I often have traders call me to discuss their trading issues. Today I heard from a trader whose problem was a common one. It just wasn’t the problem he thought he had. For the purposes of this story, let’s call him Vitaly – because that’s his real name.
What was Vitaly’s problem? Let’s first take a look at some of his trading stats…
- Percentage Profitable – 79.59%
- Number of winning trades – 429
- Max consecutive winners – 90
- Average Winning Trade – $55.31
- Number of losing trades – 110
- Max Consecutive losers – 16
- Average Losing Trade – $106.95
For full disclosure, I’m not a trading coach but I do talk to hundreds of traders every year. Some professional traders and some retail traders. Some are profitable and many struggling. Vitaly is a customer and uses our tools daily. He’s one of the customers that’s kept in touch about his progress as he’s been developing as a trader.
Looking at the stats in isolation is tough but we can do some number crunching. His losers are bigger than his winners, so first, we have to take a look at the win rate to make sure his winning percentage isn’t just because of a skew in risk:reward.
Let’s consider a system, where winners were getting 10 ticks and losers were losing 20 ticks. Entering at random, you would expect 66% of the trades to be winners. As the target is closer than the stop, probability would see you hitting the target first 66% of the time. The system would break even before fees because and would have no edge in it.
So is Vitaly suffering from R:R skew?
Considering the size of his winners and losers, he’d need to beat a 65% win rate to show there was edge/profitability in what he’s doing. He’s way above that. So it appears that there is merit in what he’s doing. It’s also working over a good size sample, so it’s not as if we are just looking at a handful of trades.
So what’s his problem?
His problem is this... His trades are scalps taking 3-5 ticks profit on Crude Futures and he takes many trades a day. Stops are the concern. He has an emergency stop at 30 ticks BUT he actively manages his trades with order flow. In other words, he will exit a losing trade when he feels there is aggressive selling. Price simply isn’t the only factor in his decision-making. In effect, he has no hard stop loss. Typically, he’s out at 6-8 tick loss but sometimes it’s just over 10 ticks.
And this is a problem for one reason only. He’s sharing this information with other traders who tell him “You aren’t doing it right”, “You have to have a fixed stop”, “30 ticks is way too far”, “that will never work”.
And his problem – he’s listening to them!
The traders' dilemma – listening to other people
Vitaly is actually doing really well. He’s found a way to trade that works for him. He’s been doing it long enough that his performance is not the result of chance. His method of managing trades would not shock anyone in the world of professional trading. After all, so what if price moves against you a few ticks, if selling is still quite light?
His emergency stop hasn’t been hit this year. In other words, he’s very disciplined and gets out when the market shows it’s not going his way.
People telling him he needs to have a fixed stop at 10 ticks, simply do not understand what he is doing. He is actively managing his trades. The people putting in 10 tick stops and then sitting there like a deer in headlights watching the market go down and stop them out – they are the one’s doing it wrong. It’s not as if stops are bad but letting them get hit when you already know your trade is failing, that’s just giving money away.
The problem is that Vitaly will fail as a trader if he seeks validation from other non-professional traders. This is where a lot of traders fail. They take advice from people they meet online that are complete strangers. They take advice from people that don’t have the same set of trading skills they have (in this case the order flow reading skills). They take advice from people that aren’t trading profitably. None of this advice will be helpful.
The market – the best advice you can get
Vitaly already has the best advisor - the market. It’s telling him that what he is doing is right. As a trader, it’s easy to lack confidence. It’s also easy to think the “grass is always greener” and think that someone else’s method would be easier/more rewarding than your own. That’s why charlatans advertise “trade the easy way” and “97% win rate”.
Vitaly is a disciplined trader but now he needs to be disciplined in terms of whom he listens to. My advice to him was very simple:
“STOP LISTENING TO PEOPLE TELLING YOU THAT YOU ARE DOING IT WRONG!”
Hopefully, he’ll listen. It’s OK to take trading advice but when you start showing a profit, it’s time to listen to yourself because you are already way ahead of most retail traders at that point.