My trouble with controlling risk...

RiskTrouble · Mar 9, 2007

Hi. I’ve been trading for about four years. I have a good price-driven model that I use to make short-term trades in various futures markets (primarily crude oil, British pound, FTSE, and mini-Dow).

I try to be in and out very quickly picking up 3-10 ticks at a time, and I can consistently make good profits (US$400-$700 per contract/per day) with a very high winning percentage (around 90%). I’m good at reading order flow and picking S/R areas on the chart, and I generally trade with the trend (buying or selling the pullbacks/bounces).

My problem is that I have outsized losing trades that are wiping away my profits and then some. These are trades that I know are crap when I have the opportunity to get out for a loss of 2 or 3 ticks. Instead of getting out with a 2 or 3-tick loss or even a 10-tick loss, I have simply watched these trades run against me -- just sitting frozen in the headlights of the order book.

I know this sounds like a complete cliché of Trading Problems 101; however, that’s not helping me control this behavior. I take full responsibility for it; it’s not the market, my broker, my charts, nor my data vendor – it’s just plain dumb ass behavior.

I feel like there a wiring problem in my head that is preventing me from gracefully accepting these losses (it’s not that I can’t do it – I simply don’t do it). It’s not as simple as putting in stops (although that would certainly help to reduce the magnitude of the losses). My successful trades can sometimes go 5 or 6 ticks against me, but I don’t sweat as long as the character of the market doesn’t change significantly (based on my read of the order flow and T&S). When the character does change, I don’t want to be in that position any longer. I want to be able to pull the trigger as soon as I know it’s wrong. I think part of the problem is taking money out the equation in thinking about winners/losers.

I would greatly appreciate hearing from short-term, discretionary traders who have successfully overcome such a problem. I know there is a lot of material out there relating to this problem, but I think the insight of a trader with a similar style will be more helpful. Given the flood of information that a short-term trader observes, I believe it’s easier to lose one’s perspective relative to swing or position trading. I believe that if I can find a different way to look at losses then I will be able to deal with them in a straightforward manner. For example, one trader said that he thinks of his losses as employees -- i.e., a necessary cost of doing business. That particular one doesn't work for me, but I like the spirit of it.

All constructive criticism and helpful suggestions are welcome, but no trolls please. Thank you.

Crap Buddist · Mar 9, 2007

I dont have the answer ,but have a question. Are you generally labelled as being correct in life, friends family etc.? Seen as being laid back? able to see the other sides view of events, no matter what the situation etc?

RiskTrouble · Mar 10, 2007

Crap Buddist said:
I dont have the answer ,but have a question. Are you generally labelled as being correct in life, friends family etc.? Seen as being laid back? able to see the other sides view of events, no matter what the situation etc?

I'm happy with my life. I have a great family and a successful business (apart from trading). Since I work at home I don't leave the house as much as I should, but other than that I'm a balanced person. I am a bit stubborn (not one of my better qualities), but I don't have problems admitting when I'm wrong and I consider myself to be open-minded. However, I am a type A personality, and I'm would a little tightly. I recently started exercising again to help with stress management. I have a touch of perfectionism in my personality, and I don't think a high winning percentage has helped me learn to take losses comfortably.

Thanks.

laptop1 · Mar 10, 2007

Most of you trades are winners right, and some trades goes against you 3-10 ticks right, but you don't mind, because most of you trades will win.

That's you problem, every time you make a trade you think you will win, You know how to take profits....

All you need to do is, reverse you thinking knowing what to do when you are wrong.

I could go deeper in to it, but I'm not sure how much room you give the market and what are you profit targets, that is, if you have profit targets or base it on feel to get out.…

You could double up if the market goes against you by 12 ticks with an absolute stop at 16, that is, if you are close to S.R You cant double up on any old number, there should be a good reason....

DemonHeadmaster · Mar 10, 2007

I agree. I think because you're so used to making money on pretty much every trade you put on, that when you put on a bad one you get annoyed. That there was some information, or something that you didnt notice that resulted in you putting on a trade that you thought was good, but didnt work out. Once you realise that you can cut the position straight away (and limit any losses), you can go back to making good trades again.

barjon · Mar 10, 2007

RiskTrouble said:
................................My successful trades can sometimes go 5 or 6 ticks against me, but I don’t sweat as long as the character of the market doesn’t change significantly (based on my read of the order flow and T&S). ...................

rt,

Two questions:

1. How often is "sometimes" (ie: what percentage of your successful trades)?

2. How often (percentage) do those trades that go 5 to 6 against go on to become your outright
losers?

If the answer to those questions is low (1) and high (2) then the arithmetic has given your answer and a stoploss order seems appropriate as a mechanical discipline.

Similarly, if you can't bring yourself to pull the trigger then the only way is to pass the buck to someone else via a resting order. I suffered from a similar problem so I use resting orders all the time, albeit that I'm working a longer time frame than you.

Hope this is helpful.

good trading

jon

options · Mar 10, 2007

Oh this is going to turn out to be a good thread!

RiskTrouble you already have part of the answer, you have said it yourself; and Crap Buddist didn't have the answer then but his 'grasshopper' question may have given him the answer now.

K, firstly I was exactly where are now. And I mean exactly. Ftse futures e mini dow on a 2 min time frame. 7 out of 10 average. Then one trade would kill the day or even worse the whole weeks work.

It didn't happen often, most times I would cut and be quite happy to be proved right by that decision.
BUT, when it did happen it wasn't a hand to the mouth oh dear moment. It was a baseball bat to the back of the head moment.

It could not go on. Especially as i was sitting electronically side by side with my mentor. He made money most times whereas I would get hit by the baseball bat sometimes.
I could go on but you get the gist.

The short term answer is to put on your chart an appropriate STOP moving average and when the price makes a whole closing bar under that, exit regardless.

The longer term answer is...YOU.

It is all mental.

Buks' signature: "I have seen the enemy... and it's me."

Crap Buddist: "Are you generally labelled as being correct in life, friends family etc.? Seen as being laid back? able to see the other sides view of events, no matter what the situation etc?"

RiskTrouble: "...but other than that I'm a balanced person. I am a bit stubborn (not one of my better qualities), but I don't have problems admitting when I'm wrong..."

Yes, you do!

"...I have a touch of perfectionism in my personality, and I don't think a high winning percentage has helped me learn to take losses comfortably."

You got that right!

The long term answer then.

Now. What worked for me, and I am not saying that it will work for you or anyone else, but, my answer was to move out on the time frame, and I mean a lot.

From 2 min charts I now trade from weekly, daily and hourly taking an entry or exit on a ten min can still cause a baseball bat to the back of the head moment for me. Note, I said can.

I was trading the wrong time frame and the wrong market for me

Everyone wants to be a futures trader don't they? Trading 30 or 40 times a day, Hell make it 300 times a day. Come out at the end of the day 200 grand up on the account and then do the same again the next day.

That is the common perception as to what we want. The perception that has been fed up to your mental dinner table.

The reality is that few can trade by looking through a microscope at the market and make a living for any length of time without suffering from burnout or an account that is on death row.

My answer was to take a step or two back. I can see a whole lot more. But I think that mainly to be able to trade a market consistently and properly over the years is to understand that the short market moves are just blips and small ebbs and flow of the bigger ocean wave, and that they do not count. They are designed to wrong foot.

Think of yourself as an ocean going liner rather than a speed boat. It takes a long time for the liner to turn and then goes with the flow. This is the market mass moving the liner. The whole of the market cannot turn the liner on a 2 min or ten minute time frame. The orders coming in from all over the world simply do not allow the dynamics of this to happen. It takes a lot longer than this time for the orders to be processed. Even on a hour time frame you my not see the true intent.

But my last word on the matter is that you can still scalp on a hour chart

Crap Buddist · Mar 10, 2007

RiskTrouble said:
I'm happy with my life. I have a great family and a successful business (apart from trading). Since I work at home I don't leave the house as much as I should, but other than that I'm a balanced person. I am a bit stubborn (not one of my better qualities), but I don't have problems admitting when I'm wrong and I consider myself to be open-minded. However, I am a type A personality, and I'm would a little tightly. I recently started exercising again to help with stress management. I have a touch of perfectionism in my personality, and I don't think a high winning percentage has helped me learn to take losses comfortably.

Thanks.

OK, well what are you thinking when you have that trade going against you. ?

What do you tell yourself, your inner voice, what do you say?

I think what can help for us to correct this is to perhaps maintain a running verbal dialouge ,speak it out as you are trading, reading the market, even record yourself.

Now whats your inner voice saying when you know its going against, likely to get worse etc, what are you saying to yourself?

I think, all that needs to be done maybe is to replace that, with what you know you should do but dont, replace that inner dialouge.

Thinking about it, im sure theres a greater chance for you to deliver the behaviour you want of yourself if you express your mind external verbally instead of silent inside.

Its likely to be more empowering , a greater authority of your own voice , very subtle and simple .

Very typical situation you put forward , I'm just pushing with ideas, maybe a few more members with greater knowledge of mind conditioning /behaviour change for this will winkle some techniques forward to help further.

RiskTrouble · Mar 12, 2007

laptop1 said:
Most of you trades are winners right, and some trades goes against you 3-10 ticks right, but you don't mind, because most of you trades will win.

That's you problem, every time you make a trade you think you will win, You know how to take profits....

All you need to do is, reverse you thinking knowing what to do when you are wrong.

I could go deeper in to it, but I'm not sure how much room you give the market and what are you profit targets, that is, if you have profit targets or base it on feel to get out.…

You could double up if the market goes against you by 12 ticks with an absolute stop at 16, that is, if you are close to S.R You cant double up on any old number, there should be a good reason....

Regarding your first point, I think that's a big part of the problem; however, your comment about reversing my thinking is exactly what I would like to do. For example, I discovered that my wife and I are motivated differently. She is motivated by the avoidance of unpleasant consequences, whereas I am motivated by achieving goals. Following from that line, I think I tend to be more motivated by the possibility of achieving profits than I am by minimizing losses. I want to create a positive association with controlling my risk so I can use my achievement mind set instead of a "be careful" mind set. That said, I do realize that risk management is the true skill in trading, and, currently, not controlling my risk is preventing me from achieving my goals.

DemonHeadmaster said:
I agree. I think because you're so used to making money on pretty much every trade you put on, that when you put on a bad one you get annoyed. That there was some information, or something that you didnt notice that resulted in you putting on a trade that you thought was good, but didnt work out. Once you realise that you can cut the position straight away (and limit any losses), you can go back to making good trades again.

I know. I try to keep the following equation in the front of my mind...

Sitting with losers = Stress + Wasted time + Full bladder + Missed opportunities + LOST MONEY

Many thanks to both of you.

yacarob1 · Mar 12, 2007

Get yourself a good woman

RiskTrouble · Mar 12, 2007

barjon said:
rt,

Two questions:

1. How often is "sometimes" (ie: what percentage of your successful trades)?

2. How often (percentage) do those trades that go 5 to 6 against go on to become your outright
losers?

If the answer to those questions is low (1) and high (2) then the arithmetic has given your answer and a stoploss order seems appropriate as a mechanical discipline.

Similarly, if you can't bring yourself to pull the trigger then the only way is to pass the buck to someone else via a resting order. I suffered from a similar problem so I use resting orders all the time, albeit that I'm working a longer time frame than you.

Hope this is helpful.

good trading

jon

Hi, Jon. Regarding question 1, I would say that the majority of trades go against me by no more than 2-3 ticks. Trades that go more than 5-6 ticks are probably about 50/50. Your point is well made. As an incremental solution it would be wise to place a stop order that can save me from large losses until I develop the discipline to pull the trigger on losers as soon as I think they're duds.

Thank you.

RiskTrouble · Mar 12, 2007

Crap Buddist said:
OK, well what are you thinking when you have that trade going against you. ?

What do you tell yourself, your inner voice, what do you say?

I think what can help for us to correct this is to perhaps maintain a running verbal dialouge ,speak it out as you are trading, reading the market, even record yourself.

Now whats your inner voice saying when you know its going against, likely to get worse etc, what are you saying to yourself?

I think, all that needs to be done maybe is to replace that, with what you know you should do but dont, replace that inner dialouge.

Thinking about it, im sure theres a greater chance for you to deliver the behaviour you want of yourself if you express your mind external verbally instead of silent inside.

Its likely to be more empowering , a greater authority of your own voice , very subtle and simple .

Very typical situation you put forward , I'm just pushing with ideas, maybe a few more members with greater knowledge of mind conditioning /behaviour change for this will winkle some techniques forward to help further.

My internal dialogue is always right on. That's my frustration; I know what I should do and I don't do it. It's like there's one of me standing behind the me who is controlling the mouse -- the one who's standing knows what to do and the one with the mouse has tunnel vision and won't listen. I guess I sit there mumbling my assessment of the situation. I will try speaking out loud so I listen to myself better.

Great suggestion -- thank you.

grantx · Mar 12, 2007

RT,

Attached is a Word file containing what I consider essential points. I have also included Option's comment: "I have seen the enemy..." This really did strike something inside.

Grant.

Mr. Charts · Mar 12, 2007

1. Concentrate on thinking about losses, not wins.
2. Decide how far you will allow a trade to go against you and keep your finger over the exit button saying out loud repeatedly, "I will exit at that level if reached." After you've done that the first time, it gets easier and easier. Obviously exit a winning trade at the usual level.
3. If you place a stop in the market, you will never learn the self-control you need. Nor will you get the feeling of satisfaction of doing the right thing yourself. That sense of satisfaction feeds back and re-inforces your self-control.
Richard

RiskTrouble · Mar 12, 2007

options said:
Oh this is going to turn out to be a good thread!

RiskTrouble you already have part of the answer, you have said it yourself; and Crap Buddist didn't have the answer then but his 'grasshopper' question may have given him the answer now.

K, firstly I was exactly where are now. And I mean exactly. Ftse futures e mini dow on a 2 min time frame. 7 out of 10 average. Then one trade would kill the day or even worse the whole weeks work.

It didn't happen often, most times I would cut and be quite happy to be proved right by that decision.
BUT, when it did happen it wasn't a hand to the mouth oh dear moment. It was a baseball bat to the back of the head moment.

It could not go on. Especially as i was sitting electronically side by side with my mentor. He made money most times whereas I would get hit by the baseball bat sometimes.
I could go on but you get the gist.

The short term answer is to put on your chart an appropriate STOP moving average and when the price makes a whole closing bar under that, exit regardless.

The longer term answer is...YOU.

It is all mental.

Buks' signature: "I have seen the enemy... and it's me."

Crap Buddist: "Are you generally labelled as being correct in life, friends family etc.? Seen as being laid back? able to see the other sides view of events, no matter what the situation etc?"

RiskTrouble: "...but other than that I'm a balanced person. I am a bit stubborn (not one of my better qualities), but I don't have problems admitting when I'm wrong..."

Yes, you do!

"...I have a touch of perfectionism in my personality, and I don't think a high winning percentage has helped me learn to take losses comfortably."

You got that right!

The long term answer then.

Now. What worked for me, and I am not saying that it will work for you or anyone else, but, my answer was to move out on the time frame, and I mean a lot.

From 2 min charts I now trade from weekly, daily and hourly taking an entry or exit on a ten min can still cause a baseball bat to the back of the head moment for me. Note, I said can.

I was trading the wrong time frame and the wrong market for me

Everyone wants to be a futures trader don't they? Trading 30 or 40 times a day, Hell make it 300 times a day. Come out at the end of the day 200 grand up on the account and then do the same again the next day.

That is the common perception as to what we want. The perception that has been fed up to your mental dinner table.

The reality is that few can trade by looking through a microscope at the market and make a living for any length of time without suffering from burnout or an account that is on death row.

My answer was to take a step or two back. I can see a whole lot more. But I think that mainly to be able to trade a market consistently and properly over the years is to understand that the short market moves are just blips and small ebbs and flow of the bigger ocean wave, and that they do not count. They are designed to wrong foot.

Think of yourself as an ocean going liner rather than a speed boat. It takes a long time for the liner to turn and then goes with the flow. This is the market mass moving the liner. The whole of the market cannot turn the liner on a 2 min or ten minute time frame. The orders coming in from all over the world simply do not allow the dynamics of this to happen. It takes a lot longer than this time for the orders to be processed. Even on a hour time frame you my not see the true intent.

But my last word on the matter is that you can still scalp on a hour chart

The short, intermediate and longer-term answers are all me.

Ironically, even though I'll sit with these losers like I'm hatching an egg, I don't feel like I have the stomach for longer-term trading; however, I have considered it, as my system is pretty robust and gives good signals on all time frames. In the end, I like making money everyday and going home flat, although absorbing all the short-term data is somewhat tiring.

Many thank for your suggestions.

RiskTrouble · Mar 12, 2007

grantx said:
RT,

Attached is a Word file containing what I consider essential points. I have also included Option's comment: "I have seen the enemy..." This really did strike something inside.

Grant.

That's a great list. Thanks, Grant.

Mr. Charts said:
1. Concentrate on thinking about losses, not wins.
2. Decide how far you will allow a trade to go against you and keep your finger over the exit button saying out loud repeatedly, "I will exit at that level if reached." After you've done that the first time, it gets easier and easier. Obviously exit a winning trade at the usual level.
3. If you place a stop in the market, you will never learn the self-control you need. Nor will you get the feeling of satisfaction of doing the right thing yourself. That sense of satisfaction feeds back and re-inforces your self-control.
Richard

1. I've tried to implement your first suggestion, but how does one do that without loading up on negative imagery?

2. That's in-line with Buddist's suggestion and I will definitely work on it.

3. That's exactly what I'm trying to achieve. I want to rely on my own strength, because I usually know when it's wrong long before a reasonable stop would be hit. Knowing that I'll always do what I believe to be correct would be such a boon. Every day there are great, high-volatility trades that I pass up because of my concern over how I will deal (or not deal) with an incorrect call. I really want to take those trades.

Thank you, Richard.

On a side note... In the past I have visited T2W occasionally, but I usually read/post on elitetrader. I am really impressed by the quality of the posts here, the sincerity of the posters, and the lack of troll activity. On ET I try to help other traders as much as I can with my posts, but often I feel like it's useless since so many threads over there go down in flames -- it's a bastion of negativity. I'm happy to see that a spirit of genuine helpfulness prevails here.

Thanks to all.

Priceman · Mar 12, 2007

RiskTrouble said:
That's a great list. Thanks, Grant.

1. I've tried to implement your first suggestion, but how does one do that without loading up on negative imagery?

2. That's in-line with Buddist's suggestion and I will definitely work on it.

3. That's exactly what I'm trying to achieve. I want to rely on my own strength, because I usually know when it's wrong long before a reasonable stop would be hit. Knowing that I'll always do what I believe to be correct would be such a boon. Every day there are great, high-volatility trades that I pass up because of my concern over how I will deal (or not deal) with an incorrect call. I really want to take those trades.

Thank you, Richard.

On a side note... In the past I have visited T2W occasionally, but I usually read/post on elitetrader. I am really impressed by the quality of the posts here, the sincerity of the posters, and the lack of troll activity. On ET I try to help other traders as much as I can with my posts, but often I feel like it's useless since so many threads over there go down in flames -- it's a bastion of negativity. I'm happy to see that a spirit of genuine helpfulness prevails here.

Thanks to all.

Don't think it's all a bed of roses on here mate, there are the odd-balls here too. Apart from that there are a lot of good traders with a vast amount of knowledge, and all for free to boot!

Best of luck to you, it takes a big man to come and ask for help and advice.

Mr. Charts · Mar 12, 2007

Originally Posted by Mr. Charts
1. Concentrate on thinking about losses, not wins.
2. Decide how far you will allow a trade to go against you and keep your finger over the exit button saying out loud repeatedly, "I will exit at that level if reached." After you've done that the first time, it gets easier and easier. Obviously exit a winning trade at the usual level.
3. If you place a stop in the market, you will never learn the self-control you need. Nor will you get the feeling of satisfaction of doing the right thing yourself. That sense of satisfaction feeds back and re-inforces your self-control.
Richard

1. I've tried to implement your first suggestion, but how does one do that without loading up on negative imagery?

Since your mind skew is the expectancy of winning, that needs to be re-balanced by greater emphasis on losses and how best to cope with and limit them.
You are currently at the stage of finding the reality of being in a losing trade too unusual to be able to cope with.
You are not "loading up with negative imagery" by concentrating on a difficulty. You are concentrating on how to cope with it immediately and decisvely. That is hardly negative, it is very positive.
My own trades run at 4% scratch, 12% losers, 84% winners. The average losing position is far smaller than the winning position, so I don't have to concentrate on the winners - they look after themselves with position management. You need to concentrate on the losers as they are the problem. For the future, you will not even have to look after them, once you not only know, but have no emotional problem of disbelief when you are in a losing situation.
Why? Because with time and experience and control, you should actually "sense" when a position is going to go against you and exit before your stop is hit. Now lots of people will produce all sorts of esoteric nonsense about the ability to do that, but the bottom line is experience and your sub-conscious recognising patterns of negative movement and your conscious mind interpreting that as gut feeling or whatever. It is simply correct anticipation through experience.
However, that's for the future and you need to take one step at a time. Your recognition of that bodes well for you.
I won't say good luck, as this business is not about luck it is about problem solving, management and self - control.
Richard

fibonelli · Mar 13, 2007

Hi RT,

No one has asked you about your position sizing and position management. Is each position 1% of your trading capital? Do you always set stop losses at the same time as when you place your buy long/sell short order?

Best wishes
Fib

yacarob1 · Mar 13, 2007

1. Concentrate on thinking about losses, not wins.
2. Decide how far you will allow a trade to go against you and keep your finger over the exit button saying out loud repeatedly, "I will exit at that level if reached." After you've done that the first time, it gets easier and easier. Obviously exit a winning trade at the usual level.
3. If you place a stop in the market, you will never learn the self-control you need. Nor will you get the feeling of satisfaction of doing the right thing yourself. That sense of satisfaction feeds back and re-inforces your self-control.

Richard is dead right as always, plus a formal stop order in the market is not guaranteed to get you out at that exact price.

There will usually be slippage.

If you find you just cannot do what Richard is suggesting, why not just place OCA orders for target profit and stop loss.

Then you can sit back and watch it.

You can let the whole thing play out or you can intervene manually or you can just walk away and have a cup of tea or cool beer in the garden.

My trouble with controlling risk...

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