A trader has some factors to consider in trading in general and in particular scalping and a focus on detail in the INITIAL analysis is called for. That then should be followed by a CONTINUING analysis as PA unfolds. These factors of course are: 1) Risk 2) Reward 3) Probability The first one can be subdivided into two parts. Initial Risk and Actual Risk. Initial is controlled by the trader. Actual is determined by the market as the post entry trade unfolds in real time. What is interesting is that traders will adjust Stop losses by (trailing) on the positive side as price on unfolds but they have been taught to never adjust it when price moves against them (negative movement). Generally the argument is “you are wrong” just take your loss and move on. However, the reality is there are several ways to place SL’s even PA SL’s. When I scalp I prefer the initial SL to be the smallest SL price action says it should be, however, if I encounter adverse movement I, if need be, I will adjust my SL to another PA level widening the SL. But there has to be a good reason to do this. Namely the unfolding dynamics of PA indicates it is probably Ok to do so. The market cycle indicates it is probably ok to do so. The average price indicates it is probably ok to do so, the pressures of the moment indicate it is probably ok to do so. We traders are taught to not predict but to react. So, most have no qualms about reacting on the positive side (adjusting reward on positive movement) but absolutely reject reacting on the negative side (adjusting risk on negative movement). The reason given is to be able to preserve one's capital to survive for more trading. In reality more often than not the trader suffers multiple losses that reduces his daily profits by a good sum. So, often what happens is a trader places a trade price moves in his favor but does not reach his initial reward. Dynamic PA indicates it is stalling. But, the trader has it hammered into him to only go for a 2:1 or 3:1 or more RR. So, he refuses to take what the market is giving him based upon his best observation of how price is unfolding. Price then rolls over and goes against him. As it approaches his SL he has been taught to not move his SL. Price takes him out by a tick or two or maybe even a point or two and then immediately reverses and goes in his direction blasting through his initial reward trade and he is left shaking his head wondering how he could be so unlucky getting the direction right but LOSING. What the trader fails to realize is that price more often that not will probe in the opposite direction before making the move it is gonna make. The problem is that a trader does not know how far it will probe into negative territory. But he is told to just take his loss. As concerns myself I will adjust (if need be) both my initial reward and initial SL as PA unfolds. However, in both cases there must be a logical reason presented to me via dynamic PA. These things said there does exist a level of SL I will not adjust. If price moves against me to a point that my premise on PA is logically indicated to me as being wrong then I will take my loss as I have simply read the market wrong or read it correct but something unexpected happened in PA that that invalidated my premise upon which I based my trade on. And it now indicates to me that there is no longer a valid, nor logical reason, to hold onto the losing position. I don’t recommend a new trader to trade this way without first practicing and learning how. Remember, ALL day long on EVERY bar bulls and bears are probing. One side wins for a while then the other side wins. It takes alot of practice to discern which side is winning, or has the stronger hand at the moment, and which side is likely to keep winning, at least for a while. Especially, when price is in a broad enough range or sideways movement that is good enough for scalping. Before I move on to reward I want to say this about risk. Initial risk is the risk you set upon entering the trade. Actual risk is what the market actually went against (plus 1 tick) you before it went in your favor towards your initial reward. Now, IF my actual risk ends up being very small then I will not follow the movement too far towards my reward unless it is a strong BO or a small pb trend. Why? You can’t have small risk, high probability, and big reward on most trades. The market (there are a few exceptions) just is not going to give that to you. That would the perfect trade. So, as the trade unfolds, if my actual risk is tiny and price goes in my direction right away I may need to adjust my profit target to a lessor amount. There is almost always a trade off. If probability increases, risk decreases, then I probably need to decrease my reward. Anytime PA indicates high probability then I don’t expect big reward. Why? Because much of the move has already been made and less is likely to come. Remember, bears and bulls are probing on each bar. New traders look at this wrong. They think if it goes in my direction right away, with tiny actual risk, then a big reward is coming and they will move their profit target to get a larger reward and before they know it the market didn’t even make it to their initial PT before whipping back and hitting their SL, giving them a loss; they don’t understand what just happened as all things seem to look well in their favor. The second one initial reward (or potential) and actual reward. Again initial reward is determined by the trader. It doesn’t mean he will get that reward. He may get more, or he may get less. Thus actual reward is determined by real time price action as a post entry trade unfolds, live. An interesting tidbit here that traders have been taught to adjust the reward as a trade unfolds in the positive but many are reluctant to adjust their trade reward if it does not reach their initial reward they set when they place the trade. Hence as a trade unfolds and the dynamics of the PA begin to clear the muddied water and it becomes clearer that price is likely to NOT reach their reward they should take what the market is giving them but more often than not they will continue to hold hoping for bigger profits. The third factor cannot be known with certainty. 1) The first one (i.e. risk) a trader has a measure of control over the risk by setting the initial risk. That risk can be determined by different ways. ATR risk setting, monetary risk setting (for instance I am only willing to lose X amount b4 I scrap the trade), Price Action risk setting based upon what price has done already. I personally prefer the latter as it keeps me in the trade as long as my premise based upon PA is valid. Hence it tends to help me avoid getting whipsawed and stopped out. Thus it tends to increase my winning percentage. Which I personally like. The cons, are depending on what cycle the market is in, I may have to be willing to accept bigger risk. And I may have to accept a smaller reward than my initial reward which I set. And my RR may be skewed on some trades towards bigger risk than reward. However, I am willing to accept that possibility as a scalper because I pay close attention to ongoing PA after entry and I know that often my initial risk to reward is not likely going to pan out (because of subsequent PA after entry) BUT there is enough movement and my actual risk as opposed to my initial risk is way less and even though the movement doesn’t appear to be going to render me my initial reward I can recalculate and see that I can exit the trade with less profit than my initial reward but also on less risk than my initial risk thus rendering me a 2:1 or 3:1 or more RR than if I had stayed with the original risk and reward. Mathematically that is good. 2) I can set the initial reward based upon just a plain mathematical thing. For instance, I can say I won’t take a trade if I don’t think it will render me at least a 2:1 initial reward to risk. Or I could say it has to appear to render at least 1:1 RR before I will take it. Or I can set an initial reward based upon PA that may include MM’s, the cycle or phase the market is (including the likely potential movement it may give in that particular cycle or phase), the recent Volatility (and at the moment), the likely potential movement it may give in that particular cycle or phase, the manner in which price it moving at the moment (dragging...grinding...swooshing or swishing..etc). Again as a trade unfolds if actual risk is much less than my initial risk I am readying to adjust to a smaller reward. If the risk appears to be getting larger than my initial risk (that is it looks like it may very well take out my initial risk and stop me out with a loss) then I will reassess the cycle or phase the market is in, the context of the moment in RELATION to previous bars, swing lows, swing highs, the selling/buying pressures of the moment and the decide if I will average down (or scale into a losing position), moving my SL out to a larger PA basis. If all appears to be conducive to scaling in then I will do so and adjust my SL. If not, then I may just adjust my SL wider and keep my same position and wait for a reversal, or I may just exit with a loss. The purpose of scaling in is to INCREASE probability THAT the trade will be a successful trade. Anytime I take action to increase probability I must decrease the original PT unless price comes back with a fury. Therefore, I will likely exit with 1 tick profit or BE on my first entry and make a point or more on my second entry as I usually won’t scale in unless price moves against me to what I consider is a min scalp, that being 1 point. HOWEVER, IF PRICE COMES back in my direction quickly like in a BO then I will adjust my PT for bigger reward on the larger position I now have. All this applies whether scaling in once or three times on a position. Usually I won't scale in more than 3 times to a losing position but on rare occasions have done it 5 or 6 times if I am scaling in with small positions and doing so at 1 point intervals. Scaling in, if one can learn to do so effectively, eliminates getting whipsawed and around, enduring alot of losses, and turns what could be two or three losing trades into a winning trade. But, I can’t just choose to scale just any losing trade. The conditions mentioned above need to be conducive. Again, it is a matter of bulls and bears probing and pushing price. One side trying to win out. Unless one understands this they may very well get stopped out multiple times with losses that are nothing more than temporary probing until one side wins. Scalping is different than swing trading for bigger moves although there are times a scalp can and should be held for a bigger intraday move. 3) Probability is my best guess based upon recent PA and the cycle or phase the market is in. It is the one factor I actually have no control over and is really just my best guess based upon what I see in PA. I realize that whatever decision I make I have at least a 40% chance of being wrong on probability. It usually ranges between 40% and 60% of being right but when I am wrong I am wrong and must exit any trade or employ another strategy to salvage the trade if conditions permit me to do so. Especially as a scalper, there is a point I must concede that I am wrong and just get out. For me that is usually the widest PA stop loss I am willing to set. Maybe I will get some time to discuss this more or engage any questions asked. I am out of the country at the moment in the most southern Highlands of Mexico.
Thank you so incredibly much writing this up for me. I am work now, and will fully read and comprehend your post and respond soon. Thanks
Hello volpri, Please provide me some logical responses to some challenges I face while doing some manual back testing. I trade intraday, 3 minute chart, price action, but only with trend of the moment. I do not like buying bottoms or selling tops. I believe in high probability trades which are normally breakout and pull back trades with trend. As you stated, these trade are normally more risk than reward. I like to keep my max risk per trade at 20-30 ticks. I do not care that my reward is less than risk, so I aim for 10-15 ticks per trade with limit order waiting. I want a high win rate. Please give me your answer choices and opinion based on the chart below where I have the problem at . Crude oil chart. I would like to take the trade below with a Sell Stop above the high of that bar, but my stop loss would go under the breakout level at 40 ticks What options do I have here to particpate with the trend here: I will place my stop loss at 51.47 A. Set a buy limit order at 51.67 and wait for retrace and fill, exit at 15 tick profit. WIN B. Wait for price to retrace near breakout out level (support) and re-enter on PA reversal setup. WIN Please add other options if you know any. Thank you so much sir.
Thanks for the post, Regarding decision making on reward per trade. I am also experimenting with using ATR indicator to decide the profit target. Initally, I had the mindset of I will exit every trade at 10 ticks no matter what. However, after some testing Irealized saw that my stop loss (based on PA structure) can be up to 30 ticks depending on market dynamics at the moment and a profit target of 10 ticks is not worth the reward for a risk of 30 ticks. So I been watching the ATR to decide on profit target or PA support and resistance to decide profit target. For this case of 30 tick stop loss, a 15 ticks would be justifiable.
not sure which bars you talking about. If I Understand correctly you want to have taken Two trades. A long and a short? Could you please indicate your entry for short with a red dot, your profit target with a yellow dot and your SL with red dot on the appropriate bar for tge short trade. for the long trade yourcentry with a green dot, profit with a yellow dot and SL with a red on the appropriate bar
Hello volpri, Sorry for the confusing. This case if for entering long only. 1st green dot is to place limit entry so stop loss is within 20 ticks. 2nd green do is to buy the close of big gren bar, but my risk is about 47 ticks. The next option would be to wait for a pull back at breakout level for small risk trade.
Here is another example with entry options I have to decide. My question is , if I want to monitor my risk and keep risk within 20-25 ticks per trade, is it valid to go with option Entry Option 2. Both entries have the same stop loss. Normally I would trade with Entry option 1, but my risk is too big for this case. Would entry option 2, be a suitable option to enter? Any other suggestion for this case would be great. Thank you.
I have a training to do tomm..most of the day but will try to respond concerning your Charts and questions tomm night or the next day.