To scale, or not to scale out?

After trade reviews of the challenging narrow range day in ES on Friday posted here, I did a "what-if" type analysis on my trades with regards to scaling out.  Renato mentions in his blog post here the advantages of scaling out and an example how.  I also believe this is a great way to potentially reduce risk and increase profits, *IF* you're starting with the adequate number of contracts and scaling out properly. 

My current scaling out strategy
Instead of using units of 4 contracts as Renato recommends, my current trade management of scaling out usually involves starting with 2 contracts, exiting 1 car at +1.50, and letting the other run after bringing up the stop loss to +.25.

As you could imagine, nearly most of the time the 2nd car is stopped out at breakeven.  So from the pure mathematical perspective, unless you occasionally have a monster runner, the #'s just don't seem to add up for the scaling out method I use. 

The reason to dig deeper?  Because I had to climb so far
My gross profit on Friday was $50, and that's after going into aggressive scalp mode about 1.5 hours before the close and climbing myself out of a $600 loss on 12 trades.  That type of P&L curve doesn't sit well with me so it was time to do some further analysis. 

One point was clear, I was not patient enough and entered some non-strategy (i.e. rogue) trades that contributed to the drawdown.  That was was got me into trouble for most of the day.  But there was also something about my scaling out strategy that I wanted to explore.

The what-if scenario I modeled
"What if I did NOT scale out and instead, simply exited my entire position at +1.50 when the 1st target was hit?"

Here are the results
Instead of ending Friday with +1.00 gross, I would have had an incremental:

• +13.75 if I used this method the entire day
• +9.25 if I used this method only during the final 1.5 hours of aggressive scalping

Crazy.  The few bad non-strategy/rogue trades I took earlier in the day were NOT filtered out of my analysis, so the results could have been even better. 

During the final 1.5 hours, the range of the ES was about  6.50 points, so these results are difficult for me to believe (but remember, they're simply based on the actual executions I took from scaling out of the 1st contract). 

What's also interesting is that when the trades were profitable, nearly all took only 1-3 ticks of heat.  So there's a possibility that the stop loss could be tightened up -- however, this requires further research and a much bigger sample size.

But can it be replicated?
A part of me wonders whether the aggressive scalping performance was due to luck and therefore, can not be consistently replicated in the future.  On the other hand, I have enough evidence over the past 3 weeks to believe that this type of performance can be more than possible. 

The real challenge is whether I or anyone can have the mental stamina to maintain this rapid-fire method of trading both intraday, as well as over days/weeks/months/quarters/years.  It's difficult being a human trying to keep up with the HFT algo-bots!

The bottom line
Renato mentioned this in his chatroom last week, and the bottom line is that you really need to be able to enter a trade with the appropriate number of contracts to effectively scale out.  So if you can't enter with at least 4 contracts, then you need to chip away and build up your account so that you can.  And only then can you take advantage of the powerful benefits that scaling out can offer.

Therefore, my new strategy starting this week will be to exit out of my entire position at +1.50 or +2.00, based on market conditions.  No more scaling out, since I will not likely be using that method when I start trading live.

A choppy day to remember

Today, the markets took a break after a powerful uptrend day yesterday.  It was a boring, choppy, narrow range type of day.  So does that mean my day was also boring?  Not quite.  Here's how my day broke down:

Early morning: Was patient, but only for so long.  I then entered a sub-optimal trade (it was NOT a formal Diamond Setups alert) about an hour after the open likely due to impatience.  It ended up being a full stop out.  Yuck.  Not a good way to start the day, since that usually triggers more losses.  And it did.

Lunchtime:  Although I was down for the day primarily due to my first losing trade, I had confidence that I could come back, even if it remained a choppy narrow range day.  After a few short scalps working on the resistance levels at the highs of the day, I entered yet another short position and scaled out half.  That gave me an opportunity to let the 2nd contract run with little risk and go to lunch.

While I was out, the trade got as much as +7.50 in the money.  When I returned, it was still about +5.00.  However, I did the unthinkable and let it stop me out at b/e!  It was obvious I did not have a strategy in place for this trade and treated it as a gamble.  This type of rogue trade usually gets me out of sync with my strategy and triggers more losses.  And it did.

Early afternoon: I continued to be out of sync with both the markets and Renato's calls.  He had about 3 calls today, all winners.  He clearly stated that the conditions are very difficult and that only those who are profitable for the week and aggressive traders should be trading.  I took another full stop loss trade based on a non-strategy (a rogue "why did I take that in hindsight?") trade in addition to other trades that took me even further down the into loss territory.  I can't keep making the same mistakes, so it was time to make a change.

Late afternoon:  I was not expecting nor did I wish for another "one lucky miracle trade" to get me out of my loss.  That would make me look lucky, yet again, assuming the markets even produced such a move on a day like today.  I decided it was time to regroup and focus only on a scalping strategy due to the choppy and narrow range conditions, and because there was one particular timeframe that continued to work very well even in these challenging market conditions.

I wanted to chip my way out of this the loss with small consistent wins, but unlike my prior crazy attempts to scalp, I had a solid trading strategy and methodology on my side.  Time to put it to the test!

Bottom line results: I took a nearly $600 loss and worked it up to b/e in the final 1.5 hours with 12 trades.  That's about +12 ES points.  And based on what I learned, next time my execution should be more effective which should lead to better utilization of potential profits.

* * * * *
Friday, October 28
Total gross profits:  $50.00
Total trades:  22
Accuracy:  65%
Contracts per trade: 2

NOTES:  Check out that crazy cumulative P&L.  Even though this is "only" a SIM account, it was still a tough experience.  As far as I'm concerned, I'm trading real money.

No big trend to fight today, only choppy narrow range conditions and my usual mental challenges.  These types of market conditions really bring out my propensity to be impatient with entries.  Which leads to rogue trades.  Which leads to losses.  Which leads to more rogue trades....  But the late afternoon was a test of my ability to regroup and refocus.  To best capitalize on these market conditions, I chose to aggressively scalp trade using the Diamond Setups system and made +12 over 1.5 hours with 12 trades.  Now I'm very tired!

* * * * *
The weekend is here, and after an intense week trading and studying the Diamond Setups system, I'm going to do my best to rest my mind.  I can honestly say that I was mentally fatigued by the middle of this week.  I will need to do my best to incorporate a way to protect my emotional and mental state of mind, as well as maintain my physical health through continued exercise.

But as tired as I am, I can't wait for Monday!

How to save your emotional capital

How can you help save your emotional capital while trading?

Simple...Do NOT fight the trend!

And so what did I do today?...I fought the trend! 

My natural preference is to trade with the trend, usually on a breakout or on a pullback in the direction of the trend.  But for some reason, I kept trying to short this big uptrending market today.  The trades I took were NOT a part of the Diamond Setups chatroom, just me trying to be "smart", and I ended up wasting a lot of emotional capital.  Didn't I just say yesterday that I was going to listen better? 

@RenaTrader said around lunch time that this will likely be a trend day up, so he was only looking for long trades (unlike me).  Then near the final half hour, he made this call to short, but only for aggressive traders (I was already selling on the way up, so hey, what's another short attempt!):

     [Oct 27, 2011 3:25:05 PM EDT] RenaTrader 1289-91 is key

But I didn't listen...again. 

I thought the market couldn't get up there, so I entered my short at a much more aggressive level at 1286.50.  Once again, not a great decision.  If I had listed to Renato, my entry would have been 1288.75, which would have entered me 2 ticks below the high of the day.  That would have only been a couple ticks of heat instead of the -2.75 points I had to endure.

My exit was based on a decent confluence of vwap and other levels at 1274.50, which was the exact swing low before it rebounded sharply.  There was also some SIM related fantasy fills on this final trade that may not have been so lenient in a live account.  Luck was on my side, and total profits on my final trade was +13.50 points. 

ESZ11 5min 2011-10-27

Because of that final trade, I ended the day $-20.10 net after commissions, vs. having quite an ugly day.  After the markets closed, instead of feeling a sigh of relief that I scratched after being down so much, I was quite disappointed with my performance.  And knowing that it was a single unusually good trade (ironically against the trend) that recovered all my losses also gave me a clear message that this kind of miraculous recovery can not and will not be repeated very often.

On the plus side, I was able to stay focused and continue to execute without getting rattled, and my emotional state was definitely in the heightened end of the normal range, but far from the tilt zone.  However, I would much rather have preferred saving my emotional and mental capital so that I'm not so exhausted at the end of the trading day. 

But that's the past, the deal is done, lessons learned...Don't Fight The Trend!

See this trade on Tradervue:
http://www.tradervue.com/shared/trades/69250

* * * * *
Thursday, October 27
Total gross profits:  $37.50
Total trades:  11
Accuracy:  55%
Contracts per trade: 2

NOTES:  I fought the trend, and gave myself a few extra gray hairs.  And if it were not for the final trade, the day would have been quite ugly.

Ouch! My "excuses" for today

Doesn't it always turn out this way?  I write about how well it looks like things are going, and then the next day, one of my wheels falls off?  No, it wasn't a "crash and burn" dream come true or "I blew up my account" type of day, but it was a losing day that was much worse than it should have been.  And as is usually the case, it wasn't the system -- it was essentially all my fault.

But before we get to my excuses, here were the stats (on SIM) for the day:

Wednesday, October 26
Total gross profits:  -$237.50
Total trades:  14
Accuracy:  57%
Contracts per trade: 2

NOTES: After a disorienting morning, I had 2 trades prior to lunch.  It then looked like another steady trading day ahead.  However, in the afternoon and especially the final hour, I had 12 trades.  Some issues and delays with my order execution system threw me off, as well as sloppy errors on my part. The trading system itself worked fine, but the I had some "challenging" moments.  It could have been worse, since I was down as much as $500 (open P&L) at one point.

And Now, Here Are My Excuses!

• I was disoriented.  Since the chat room was offline in the morning due to technical issues from the web service provider, so I felt like I was flying blind (probably because I was!).  So I was out of sync during the morning, and had to try and get my rhythm back throughout late morning and early afternoon.
  
• I was frustrated.  There were a few trades I was sure would work, especially the short at the high at the opening -- and they worked.  But I was not sure whether they were part of the system or not.  This created a slight level of frustration.  Letting a profitable trade that was several points in the money get stopped out at breakeven didn't help, either.
  
• I was impatient.  The slow morning tested my patience in the afternoon.  As the markets approached the highs of the day in addition to some critical resistance levels, I was not patient to wait for the best setups.  I've only been following this system for a few weeks, don't try and "make it my own" just yet!  I need to do a better job of following Renato.
  
• I was sloppy.  These markets can be quite thin and shoved around quite easily, especially with the European rumors.  This requires total concentration and proper preparation to understand what your next move should be.  Some of my analysis was done incorrectly and resulted in trading off of improper data.  The ES can move very quickly, so if I'm too slow or sloppy, I'll get steamrolled.
  
• It's the brokers fault!  As surges in trading volume took place, my DOM/order execution system took up to 30 seconds or so to return fills or cancel/replace confirmations.  I really haven't really experienced this before and resulted in some trades getting botched up.  I admit, I'm used to instant fills, so when nothing happened, I kept pressing the send and cancel and reverse and whatever other buttons I could to "help it", instead of just pressing it once and waiting.  So all my orders and cancellations ended up getting stacked up in the queue, further confusing the system and myself. 
  

All of these are pretty weak excuses.  And here's something else I saw as I reviewed my trades -- I noticed an old nemesis that may have made a return...The Revenge Trade!  [SHREEEK!!!]  If you see the trade records below (start reading from the bottom), you'll see that a loss is usually followed by another loss within minutes.

Now I do admit that some of these losses (and winners) were due to the botched job I did with the frozen order execution system/DOM.  But still, you can't really hide some of the intent behind these actions. 

The Bottom Line

• I was lucky, this could have been a much worse day.  On the plus side, even with all the challenges, my emotional state (although slightly heightened) was actually well within my normal range.
• Focus on following and understanding Renato.  That's why I'm there.
  
• In doubt with my state of mind?  Then don't trade -- take a walk, or take the day off.
• The broker's order execution system is acting up?  Well then don't trade!  And setup a backup contingency account at another broker.
• Just got hit with a full stop out?  Get up and take a little break.  I know that there WILL be another HIGH PROBABILITY trade around the corner, IF I am patient.

I've very fortunate to be involved with an occupation where even after a difficult day, I just can't wait for the next day to begin.  It's time to continue to capitalize on the moment and keep pushing it to the next level.  Let's do it!

Is this for real?

Today happened to be an interesting day where the ES market felt a little different from the prior couple weeks.  The "usual" market rattling news out of Europe seemed to put the thinly traded intraday morning session into a "psudo-psychotic-I-might-go-postal-on-you" mode. 

In hindsight, the Diamond Setups (DS) system still worked, and it's the usual operator error (my errors) that didn't either pull the trigger properly (using the excuse of how something's "strange" with the price action) or by not properly analyzing or being prepared for the trade (sloppy mistakes).

I'm a believer that it's good to experience as many adverse market conditions as possible, since that's one of the key ways to learn how to get through the tough times.  The next time I sense these "unusual" market conditions, I'll be much better prepared to adapt accordingly (in other words, stick to the plan).

As usual, I still had a great time today learning in the chatroom -- lots of good vibes and support from Renato (@RenaTrader) and the other members.  But since I made "only" $150 gross today (Tuesday, October 25) which was much less than what was possible, I experienced a slight letdown.  That's when I produced a report from my Tradervue.com trading journal to see how well I have done since I started learning, and I began thinking.....Is this for real?

So for the sake of full disclosure, here are the caveats before the excerpt of the report from Tradervue:

• From the "Is this statistically significant?" perspective, one could argue that there isn't enough data, and that this is mostly noise, dumb luck, etc.
• Remember, these are SIM (simulation) results, so they include a fair number of fantasy fills.  Since I use limit orders for entry and profit targets that are usually near the swing high/low extremes, it's not likely that you will be able to buy on the bid or sell on the offer with any meaningful frequency.  And my stop orders on SIM do not usually include any slippage.
  
• There are 3 days missing from results.  I've written about this, how I went off my rocker for 3 days trading a majority of non-DS setups, so I've excluded it from this report.  I still feel the shame, and rightly so.
• The gap between plan vs. actual is still quite large, believe it or not.  If I was scored against my ability to execute against the system, I'd be close to getting fired.  But for my personality and trading style, this particular system seems to provide a good margin for error.  However, time will tell once I'm trading a live account.
  

Regardless of the caveats, the numbers are respectable (especially for me), and seeing the P&L curve over the past 2+ weeks gave me a sense of confidence that "Hey, maybe, just maybe, I have a real decent shot at this." 

* * * * *

Here are my results from the past couple days. 


Monday, October 24
Total gross profits:  $487.50
Total trades:  6
Accuracy:  67%
Contracts per trade: 2

NOTES: Missed some good trades in the pre-market as well as some during he regular session, and also cancelled an order (from fear) that would have filled a few ticks from the high of the day.


 
Tuesday, October 25
Total gross profits:  $150
Total trades:  5
Accuracy:  80%
Contracts per trade: 2

NOTES: Thinly traded morning impacted by news out of Europe shook up the markets (me) for a bit.  Took a very cautious stance, missed some trades, and scratched a couple that would have been profitable.  Reminder, just stick with the plan.