Can you make money in tough markets? Yes! Here’s how
A most common question I have fielded from
traders for years centers on the word discretion. There are valid good
reasons for fixation on that topic, so let’s take it a few steps further and
explore what role(s) discretion plays in our profession.
Brand-new traders begin by being unconsciously
incompetent: in plain speak, we just don’t know what we do not know about
trading. Because the barrier of entry to trading is ability to open and fund a
live cash account, anyone who fogs a mirror can be a trader.
There are no real barriers to entry for trading
beyond there. Other professions like playing PGA-level golf, driving tractor
trailer trucks, practicing law or medicine, operating heavy equipment, even
guiding big-game hunters in wilderness areas require some degree of schooling,
testing and licensing. Not so to be a trader, which is arguably as tough if not
much tougher to succeed in than all other professions above.
For most other professions I can think of, the
schooling & testing occurs in classroom settings. For traders, that happens with
live price action in paper-trade or (yikes) real money as the test. Talk about
self-imposed performance anxiety!
Same Method = Different Systems
Somewhere along the line in every trader’s evolution is the desire for
rules-based trading. Whether that is a 100% mechanical approach, set of written
rules to follow or some measure in between is irrelevant. Truth is, the act of
creating rules for system-based trading are closer to home than you might think.
For purely educational sake and nothing else,
we will dissect some recent action in the two intraday trading methods I use and
demonstrate how one specific method can be molded into numerous different
“systems”. The same overall lessons = message here can be applied by you to the
current system or method you trade, intraday or otherwise. Here we go…
APReverse Method
(scalp mode, short-term charts)
| Position | Entry Signal | High or Low | Maximum Range |
| Short | 678.90 | 675.50 (low) | +3.40 point span |
| Short | 676.90 | 675.40 (low) | +1.50 point span |
| Long | 676.80 | 678.70 (high) | +1.90 point span |
| Long | 677.60 | 677.70 (high) |
no range |
| Short | 677.50 | 676.30 (low) | +1.20 point span |
| 11:30am | 1:00pm EST | Break | |
| Short | 678.40 | 676.90 (low) | +1.50 point span |
| Short | 677.60 | 673.60 (low) | +4.00 point span |
| Long | 674.70 | 676.90 (high) | +2.20 point span |
In this table above we have eight different
trade entry signals that could have been taken. five occurred before 11:30am EST
and three confirmed past 1:00pm EST. The high or low value was how far price
action continued before either returning back to original entry point OR giving
the next trade signal in sequence. This is the raw data part of our APReverse
method for that given day… entry signals only.
APReverse Method
System #1
| Position | Entry Signal | High or Low | Maximum Range | $100* |
| Short | 678.90 | 675.50 (low) | +3.40 point span | +$100 |
| Short | 676.90 | 675.40 (low) | +1.50 point span | +$100 |
| Long | 676.80 | 678.70 (high) | +1.90 point span | +$100 |
| Long | 677.60 | 677.70 (high) |
no range |
-$100 |
| Short | 677.50 | 676.30 (low) | +1.20 point span | +$100 |
| 11:30am | 1:00pm EST | Break | ||
| Short | 678.40 | 676.90 (low) | +1.50 point span | +$100 |
| Short | 677.60 | 673.60 (low) | +4.00 point span | +$100 |
| Long | 674.70 | 676.90 (high) | +2.20 point span | +$100 |
| Eight Trade Turns | +$700 |
Using the same entry signals and applying exit
rules, we now have a system instead of mere method. Let’s refer to this as
System #1 to keep things straight.
The system rules for table above is -$100
initial stop and +$100 profit target. In seven out of eight instances this
specific day, those trade signals held the initial stop and hit the profit
target accordingly. One trade signal bought a relative swing top and had no
chance to profit whatsoever. Is this a good system, even a great system? We’ll
explore all of that later on.
APReverse Method
System #2
| Position | Entry Signal | High or Low | Maximum Range | $200* |
| Short | 678.90 | 675.50 (low) | +3.40 point span | +$200 |
| Short | 676.90 | 675.40 (low) | +1.50 point span | +$0 |
| Long | 676.80 | 678.70 (high) | +1.90 point span | +$0 |
| Long | 677.60 | 677.70 (high) |
no range |
-$100 |
| Short | 677.50 | 676.30 (low) | +1.20 point span | +$0 |
| 11:30am | 1:00pm EST | Break | ||
| Short | 678.40 | 676.90 (low) | +1.50 point span | +$0 |
| Short | 677.60 | 673.60 (low) | +4.00 point span | +$200 |
| Long | 674.70 | 676.90 (high) | +2.20 point span | +$200 |
| Eight Trade Turns | +$500 |
Same trade entry signals, with different rules
for System #2. Here we use a straight -$100 stop and +$200 profit target. In
addition to that, we trail our initial stop to entry (par) when price action
moves +$100 per contract in our favor. The results above are similar to System
#1, but slightly less profitable.
APReverse Method
System #3
| Position | Entry Signal | High or Low | Maximum Range | $300* |
| Short | 678.90 | 675.50 (low) | +3.40 point span | +$300 |
| Short | 676.90 | 675.40 (low) | +1.50 point span | +$0 |
| Long | 676.80 | 678.70 (high) | +1.90 point span | +$0 |
| Long | 677.60 | 677.70 (high) |
no range |
-$100 |
| Short | 677.50 | 676.30 (low) | +1.20 point span | +$0 |
| 11:30am | 1:00pm EST | Break | ||
| Short | 678.40 | 676.90 (low) | +1.50 point span | +$0 |
| Short | 677.60 | 673.60 (low) | +4.00 point span | +$300 |
| Long | 674.70 | 676.90 (high) | +2.20 point span | +$200 |
| Eight Trade Turns | +$700 |
Once again, same trade entry signals with
different rules for System #3. Here we use a straight -$100 stop and +$300
profit target. In addition to that, we trail our initial stop to entry (par)
when price action moves +$100 per contract in our favor. Lastly, we trail our
stop from entry (par) to +$200 when price action moves +$220 per contract in our
favor.
The results above are similar to System #1, but
different distribution of profits.
For Better Or Worse?
One day’s example here is not meant to cover all bases. The intent is to
point out how trade management completely changes one aspect of any system. This
sample of entries was taken from a rather sideways, low-range session. During a
strong trending day, there might be six signals in favor of the trend and two
against it during normal pull backs. The six trend-trade signals might have
maximum ranges of +$200 to +$500 per contract distance. The two counter-trend
signals might have +$150 max ranges best case, or instant stop-loss worst case.
Targeting +$200 or +$300 per contract profit targets will surely outperform
targeting +$100 profit targets during trend sessions.
By the same token, sideways chop sessions will
usually produce bigger profits targeting +$100 trade exits merely because the
wider range moves do not exist inside that given day. Some traders love to “ring
the register” by booking small profits early and getting in & out quickly.
Taking more trades and smaller profits does
allow for missing a couple of big moves that a day’s profit or loss performance
hinges upon while still coming out profitable or breakeven. Holding for the
bigger profits risks the chance of missing = muffing those entries and turning
an otherwise profitable day into net loss results.
On the other hand, an equal number of traders
prefer to capture larger moves and dislike scalping out of trades that go on for
big profit potential. They can erase a few small-loss mistakes by hitting just
one solid move per day to wind up profitable overall.
Which camp is correct? Whichever one your
emotional mindset gravitates to! There is no right or wrong, better or worse
when it comes to trading any given method or system. In the end, it all tends to
even out via the law of large numbers.
Just Swingin’
The next example is our intraday swing trade method, PivotPowerReverse. The
following sequence of trades are exact entry and exit marks posted inside our
educational HotComm room. One method, two very different systems depending on
how it is traded. Net results on all closed trades as follows…
PPR Method Tally
For Week 06-09/2005:
Tuesday
ER +4pts x two contracts: +$800
ER -1pt x one contract: -$100
ER — 1pt x one contract: -$100
—
ES +4pts x two contracts: +$400
ES — 2pts x one contract:-$100
Wednesday
ER -0.7pt x one contract: -$140
ER -1pt x one contract: -$100
—
ES — 2pts x one contract: -$100
ES 0pts x two contracts: -0-
ES — 2pts x one contract: -$100
Thursday
ER -1pt x one contract: -$100
ER -0.5pt x one contract: -$100
ER +2pts x two contracts:+$400
—
ES —2pts x one contract: -$100
ES —2pts x one contract: -$100
ES —2pts x one contract: -$100
ES + 2pts x two contracts: +$200
Friday
ER -1.0pt x one contract: -$100
ER +3pts x two contracts: +$600
—
ES +4pts x two contracts: +$400
Total # of trades: ER 10 | ES 10
Wins: ER +3 | ES +3
Losses: ER -7 | ES -6
% wins: 30%
—
Weekly Total Profit
ER: +$1,100 per two-contract position
ES: +$400 per two-contract position
—
ER 10-lot traded:
+$5,500 gross gain
ES 10-lot traded:
+$2,000 gross gain
Worst Of Times
The past week was about as poor for swing trading as one could imagine.
Basically, there were very few directional swings and lots of sideways gyrations
to chop out stops in both directions. The intraday swing trade method I use gave
roughly 30% winning trade signals and roughly 70% losing trade signals in the ER
and ES alike. How then could we possibly make money in horrid swing trade
conditions like that?
Very simple: correct money management. Losers
were much smaller than winners. We accomplished that in part by scaling into
trades during scant times when market moved in our favor. Longs were added to
longs (full position) while price action moved upward and shorts were added to
shorts (full position) when price action moved downward.
Had we used all-in / all-out trading of two
contracts instead, the net results would have doubled losses and kept profits
the same. End result there would be:
PPR Method Tally For Week
06-09/2005:
Tuesday
ER +4pts x two contracts: +$800
ER -1pt x two contracts: -$200
ER — 1pt x two contracts: -$200
—
ES +4pts x two contracts: +$400
ES — 2pts x two contracts:-$200
Wednesday
ER -0.7pt x two contracts: -$280
ER -1pt x two contracts: -$200
—
ES — 2pts x two contracts: -$200
ES 0pts x two contracts: -0-
ES — 2pts x two contracts: -$200
Thursday
ER -1pt x two contracts: -$200
ER -0.5pt x two contracts: -$200
ER +2pts x two contracts:+$400
—
ES —2pts x two contracts: -$200
ES —2pts x two contracts: -$200
ES —2pts x two contract: -$200
ES + 2pts x two contracts: +$200
Friday
ER -1.0pt x two contract: -$200
ER +3pts x two contracts: +$600
—
ES +4pts x two contracts: +$400
Total # of trades: ER 10 | ES 10
Wins: ER +3 | ES +3
Losses: ER -7 | ES -6
% wins: 30%
—
Weekly Total Profit
ER: +$320 per two-contract position
ES: -$200 per two-contract position
—
ER 10-lot traded:
+$1,600 gross gain
ES 10-lot traded:
-$1,000 gross loss
Proper Scale
Unless my math is wrong on repeated checks, scaling into positions was quite
profitable during a very tough swing-trade week. All-in / all-out was barely
profitable before trade costs, with actual net loss in the ES.
Worse than that, imagine what would have
happened had I entered all-in and scaled out one position halfway to profit
target and the other contract at profit target. Can you see the reverse leverage
there? Losing trades would remain the same, winning trades would be cut in
half… net losses would be doubled!
Scaling out at partial profits only works when
a system or method has a high win percentage, and heaven help you during a
stretch of challenging market conditions. There is nothing wrong with our swing
trade method… it averages roughly 50% win ratio over time. The past week was a
series of session that did not swing, hence very tough trading conditions for
this approach. Regardless of the method or system you trade, correct trade
management makes ALL THE DIFFERENCE during good times, and bad.
Viva La Discretion
Moral of the story? Give us any method and we can mold a system with our own
personal rules that works for each of us a bit differently than anyone else. And
thank heavens for that!
If we tried to use a 100% mechanical system
that spit out entry signals, stop-loss signals and exit targets to the exact
tick for everyone, what do you think would happen? The system would be instantly
bastardized and killed. Period.
How is that so? Why is that fact 100% true?
Just imagine that you, myself and ninety-eight other Russell 2000 emini traders
bought the exact-same mechanical system for $X,XXX guaranteed to work. The
system writer has a track record of 95% win ratio and profit factor of 5. Sounds
like a pure money machine, doesn’t it? Heck, we’ve waited for this Holy Grail
all our lives, and here it is! Yippee!!!
The mechanical method we bought gives all of us
identical entry, stop and exit targets alike. First day in live trading, you
queue up your ten-lot, I ante up my one-lot, etc. Collectively, the 100 traders
who bought this method stage trade entries to the exact tick for 300 ER
contracts collectively. That’s an average of only 3-contracts per trader. How do
you think we’ll fare?
I can tell you two things for absolute fact:
limit orders will be partially filled or not at all. Market orders will slip so
badly, the last contracts filled will be partway to the stop-loss order upon
entry.
The Russell 2000 emini is a very popular
intraday trading vehicle, but it cannot handle 300-lot entries OR exits on the
mark. Not even close. Slippage would be so bad against us in both directions
that our Holy Grail system would be killed deader than a squirrel in the road.
Only when we all abandon it would the signals allow liquid fills in & out for
profitable results again.
Am I right or right?
The only reason any method vendor offers their
information for sale at all is based upon the very fact that no herd mentality
can burn it out. I know from experience as a buyer and a vendor or methods that
no one trades the same approach verbatim: we all mold every method into our own
personal system in due time.
Summation
A trading system with some set of rules is important. Very important. The
degree of discretion we have in any method or system depends entirely upon us
and what we assign as limits, boundaries and ideals to trade. There is a lot
more to this profession than reading a book, opening an account and joining the
fray of professional traders in their trenches.
The craft of trading can be learned by anyone
and mastered by most. To do so takes time, effort, investment and practice. To
circumvent any of those laws will make you nothing more than mere liquidity in a
marketplace designed to take from the unskilled and give to the skilled. Pure
Darwinism at its finest… lofty titles, advanced degrees and outer-world
ribbons mean absolutely nothing in the world of successful trading.
Please join us for the public-access market
outlook section for stock index and FX weekly chart review in
www.CoiledMarkets.com posted
online by 5:00pm EST on Saturday. Please have a fun-filled, restful weekend!
Trade To Win
Austin P
Austin Passamonte is a full-time
professional trader who specializes in E-mini stock index futures, equity
options and commodity markets.
Mr. Passamonte’s trading approach uses proprietary chart patterns found on an
intraday basis. Austin trades privately in the Finger Lakes region of New York.