Cutting your losses early - Momentum based method

Hey,

I haven't posted here in years. I have gone through the ups and downs of trading for nearly a decade (mostly downs). The last couple of months seem to me like I've figured out a way to be consistent in my returns and method. I want to share the method. I think if some people joined this method, we can quickly gather enough data to make sure this method is robust for not just a year but for many years to come. I'll spare you the details of how I got here.

This method is about not blowing up your account and gives an actionable plan to "cutting your losses early". If you expect to make a living from this in 6 months time you can stop reading now.

There's 3 sections to this, which I scatter over 3 posts.
Some of this may seem wordy and I'm not great at explaining things.

1) Money/trade management - Losing money smarter
2) Charting analysis - Not losing money quickly
3) Collecting data together

TLDR;
Found a way that's been making me money for a while and I think it's solid. Would like others to join the concept to prove its robustness with varying entry parameters. Reduce stops on every trade to an average of -0.6R. Make more money than lose on average. Try to make 10R a month. Technical analysis is a waste of time. Go with HTF momentum trends. Use momentum entries in the most volatile hours of the day (London Open and NY Open for 2-2.5 hrs each) and try your best to be consistent in reducing stops and don't go for home runs. Started a spreadsheet to track this method's performance with other people. Let me know if you want to start your own sheet in this file:

https://docs.google.com/spreadsheets...it?usp=sharing
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1) Money management - Losing Money Smarter

To kick things off, the money management part is the most important bit of it all.
The way I calculate losers and winners is based on risk and return. A lot has been written on this topic, so I don't think it's necessary to repeat it all. If this is new to you, look into Van Tharp or just google it. To sum it up, if you consistently risk $1 a trade, your aim is to return a multiple > 1 of your trades on average. Easier said than done. What my method does is modify this logic just a little bit (and its hardly revolutionary).

Assume the risk for a trade is consistently $1 and my targeted multiple is 1.5R. This means I now risk $1 to make $1.50 and in theory, if you don't risk a large % of your account per trade, this could be enough to significantly reduce your risk of ruin and be profitable on < 40% win rates. Weird that I still was never able to make money consistently every month with this. That's because it's hard to reliably assess the market will move an absolute of 1.5R in my favor.

This method deals with that problem. Instead of focusing on absolute risk and return, I now focus on relative risk and return.
To continue the example from above, the way it works is that my absolute risk of $1 (-1R) basically means that I have a stop loss in place, and I accept my trade just didn't work out once it hits -1R. However, if I entered with a full $1 risk, and consistently reduced my stop size on virtually every trade to a figure less than $1 before being stopped, then I would consistently lose less than $1 based on the relative -1R. Also, I wouldn't need to rely on the market moving an absolute of 1.5R in my favor anymore to achieve the same relative return multiple of 1.5R. That's the underlying logic of my method.

Consider this scenario - On average:
I enter a trade that has a stop of 30 pips.
My absolute risk is -1R. -30 pips.
I reduce my stop to -15 pips.
My absolute risk is for a stop is now -0.5R. -15 pips. My relative risk is -1r. -15 Pips.
The trade moves 25 Pips in my favor and I take it off. My absolute return is garbage at 0.8R at a static stop of -1R. I'd need a win rate > 60% to make this sustainable.
Considering I move my stop on average to -0.5R, my relative return is 1.7R. This way I don't need to rely on absolute moves.

There's a few more details to this simplified example and if you're skeptical (which you should be), go ahead and ask me.
The biggest question that comes up is how can you guarantee you will reduce your stop to -0.5R on average? I'll try my best to discuss this in the second section.

I feel like this should explain the money management part of this method but I'll be happy to edit this post over time if you think this doesn't make sense. Ask questions or tell me if you think it's unclear, so that people reading this for the first time can get the hang of it quickly. There's clearly tons of scenarios that can unfold, so if you think something's missing, let me know.

2) Charting Analysis - Not Losing Money Quickly

Part 1 of the method ended with the question of how you would be able to ensure you can reduce your stop on virtually every trade. This is where the charting analysis comes in. It is not the most important bit of this method. Yet, there's a few things that are worth noting.
First of all, leave your technical analysis regarding support/resistance, supply/demand, moving averages and all that garbage at the front door on this thread. It will not benefit you with this method. Secondly, do yourself a favor and only look at instruments that are somewhat volatile. You're the judge on this one.

The point of the chart analysis is to make the things discussed in section 1 happen.The goal is to reduce the stop to < 1R on virtually every trade. I've come to the conclusion for myself that the safest way to ensure this is by being up on ideally every trade for at least a few ticks, regardless if it works out in the end or not. The primary focus is the downside of the trade, and we want to reduce it consistently. This means that I want to avoid fading a move that can instantly stop me out without me ever seeing the green side of the trade.

The way I enter trades is with momentum. I have tried summing it up in a 4-step process and I'm sure that I missed out on some details that we can add later.
When you read the following lines, keep in mind that the whole point of this is to reduce my stop on every trade. It's just how I enter and my trades and the entries are far from perfect. It's just a suggestion how to analyze your charts if you don't have a momentum outlook on the market. If you do, your mode of entry may be a lot better than mine. Also keep in mind that if you start posting SR or SD lines, I will personally curse you. I can't stress it enough. The whole point is to consistently reduce your stops.

1) Identify HTF Momentum Trends
2) Identify HTF Momentum Retraces
3) Identify price slowing down on HTF (or at least not too LTF)
4) Identify price turning heavy inside the session

1) Identify HTF Momentum Trends
What I mean by HTF Momentum trends is that I want to see big candles going pretty much strictly in one direction on a time frame that you consider your higher time frame. I typically use the weekly, daily, and h4 charts as my higher time frames. Pictures speak louder than words though.
The following are what I consider HTF momentum trends. Heavy moves in one direction. I think it's pretty straightforward. Let me know if you think differently.
Down trend weekly:


Up trend daily:


Up trend h4:


There is definitely some degree of discretion to this. Also if you analyzed the weekly you may say it's an HTF trend, on the H4 it's an up trend though. That's fine. The chart analysis part is not the most important bit to this.

2) Identify HTF Momentum Retraces
Step two is that within the HTF up/down trend, I want to see an HTF momentous counter trend retrace, that happen without a whole lot of consolidation going on prior to the retrace. That means I don't want to see weeks of sideways trading prior to a strong, momentous retrace. Going with the example #1 from earlier:


There's no major consolidation prior to the retrace. I want to ensure the momentum is there in both directions on the HTF. I also find this part straightforward but again, please let me know if you think differently.

3) Identify price slowing down on HTF (or at least not too LTF)
This part is a little trickier. What I want to see happen as the next step is to see price significantly slowing down from the retrace on either the HTF, or a time frame that is not too low. Now that sure sounds ambiguous. Let's work with the same example from above again. In Step 1 I have analyzed a momentum weekly down trend. In Step 2 I have analyzed a momentum retrace on the same time frame. In Step 3 I would now either pay attention to this weekly time frame again, and wait for price to lose steam of its retrace. At the same time I would also look on the daily time frame for it to lose its steam. By losing steam I mean more sideway trading, no big up retrace candles anymore. Here's what the retrace and its slowdown looked like on the daily chart:


Let me know if this step doesn't make sense to you. I'm basically looking at a transition from a strong weekly momentum retrace to a more sideways oriented trading on the daily chart.

4) Identify price turning heavy inside the session
So far we have identified a strong HTF momentum trend (Step 1), a strong HTF momentum retrace (Step 2), and price losing the steam of its retrace (Step 3). In Step 4, we're finally looking for an entry.

Something crucial is this: I only trade the first 2-2.5 hours of the London Open (from 8 GMT) and the New York Open (from 13 GMT). This puts everything I've talked about so far together: I want to trade with the most volatile hours of the sessions that most of the time move the markets. I do this because in most cases an intraday momentum move in the direction of the HTF momentum trend, after a HTF momentum retrace enables me to reduce my stop because on pretty much every trade I enter I am up for a few pips at least, no matter what happens after.

The mode of entry can differ somewhat. Picking up the weekly HTF trend example we've been working with again:


Price has slowed down and dropped heavy in relation to its surrounding candles. But wait a minute! That's a daily chart. That would ruin the whole entering with the session open momentum framework. And that's exactly true. So I then wait for the next day and hope for price to retrace somewhat to justify trading towards the previous day's lows and getting a positive return out of it. In this case, the entry of the second arrow on this daily chart could then be fractured down to an intraday chart. Most of my entries happen on M30 or H1. In this particular scenario, Step 1, Step 2, Step 3, Step 4 ended in the scenario of a M30 entry:


The mode of entry may seem a bit discretionary. It is. But again, it's not the most important bit. The most important thing is reducing the stop on every trade. Using a session oriented momentum method is the most solid way I can think of to make this happen. Having a HTF framework like I do is just how I can structure my trading better to avoid entering 5 trades a day.

Please feel free to ask questions but remember that this is not a place for technical analysis.

The next post will be about how we can collect data together, which goals to set and how you can use this method while keeping yourself accountable for your progress.

3) Collecting Data Together

The reason I share my method is not because I'm just a nice person (although my mom would argue differently). I believe this is something robust but I want to know if other modes of entries also work. There's some discretion to my trading. I still think that with this general framework, you can escape the non-consistency and at least be profitable, although this will not make you instantly rich like those trader kiddies on Instagram lol.

I have started a Google Sheet document and populated it with my R-data from this month. I'd like for a few people to join me on this quest.

The link is : https://docs.google.com/spreadsheets...it?usp=sharing

If you're interested in participating just reach out to me. I'll create a sheet for you inside the file that only you can edit. No strings attached.
It's a great opportunity to keep yourself accountable and have a realistic outlook in terms of results compared to other traders using a very similar approach.

If you need any clarification on the sheet let me know but I think it's pretty self-explanatory.
My personal goal are 10R a month but depending on how much you trade it could also be less than that. Just make it realistic to achieve. The way to trade with R is to set yourself a fixed amount of money that corresponds to 1R. Then roll with it for a few weeks and see if this method and way of tracking data makes sense to you.

I suggest to start out trying to reduce your stop to an absolute of -0.6R once you're up 0.3 - 0.5 R on any given trade. It can sometimes fluctuate but it should net out to around -0.6R. The way I came up with this was by tracking my results over 50 trades. For each 50 trades I track my reduced stops and they average out to 0.6. It's a solid base to start your journey from.

If you have any questions regarding the sheet or its contents just reach out to me. I became very used to handling it all this way, so there might be things I take for granted that don't make sense to you right now.

You could also hook up a trade explorer to your account but I don't want to impose this on anyone.
Good luck and enjoy your journey to losing money the smarter way.

Not clear enough the MM part.
It's better to make real example with entry, SL, TP and from there workout the possible scenarios after you entered.
Can be a win, than what's next move?
can be a loss, than what's next move?
etc...
In this way, you will clearly communicate your logic and people will understand better.
Cheers

Thanks for the feedback. I'll add an example tomorrow to illustrate this better.

Merka,

here's an example ref the trade management



Entry: 1736.8 with a full R (absolute) in risk. The left side r2r grid shows my absolute return and risk.
My reduced risk over 50 trades on average is -0.6R (absolute). The right hand grid shows my relative R in comparison to the absolute R.
I reduce the stops on every trade (section 1 & 2 in the text above) to return a relative R >1 without having to rely on an absolute move of >1 R to net average positive returns.

Trade didn't work out for me. I lost an absolute of -0.5R (-0.9R relatively).
Hope this makes sense.



Spreadsheet to track the R:
https://docs.google.com/spreadsheets...it?usp=sharing

Let me know if it's still unclear.

dax long

stops being reduced if this pushes up, as always lol

once the trade was green just a few ticks, i reduced my stop to an absolute of -0.7R ca. that's a relative of -1.3R.
As it started popping up I have reduced my risk to -0.3 R. And I'll keep on reducing it until it hits my average winning trade absolute return of roughly 1.4R. At this point it's mathematically nonsense to give a large % of your floating returns back.

I know this all sounds a little complex but it's really just reducing your risk no matter what to avoid blowing up your account. Large trades are mostly there to show off to your friends and are isolated events in your overall performance. Win rates barely matter. I'll get torn apart for saying this lol.

pound long. reducing risk as always.
Not the biggest fan of the entry. Again though, don't think the entry matters THAT much anyway.

lmao

Pound long, reducing stops and all. 1 winner, 3 losers this week so far. -0.8R on the week.

IMO, SL should be here.

Thanks for popping in, mashfx.

Check out this pic:



The stop loss you proposed, on the left grid, would require my trade to move in my favor a lot more to be in line with my average risk profile. i've tried to explain this at the start of this thread. A technical stop (like placing below a low or high) is in my estimation a better way to be "right" on a trade, but you won't make more money than you lose on average unless your absolute return on the move exceeds your average stopout. I hope this makes sense.

Basically I'm not concerned about being right, but losing on average less than on the trades I win. 25-30% win rates can float my PnL green this way. I don't want to rely on big moves to make this happen. Positive returns is all I need to be consistently profitable.

Let me know if this is unclear.

OK I got it. absolute R and relative Rs are same $1 right?

Say I risked $1 on every trade that I make:

I see a trade opportunity and enter.
My absolute risk is $1.

My relative risk is my average reduction of the stop. On average (calculated for each 50 trades), I reduce my stop to $0.60 in risk.
I reduce my stop on every trade that I enter.

So when I make "only" $1.20 absolutely, my relative return is already 2R ($0.60 average risk x 2 = $1.20).
That's why I prefer to go with a smaller stop because I can reach a relative return, that is higher than my average stopout (over 50 trades) quicker.

For what it's worth, my absolute return over 100 trades is ca. 1.37. My absolute stopout over the same 100 trades is ca. 0.61
So I can return my money risked on average a little over 2x over these 100 trades.
My win rate is garbage. Just saying

Are you scaling out some @ 1R or closing whole pos @2R? thank you

I don't scale out anymore. Diluted my returns.
I take it all out, usually around 1R - 1.5R. On momentum rips sometimes more (with a stop trailing pretty close behind).

usdcad long. reducing stops and all that jazz..

pound short. reducing stops.
week total so far: 3w, 3l, . +1.3R

a little update:



I have consistently reduced my risk associated with this trade. There's always a chance it can stop me out on a retrace and work out as planned right after. That's annoying but it doesn't matter in the longer run because the associated risk in letting a trade "breathe" will nearly always outweigh the average returns. If you want to be in the business of risk reduction to stay profitable, being right isn't that important.
Floating the average PnL green is more important. Wanting to be right to make money cost me years.
Hope this makes sense