(binned per thread starter’s request)The "Thinking is Optional" S

Yeah. Just dumb luck.

MONEY MANAGEMENT

RISK:REWARD

Money management discussions weave in and out of various threads in these forums. Some lead to heated exchanges and often deteriorate into profane name calling and additions to ignore lists. Bringing up risk:reward (R:R) can be particularly sensitive. Some live and die by the concept while others dismiss it out of hand. At the risk of being targeted for ridicule, I'll poke the bear just a bit.


RISK (loss)

Trade Entry whether market, limit or stop immediately exposes the trader to risk. Most traders do not intend to lose and inherently seek to limit their exposure to risk in some way. It may be effective or ineffective.

1. Stop losses are probably the most frequent method to limit risk or loss. All stop losses are intended to reduce or limit risk. It may be mental or set at the time of entry. Even if the stop loss is not immediately known, the trader will likely eventually bail out of the trade as losses mount and the account dwindles. This is still a stop loss but comes about out of fear, frustration and anxiety.

2. Finding a method, system or strategy with a "high win rate". A high win rate in these trader's minds equates to a low, or at least lower potential loss rate, and therefore satisfies, for at least a while, the notion of decreasing their exposure to risk. The thought here is that the majority of trade entries are likely to immediately be followed by mounting gains. The few trades going into the red will be few and will be dealt with as they arise.

3. Limiting number of trades. Some manage risk by limiting themselves to a set number of trades per day or week or what have you. For example if I lose 3 trades in one day I'm done. "Live to trade another day" as they say. This also includes stopping trading after a set number of wins or pips. "I'm done for the day or the week" after bagging a certain number of pips. Essentially this "not overtrading" as a risk limiting measure.

I'm sure there are other risk limiting measures employed but the idea here is to put forward the notion that most if not all traders seek to limit their risk or to limit losses.


REWARD (profit)

Most traders have the expectation that once in a trade that they will at some point exit the trade in profit.

Depending on trade size (standard, mini or micro account) the cost of the trade figures in. Thus profit can be achieved one tick/pip beyond satisfying those costs.

Depending on trading style (scalper, short/mid/longterm) each trader likely has some kind of target. Some consciously derive this target while others fly by the seat of their pants.


RISK:REWARD

The reward-centric trader: Some trade thinking only about reward. They intend to get into profit ASAP and get out with an undetermined profit target. These traders have low tolerance for loss employing very tight stop losses. They seek a high win rate often failing or eeking out a thin profit for the day although some days are more rewarding than others. These traders are often day traders or scalpers. Make no mistake some are quite successful in their endeavor. Successful traders of this type have an innate ability to limit their risk and usually do not let losers run. They are generally tied to the computer during their trading interval.

The loss-accepting trader: Some trade knowing loss is inevitable. They are willing to let a trade go south for a time in order to get a larger reward. These traders pay attention to stop size and seek profit targets multiples greater than their stop size. They also accept win rates often less than 50% knowing their reward size will overcome their lower win rate. These traders tend to trade less frequently sometimes once or twice a week or even less. They tend to enter trades with set stop losses and generally distant profit targets. They are not tied to their computers and can walk away waiting for a trade to come to a natural conclusion based on their stop loss or profit target.

Money management

All trading involves some degree of money management. It can be lackadaisical, sophisticated or something in between. Whether scalping, day trading or longer term trading the trader will knowingly or unknowingly use some type of money management that will lead to losses or profit. Ultimately a trader's money management will determine profitability.

Even if a trader is unaware or cares not about R:R their trading will have an average R:R that could be calculated if they chose to do so. It's kind of like driving and not knowing how many miles per gallon you're getting. Even though you don't know it it's still there.

The Losing Trader

The losing trader has a problem:

1. Losing due to a truly faulty method, system or strategy. Most automatically assume this is their problem and jump from one system to another. It's entirely possible that the system works to some degree but the trader does not employ reasonable money management. Methodically employing proper money management technique can reveal a faulty trading method. In fact, instead of back-testing, it is the proper way to evaluate a trading methodology.

2. Losing due to poor money management with a truly workable method, system or strategy. This is really answered in #1 but I'll restate this way. If a trader does not use proper money management then even a potentially winning system will not work.

The Winning Trader

The winning trader is doing something right. Ultimately it will be some combination of a reasonable method and money management. The "edge" so often sought lies in this revelation and not in some complex sophisticated mathematically derived system.

It doesn't take much to see why most endeavoring to trade profitability fail to do so. They are system and reward-centric thinking it is the system that will result in them being profitable. Money management is the last thing on the minds of most. This is extremely evident in the threads in these forums.

Most systems, methods or what ever you want to call them are designed to trigger trade entries. Rarely do you see a system describe what happens after the trade is triggered. Just get in then deal with it later is the overwhelming thought pattern.

EVALUATING TRADE METHODOLOGY

Following is a suggested strategy to evaluate a trading methodology, system or strategy. It is not meant to evaluate a scalping strategy. It can be used for day trading.

First you need to find something that seems reasonable to you. Without going into detail on how to search I'd recommend the following:

1. Seek a method that overall centers around trend trading. Studying trends and their nature and structure would be helpful in this endeavor.
2. Limit indicators. I'm not going to bash indicators as I'm using moving averages in the system in this thread. Use them to help you trade with the trend. A method that employs multiple indicators will make evaluation difficult and is not necessary for a viable system or method.
3. Back test. This is only to get a sense that the system seems to work. Back testing will involve studying examples where your method works and where it doesn't work. Be careful about spending too much time optimizing during backtesting. You're just looking for something that is reasonable.
4. Make some rules and make a committment to stick to them.


Evaluating the method or system

1. Commit to a minimum of 10 trades that strictly follow the rules you've set. Don't change anything until you have 10 trades even if everyone is a loser. Using a demo account or a small live account is smart.

2. Decide on a simple money management plan. This is important because it will be the ultimate revealer of whether your method is viable or if it just needs "tweaking".

3. R:R - It is absolutely crucial that you make R:R part of your evaluation and your trading methodology. If not then don't bother going any further. Choose a minimum of 1:2 or 1:3. This means your reward will be twice to three times your risk. This doesn't mean choosing a fixed R:R. You will need to evaluate every trade carefully to determine where to place your stop loss and where your profit target will be. If you determine a risk of 10 pips then your profit target should be 20-30 pips. If risk is 20 pips then your profit target should be 40-60 pips. Enter SL and profit target immediately upon trade entry then walk away and let the trade go to completion. Later during subsequent evaluations you may implement things like trailing stops to increase profits but these should not be part of your trading plan initially and if and when you do employ them they should never result in exiting a trade before reaching the desired target as this will decrease your R:R and ultimately your profit.

4. Trade size - Be realistic to the size you plan to fund your trading account. Your trade size will be directly related to your risk. Think about how much do you want to lose on any one trade. I recommend 1-3%. So if your account is 10K then your risk on any trade will be no more than $100-300. As you can see one loss will have minimal impact on your overall account size. Remember to include the cost of the trade.

5. After 10 trades then you're ready to an initial evaluation. It's important that you've really followed your own rules and not changed them midstream. If you haven't then the evaluation will be worthless.

6. If every trade was a loser it doesn't necessarily mean it should be abandoned altogether although this is a consideration. Only you will know how each trade went. Examining 10 trades will not be difficult and doing so may reveal the flaw or flaws that resulted in 10 straight losses. Even viable trading systems can rack up 10 losses in a row. If during your trade examination you are able to identify the flaws that there are reasonable remedies for then adjust your rules accordingly.

7. Now you should again proceed to apply the adjusted system to 10 trades and go through the same process. If again you incur a majority of losses and it doesn't seem there are any remedies then it may be necessary to abandon the system.

8. However if you've won even as little as 3 to 4 trades it is entirely possible that you will notice your account is in profit. If you haven't followed your own rules including the commitment to allow the trade to go to a natural conclusion without exiting early then you will potentially duped into believing your method doesn't work when in fact it might work. Yes it is possible to be profitable with a win rate of as little as 3 winning trades. Remember if you were using a 1:3 R:R then even 3 winners will have exceeded the 7 losses.

9. If you've come this far and you've been able to demonstrate even a low win rate that is profitable then you can continue to repeat the evaluation method to identify potential improvements. However I urge you not to be overly concerned with win rate. Rather concentrate on R:R which is nothing more than money management.

10. You don't need to follow my evaluation method exactly but you should develop an strategy evaluation to objectively determine the viability of your trading strategy.

Great work Winston, I really admire your clean charts and common sense approach to trading, looking forward to more.

Here price is up-trending making HHs and HLs. It will be doing this until it is not so it would be presumptuous to sell at any point.



The LH was only known when the LL occurred. The LL confirmed the LH. Until there was a LL that took out the L one would have had to assume that price was going to make a HH.

Now that price has made a LL a downtrend is technically in place and the next pullback is anticipated to be a LH.



Please forgive my crude drawings.
If we apply a moving average cross in combination with trend characteristics (HHs,HLs, LHs, LLs) then we have a potentially powerful combination of factors that lend themselves to more true signals rather than using one or the other by itself.
In addition one can use a faster time frame once the slower time frame lines up to enter with similar concordance of factors already described.
For example I have been using the 60 minute so when the 200 MAs line up, the 3,6 MAs line up and their is evidence of trending (HHs,HLs or LHs, LLs) then I look at the 5 minute. On the 5 minute I trade a 3,6 MA cross after a pullback and realignment of the 3,6 MAs.

This USDCAD 60 minute chart was trending down as shown with LLs and LHs until we see a failure to make a new low followed by a break of the previous high (blue line). At this point we can immediately go to the 5 minute chart.

The 5 minute shows PA just before breaking above the blue line. There is a pullback in the 5 min just before price crossed the blue line so this would not have been the perfect entry which should be above the blue line but it is one that could be taken with increased risk. The best trade is above the blue line with the 3,6 MAs in proper alignment. Any small bar pullback or MA pullback with realignment of the MAs on the 5 min that occurs above the blue line is an entry.


Stops can be placed either on the 5 minute or the 60 minute. I prefer stops on the 60 minute once entered to prevent "false" stop outs. Either is an option.

I thank you for your dedication.

I point the "the high win rate" statement. What is for you a high win rate?
It is a misleading thing and i will give you some input to think about.
If you have a loosing series of trades, but you manage after it with money management tools one trade recover all loosing trades?
Say you have trade with 1%, loose around 5% within 5 trades. The next trade is going to our favour and you put new trades as long as the trade is in right direction. In the end you have 10% or more plus.
So we have a bad hitrate, have we?
Trading is about this. Take loosing trade as business, also if it will be less as 50%, but take all out of it if you are on the right track.

1. [/u]

1. I intentionally left the "high win rate" to the trader thinking about such a thing. In this instance I am pointing out that some believe that a high win rate will protect them from being unprofitable. To be clear I am not in favor of traders seeking a high win rate.

2. I think we are saying the same thing. What I have written is true and if applied will assist traders to be profitable.

An excellent thread with thoughtful commentary. I will be practice trading this strategy, but maybe I will wait until after the Dec. holidays.

Just doing some backtesting and seen these two potentially epic setups on gold

Here on EURUSD, I see this as a good long setup.

Your 200 MAs may not be correct. Check the settings.

On my chart the faster 200 (not shifted) hasn't crossed the slower 200 (shifted 20). So based on this I wouldn't enter a trade.

Additionally price is currently in the middle of that huge wide spread bar.

I would wait for price to get above the wide spread and also for the 200 MAs to line up properly.

I see. I used EMAs instead of MAs. Fixed it and now I see. Thanks

We might see a trade soon on AUDUSD

In the right direction

Let's try it.....

I imagine you hit SL. I think there will be a trade soon, closer to the 200 SMAs should be safer.

Your "system" could be done by a EA, that's why it can't compete in this very competitive market that trading is.

And even if it could, sharing it won't help it a bit, quite the opposite actually because of liquidity.

Trading is like formula 1, it does not matter how good you are but how better you are.