuming what I said above is equal regarding the 2 traders above... the trader that will make more $ is the one that has more trades given X amount of time. In a nutshell the point is.. you will be trader #1 or #2.. and the HARDEST part of trading is taking care of the frequency of trades. If you want to be trader #1 then you should be looking to trade more often... perhaps you should never avoid your signal (whether mechanical or discretionary). Trader #2 can be gun shy.. and stalk the market. Only entry when everything clicks. Now here is what separates the winners from the losers. The pro knows that he is trader #1 or #2 and accepts this notion and his trade frequency will be subject to the rules set above and will find the balance of the proper amount of trade frequency. The losers.. will try to be trader #1 and undertrade.. or try to be trader #2 and overtrade (very common). The worst traders of them all.. don't know whether they are trader #1 or #2. (most common) Many traders only focus on entries.. as I mentioned a lot on the thread. The exit is what separates the men from the boys. Decide whether you will be trader #1 or #2. Then before you consider working on entries... work on your exits. Do you want your exit to be a function of volatility, trailing, whatever? the more determined you are-- the better exit you will have. Decide what type of market (trending, choppy, whatever) best suits your exit strategy. Decide the type of profit to loss ratio you want. The pro's treat their gains as multiples of their loss. Then once you have determined all of this.. work on entries. What I I just mentioned above personally took me years to figure out. In my honest opinion, and this is definitely controversial.. I believe that all exact entries sooner or later will be random, however market conditions.. trending or choppy will be here forever. Types of patterns, technical, mathematical, whatever.. that try to pinpoint exact entries never really last forever. So if you backtest... then use your entries as random, market conditions as a filter.. and the exit part as the constant. If your system would still be profitable with random entries.. then you have found the holy grail. If you can improve the performance of your system with entries of your own (mechanical or discretionary) and hold your exit strategy and market condition filters constant in "realtime" trading then you will be a super trader. Final note, what I just mentioned above is pure methodology. Once you know "who" you really are as a trader.. paper trade, paper trade, paper trade!.. then back it up with some hard earned money. Otherwise, you will be fighting a war thats already be lost. --MIKE
mike, tell more about your exits please. let's say you are up 6 points - your target is 10 points (do you work with fixed targets?) - and the market goes against you - how much do you risk of the 6 points - how do you handle it?
No trades today as my cable service crapped out (again). Get this; it was building specific... the whole island was on-line except my apt. building. Then my dial-up kept dropping packets which either stalled my TWS or lagged quotes from my other brokerage. I don't know why the outages always happen during market hours. What's even more weird is that they always fix the problem within 15 min. after market close. Today it back on within 3 min. of close. I hate it when that happens.
I do not work with fixed targets. I prefer targets that are a function of the market, not arbitrary. Therefore, I use exit strategy that adjusts to the market. Within this is exit strategy I take many things into consideration. The most important being time and volatility. My exit is mechanical and its rather unique. I designed it myself after realizing the type of trader I wanted to be ( go back to my previous posts). An important thing to note is.. that my exit strategy is only ideal during trending markets. Thus I use a filter to make sure I am trading in proper market conditions. Designing a universal exit strategy is extremely difficult.. and personally I don't thing it would work in the long run. Regarding my entry.. it is somewhat optimized upon the conditions of my exit. So once I had my exit plan formulated.. I simply tried to find the best entries that work with it. For example to make it more clear.. if my exit plan works best when volatility is greatest.. perhaps my entry will be based on when volatility is least.. (thats just an example). To make more sense let me give another example. When the markets rally sharply and quickly my system looks to go short and vice versa. That is the trade setup. The entry and exit is a function of mechanics. So to answer you question.. I don't know. My system takes many more things into consideration than the data you provided me. Hope you understand. -------------------------------------------- I just want to clarify one thing. I believe that pure discretionary traders can be profitable. ONLY, upon the conditions of them being extremely emotionally balanced and sticking to a set of rules. Most humans DO NOT have these attributes and will deviate, therefore its a waste of time. --MIKE
Great way to clarify things, Mike. For me I think I'm trying to apply the elements of both type #1 and type #2 at the same time, seeking a balance between the two. Am I crazy to even try? I think it's possible, provided that "discipline always triumphs over conviction" -- type 1 will be setting the stops, while type 2 looks for situations where it may be preferable to sit through drawdowns on an open profit. Ultimately, what I want to do is combine the "non-cognitive" entry (waiting for opportunities for low-risk entries, reacting, not anticipating) with the possibility for discretionary (greater) profit targets, if any . I know what I cannot allow is letting anticipation of "greater profit potential" be an excuse for disregarding my stops -- ie, rationalizing a losing scalp into a position trade.
Illiquid, There is no trader #3. Winning over %75 and having profit/loss over 2:1. Can someone actually do this year in and year out? Let me ask a better question... Whats the point if you can still be profitable being trader #1 or #2? I dont try to change the rules of the game.. I just pick my side, follow the game plan, and play by the rules --MIKE