I want to explain a little about this trade below that I posted in an earlier post. This is what is called a high probability, big risk, smaller reward trade. It is high probability because because that BIG bear bar was a BO of a range. And it closed near it’s low. And it was followed by a bull bar with a big tail showing alot of buying/covering was taking place. The bears are going to try and stop this buying and make the trend south continue. The bulls want it to go up. Who is going to win? The bears are stronger that is obvious. It is more probable we will get at least another push down before we will go very far north even if the bulls do eventually succeed. Therefore, any entry short near bottom of that big bear bar even if made on the subsequent bull bar has a high probability of a successful trade. That is why I started averaging in 10 contracts at a clip. It is large risk because the proper INITIAL stop loss is the above the midpoint of the big bear bar or as a max amount the top of the bear bar. Why? Because, before we get a subsequent second push down we might see a deep pullback unfold. In this case, we didn’t see a real deep PB before we got that second push, but we could have. And if I held which I did I ended up seeing around a 50% PB. The best exit on the short was the first resumption back down. Which I didn’t take. I just decided to hold. But the only good that came from it was I got an opportunity to average down another 10 contracts before it went back down a second time. As it was getting close to the close of the session I exited it all with profits to make sure I was out however, it went on down even some more in the last few minutes before the close. It is smaller reward. Why? Because most of the move was already made so I could not expect much more of a move after my entry. That is the downside or con side to high probability trades. You can’t expect too much of a reward as much of the move has already been made. Of course, there are some exceptions but as a general rule if a trade is high probability expect smaller reward. I know that is counter-intuitive as one naturally would think high probability means bigger reward but IT DOESN’T except in certain cases such as when one already had a position when the BO occurred. Actually, on this chart I did and made several hundred in seconds before that averaged in trade took place. I can assign my risk. I can assign my potential reward. The harder is one assigning probability. So, I have to ask myself shall I take this trade? This is moving quick so I have to be decisive. Basically, I have to ask myself. What is the probability of this retracing 11 points up that big bear bar before it will go down another 5 points from my highest potential average down position. So, I am willing to average in up to a third of the bar or roughly 6 points. So I set my stop just above the 50% pullback on the bar..say 11 points away from where I want to make my first entry. I then decide I will average down up to as much as 6 points. So I quickly place any bracket order that is a least: SL 11 points Final averaged down entry 6 points max Potential PT 5 points from my final entry. Or basically BE or maybe a small profit too on my first entry. Since the market is moving fast I place this and then can fine tune it afterwards. So, it is placed. I then ask myself is the correct? What is the possibility of it retracing 11 points hitting my SL before it will retrace 6 (1/3 up the big bear bar) and then continue back down 5 points at least. I decide there is a 20% probability it will do this. So that means there is an 80% probability that I will get my 5 points from my last averaged down entry before I would get stopped out. Mathematically it looks like this: Probability of success x the potential reward Probability of failure x the initial risk To have a good traders equation I want to see the former be greater than the latter. So plug the numbers in: 80 probability x 5Pts = 400 20 probability x 11pts = 220 400 hundred is greater than 220. So I reason the odds favor I will capture a 5 point move before I would get stopped out. I can assign my initial risk. That is within my absolute domain. I can likewise assign my potential reward. The sticky variable is the probability. That number comes from experience and seeing these sort of things happen over and over. It is actually my best guess. I do not know for certain the market will give me my reward before it would hit me at my stoploss. But I just know this is a very strong bear BO that took place in seconds. The likelihood that the bulls will reverse this without at least another push down by the bears is VERY low. That bull bar after the big bear bar was made by the bears taking profits from the push down not so much by new bulls entering the market. Now comes the question as to why assign 80% and 20%. Because I know the bears are taking profits and some new bulls are entering after seeing that high close on the bull bar that follows the big bear bar. Chances are it will probably go up a little more after that bull bar before it goes down. I reason since such weakness is in the immediate background I am willing to average in up to 1/3 of that big bear bar. So, my best guess is taking into consideration the weakness displayed I believe I have an 80% chance of making 5 points from my last averaged in position before price would hit my initial stoploss located 11 points away from my first entry located and located just above the 50% distance of that big bear bar. Remember those 50% retracement. Very important. Since these movements are sometimes very fast I may have to quickly place the bracket order with oversize stop and PT then afterwards figure this out and adjust the orders SL and PT on the DOM accordingly. So, since 400 is greater than 220 it is a positive traders equation. SO ONCE I have figured it out I leave all set as it is, after taking my first entry and wait for next average in and then next and next. Up to where I will stop averaging in. Then it is a matter of waiting to see if I get stopped out on 40 contracts or make 5 points on last entry and less on each of the earlier entries. Of course, it could just rip on down after my first entry and that too would be fine. If it stops me out once it reaches 75% (bulls are back winning) back up on that big bear bar I am doubling or tripling up and going long. With 80 long contracts it will travel less distance and I am at BE. If I tripled up very soon I am back in the money. If I just doubled up I am soon back in the money too.
Fascinating discussion about risk and probability. Thanks. How do you know that the bull bar was profit taking by bears as opposed to fresh bulls?
You have stated at least twice the concept of reversing your position at your stop and then doubling it or tripling it. I have seen others do this. How often does this work for you? It seems precarious to me in a volatile market. Maybe the bears (in this case) are just waiting the microsecond after Volpri gives up on the short to take it down again!
Great reminder about the DXY! I used to trade FX regularly and watched DXY religiously, but have gotten out of the habit because it costs extra to subscribe to ICE data. Do you have another suggested source? It has been awhile, but my memory is that (in general) the DXY is inversely correlated with stocks. Would you say the same? Is it still the same?
Well you got the big bear bar a fast 17 point drop in seconds. I was already short before the drop out of the range. I had no time to slide my PT down. In seconds I was out with a several hundred dollar profit. So the bear Bar ends. Next bar opens near low of that prev bear bar immediately continues on down another 9 points or so. So....here we are a drop in the ES 17+9 = 26 points. In minutes. Ok lets say you are short. By the time the low of that bull bar is made and price starts climbing back up what you gonna do? Cover and take profits or hold for more gain? How often do we see a 27 point drop in the ES in seconds and minutes? An institution started this and algos jumped on board and drove this down. Most all long institutions were dumping on that bear bar driving it even more. We got bears selling and longs selling exiting..covering..driving it down hard and fast. Longs were giving up on their longs. They ain’t gonna go back and get long any time soon. They are still wiping the chicken shit out of their eyes. Little mom and pop traders didn’t drive this down. This was bearish institutions winning over the bullish institutions. In a hard fast way. That second bar going down to it’s low after that big bear bar is called a give up bar. Any longs that held through the bear bar are now dumping faster that crap goes through a goose. Buyers are backing off. Nobody wants to jump in long on this until they see the slide down slow and stop. Since nobody is buying the sellers keep selling until they can't sell any more. Sellers need buyers. Three dump truck loads of oranges drive up into the market place and there are 100 buyers so they are selling. Then 30 buyers then 20. Finally 10 buyers. Then 1. There are still 2 dump trucks of oranges unsold. But no buyers. So oranges selling stops. The market drys up... The sellers on those two bars now begin to cover and go long ...that creates buying pressure. Price rises. By the close of that second bar (closing high) new buyers gingerly begin to come back in and go long. The next two bars are new longs and some profit taking too from some of the greedy sellers who didn’t cover on the low ..missed out...and still need to cover. Then we get the first slide back down again. Sellers asserting themselves again making the new longs trapped in jump out and and leftover shorts still holding may even add. And some new shorts enter. Now that ninth bar from big bear is a larger bull bar. That bar is new buyers entering trying to drive it up. Any attempt to drive it up will be met with more selling. The new bulls win for a bit then we hit that 50% retracement of the big bear bar on that 10 bar where I added my last 10 contracts. Bears assert again trying to make it fail. Bulls push back and we get a second shot at that 50% retracement by bar 17. Then the bars go sideways ..overlapping bars......neither side winning. Bears most likely building as we have more bear bars than bull bars in that small sideways move. Every push up is met with a push down. Every push down is met with a push up. Finally the bears win and we get another BO south. By the 14:25 bar the bulls give up again and we start that second slide down into the close. Now let me ask this. If you saw that big bear bar heading south faster than a turkey running from a bull dog followed immediately by a second slide down are you gonna waltz in the mayhem and go long? Or are you gonna wait and see some buying pressure materialize first before you would go long? Well those long institutions that just go the crap beaten out of them by the bearish institutions aren’t going to jump right back in long either. So who is going long to create that buying pressure so that bull bar after the big bear bar closes strong and is bullish? You got it; the previous bears are scrambling to covering and take their profits.
If I use monetary stop-losses in a volatile market yes I will most likely get whip sawed around like a sheet on a clothesline on a windy day. But I prefer using PA stop-losses so the volatility is taken into account for in my stop placement. And IF my stop loss is hit then my premise is wrong and I got to look for an entry opportunity in the correct direction. Sometimes that doubled up entry will be on the same bar or it may be 5 bars later. Here is an example. These trades were last month. I started the day bad. Couldn’t read the market right ...averaged down twice and stopped out twice before I could get it right. I am a diabetic and some morning my brain does not function right or if my lovely wife is rattling pots and pans in the morning when markets open I can’t think straight. Unfortunately, I have a one track mind. When trading I don’t like noise...distraction..or people talking to me. I don’t remember what the problem was that day I just know I couldn't get the direction right on my first two series of averaged in trades. This is where discipline comes it. I have a saying memorized. “Discipline is being responsible to WHAT I am supposed to do, WHEN I am supposed to do it, HOW I am supposed to do it, even when I don't feel like doing it.” I saw I was wrong on the first series where I went long (actually I was right but my stop was just a little too close but I went ahead and took my loss) ..then went short 16..had it wrong this time so bit the bullet exited at my stop and on the same bar went long 20. Finally got it right this time and just held and got back my loss and some. Then two trades in the afternoon both right. Long 13 averaged down. And long 20 averaged down and ended the day with 867.50. How often do I get whip-sawed? Not very often. It is rare to get two back to back averaged down losses. When this sort of stuff happens, and it will occasionally, I know if I just work the process ...keep my focus...don’t get rattled..make it a game to execute properly that in the end I will come out. I may hit adversity but I have the tools and skills to overcome that adversity. I try to not care about the money. Just care about executing the process. I can count the money at the end of the day. Sometime it is just best to not even have the dollars made or lost on the DOM so it won’t affect my judgement, decision making, or execution. I just need to focus on reading price action the way I know to read it and execute. And be flat by the end of the session. Win or lose. This was little tiny MES remember. +$867.50
I made one MYM trade today for 16 ticks ($8). The amount of choppiness this morning was pretty amazing after a crazy selloff last night when oversees markets fell 1%. But I came out alive and ahead. 2,990 ES is holding the market up well. If it breaks, I think we will reach 2,970. The bulls and bears both fought admirably this morning, but the bulls won out again. (I show ES, because I think it best portrays the full market).
What a great annotated chart! Thanks for sharing it. Hard to argue with your success. I may consider trading similarly on another account. I can't on this one even at 20 contracts, because of my all-in/all-out commitment, but I am watching how it is done.