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Decisions, Trade-offs & Managing to Survive

  • #1
  • First Post: Edited May 10, 2012 1:17am May 9, 2012 11:34pm | Edited May 10, 2012 1:17am
The name of the game is risk management. Do it poorly and you lose money. It's just that simple.

So how do we manage risk? By making "good" decisions. However we can't do that unless we know what makes up a good decision. That takes time and experience. Sorry beginners. The good news though is if you put in the time, you might some day learn how to make good decisions. Maybe.

Calculating where and when to enter and exit are two of the more important and common decisions we make. The decision to enter at a certain time and price sometimes puts us in a situation where we may have to make a trade-off at a later point in time. A trade-off which we believe reduces risk. Otherwise there is no purpose in making a trade-off.

I will give you an example...

Let's suppose price is in a tight range between 1.3200 and 1.3300. You decide to enter when the range is 'broken' so long as it is during the heavy volume hours (such as during London session). Seems like a logical decision. Your technical analysis suggests that there is no reason to believe a support exists until price reaches 1.3150 (based on past support levels) so we set our take profit there. You also believe what was once a lower support during range (at 1.3200) will become resistance after price breaks below it so you place a stop loss at 1.3225 for a risk/reward ratio of 2:1. However price unexpectedly stalls at 1.3175. Now the chart is clearly giving signs that a support has been created at this level. So here comes decision time...

1. Do we exit our full position for +25 pips?

2. Do we leave our full position in the market but move the stop loss to break even?

3. Do we take profit on half of the position and leave the stop alone?


Learn to spot trade-offs that reduce risk and you will be making the right decisions more often than not. You have to survive first to have a shot at making profit.
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  • #2
  • Edited 11:50pm May 10, 2012 1:31am | Edited 11:50pm
Okay to follow up on the example given in the opening post...

I would have choosen #3 (take profit on half position and leave stop loss at original spot). At 1.3175 I have reached 1:1 RR, so by taking half position I'm essentially giving myself a worst case scenario of breakeven. I also have what appears to be a potential resistance at 1.3200 protecting the stop so why move it? If I were to move it then perhaps MAYBE move it to 1.3220 or 1.3215 at the most to lock in some profit. I like to give the stop loss some breathing room from the resistance at 1.3200 and make the market come beat me.

Should price have stalled and appear to have found support at 1.3185 and not at 1.3175, taking profit of half position is still a viable option since moving the stop loss to 1.3215 to adjust for 1:1 RR still leaves the 1.3200 resistance barrier protecting the stop.

There's more to it then just that, but I find this thought process to be fundamental.
  • #3
  • May 10, 2012 7:45pm May 10, 2012 7:45pm
I was with you until you gave those three choices.

First, I'd ask, why is that slow-down at ...75 even there?
Is it a momentary slow-down or something major not in the trading reason?
If the former, then 4. I'd check my in-trade drawdown to see if it'll handle the weight.
When the latter, then 1., and then take a break or jump head-first into lower-risk (paper,simulator,penny) set of trades until look at the chart more sensibly.

Anyway, all those numbers initially confused me, as I usually overemphasize the reason over the math.
  • #4
  • May 10, 2012 7:57pm May 10, 2012 7:57pm
Quoting ha-pattern
I was with you until you gave those three choices.

First, I'd ask, why is that slow-down at ...75 even there?
Is it a momentary slow-down or something major not in the trading reason?
If the former, then 4. I'd check my in-trade drawdown to see if it'll handle the weight.
When the latter, then 1., and then take a break or jump head-first into lower-risk (paper,simulator,penny) set of trades until look at the chart more sensibly.

Anyway, all those numbers initially confused me, as I usually overemphasize the reason over the math.
You make a valid point asking for a reason. Perhaps I should of been clear in saying there is no obvious reason in this particular example. No fundamental reason has emerged, at least not publicly, that explains why price is being supported at that level. There is no right or wrong answer. I'm just throwing out a hypothetical scenario. I gave an answer as to what I would do and why. I started the thread to provoke these kind of responses. So very nice reply. Certainly looking at what 'outside' factors could be influencing the price is something to look at. Things like dollar index, gold, oil, etc. Again, nice comment ha-pattern.
  • #5
  • May 15, 2012 6:17pm May 15, 2012 6:17pm
Given the scenario I'd say 3 as well, 1.3175 could be a search for liquidity as could stops just above 1.32, both potentially temporary and a shake out of weak shorts, I'd hang in there especially as it's a 'free' trade, if I'm wrong it's cost me nothing. Or maybe by closing half I'd also be a weak short....what a dilemma!

Great example of where our mind should be though, managing risk and surviving for the long game.
  • #6
  • May 15, 2012 8:04pm May 15, 2012 8:04pm
Quoting 2+2=4ex
1. Do we exit our full position for +25 pips?
2. Do we leave our full position in the market but move the stop loss to break even?
3. Do we take profit on half of the position and leave the stop alone?
Good post, that reflects the type of dilemma that we all face on a trade-by-trade basis.

Let me add another option:
4. Do nothing, as we assume that, despite the unexpected stalling, the initial TP and SL are still valid.

My 2c is simply that, unless there is a valid reason for making a decision (either based on criteria such as that described by pipmutt; or based on one's own experience or the results of historical testing) then it doesn't really matter what we do, because any action performed without a provable rationale is effectively nothing more than a coin flip.

If the market is in a strong trend (in the direction of the trade) on longer TFs, then I'd definitely be more willing to let the whole position ride. I'd also look at the strength of the currencies in the pair, relative to the strength of other currencies; time of day; imminent news announcements.

Even though many experienced and successful traders will disagree with me, I don't buy into the idea of moving a SL merely to protect profit, for exactly the reasons described by numbnuts here. Whatever happens henceforth is going to happen regardless of whether a trade is currently +25, -25, or whatever; the market takes no cognizance of an insignificant retail trader's P/L. That is one of the biggest errors that newbies make, IMO: making decisions based on their recent P/L (e.g. recovery type systems), instead of attempting to anticipate probable market behavior.
  • #7
  • May 15, 2012 9:02pm May 15, 2012 9:02pm
Quoting 2+2=4ex
The name of the game is risk management. Do it poorly and you lose money. It's just that simple.

So how do we manage risk? By making "good" decisions. However we can't do that unless we know what makes up a good decision. That takes time and experience. Sorry beginners. The good news though is if you put in the time, you might some day learn how to make good decisions. Maybe.

Calculating where and when to enter and exit are two of the more important and common decisions we make. The decision to enter at a certain time and price sometimes...

Hi OP,

Excellent thread! - To give it a crack - I think that you first need to know what you are playing. If lets say you trade correlation between AUDJPY and SnP500, and you time your short correctly, but then you see that one is not acting right - then you need to get out regardless of your pip count.

The point I think I am trying to make is that the trader also needs to take into consideration his method of reading the market/trading and base your exits on that.

Give you an example, you trade a 1 standard dev bb/20 periods on the 15min, and the market gives you a short and if you expect 100 pips profit but, price crosses the upper 1 stdev, then you need to get out.

In short, the market needs to be acting right for you to keep the trade until your target. Your method needs to be such that the read gives you a fairly good edge to fit a healthy risk/reward ratio.
  • #8
  • May 23, 2012 10:16pm May 23, 2012 10:16pm
Quoting Dick Clark
Hi OP,

Excellent thread! - To give it a crack - I think that you first need to know what you are playing. If lets say you trade correlation between AUDJPY and SnP500, and you time your short correctly, but then you see that one is not acting right - then you need to get out regardless of your pip count.

The point I think I am trying to make is that the trader also needs to take into consideration his method of reading the market/trading and base your exits on that.

Give you an example, you trade a 1 standard dev bb/20 periods on the 15min,...
Excellent and valid points. Knowing when to differentiate between market acting "right" or "wrong" is important. Then knowing what's the best decision comes next. Combining the two means taking action to reduce risk. Objective number one is to stay alive. Do that and just let the profits come when they may.
  • #9
  • May 23, 2012 10:24pm May 23, 2012 10:24pm
Quoting 2+2=4ex
Excellent and valid points. Knowing when to differentiate between market acting "right" or "wrong" is important. Then knowing what's the best decision comes next. Combining the two means taking action to reduce risk. Objective number one is to stay alive. Do that and just let the profits come when they may.
Seems like you and Dick got it goin' on . Congrat's

"come when they may", that's always the best rule.
When the Joker is in the deck.. fear not and play it well
  • #10
  • May 23, 2012 10:30pm May 23, 2012 10:30pm
Quoting 2+2=4ex
come when they may.
Oh. I forgot you favorite greeting

wolf !!
When the Joker is in the deck.. fear not and play it well
  • #11
  • May 23, 2012 11:01pm May 23, 2012 11:01pm
Quoting Slim Buffett
Oh. I forgot you favorite greeting

wolf !!
WOOF!!

That's the ole beagle bark.
  • #12
  • May 23, 2012 11:06pm May 23, 2012 11:06pm
Quoting 2+2=4ex
WOOF!!

That's the ole beagle bark.
Ohh, got that wrong. It was WOOF ! rather than wolf

See how smart you are? I love talking woof, woof and beagle bark
don't you? What do you think about cats?
When the Joker is in the deck.. fear not and play it well
  • #13
  • May 23, 2012 11:24pm May 23, 2012 11:24pm
Quoting Slim Buffett
Ohh, got that wrong. It was WOOF ! rather than wolf

See how smart you are? I love talking woof, woof and beagle bark
don't you? What do you think about cats?
I liked them shaved.
  • #14
  • Last Post: May 23, 2012 11:31pm May 23, 2012 11:31pm
Quoting 2+2=4ex
I liked them shaved.
There might be hope for you yet.

Only time will tell

But you'll HAVE to get over that beagle thing.

I got'ta go chase a rabbit. Keep it real.
When the Joker is in the deck.. fear not and play it well
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