In This Episode
- Why your exit method might be more important
- What you may have missed when you learned your trading strategy
- Maybe you need to change your risk rules
Should You Switch Your Trade Entry Method?
When a trader has a losing streak, their first thought is to change their trade entry method. But is that the best thing to do?
In this episode, we talk about the data that you should look at in order to tell if your entry method is worth keeping.
As we talk about in the episode, many times traders are better off examining their exit strategy.
So if you're doubting your trading system's entry, be sure to listen to this episode.
Read the Transcript:
Walter: I got a question today or yesterday from a trader. I said, “How's your trading going?” He was saying that what he realized was that he was losing quite a bit. He was thinking that what he needed to do was to get better at reading the markets. Basically, he's in the price action so that's kind of his approach which is close to you know near and dear to me.
I know that you know a lot about it too. What I highlighted for him is something I think that a lot of other traders could benefit from; which is this idea that a lot of times we focus on what seems to be the obvious thing. When someone else has a look at it, sometimes you'll realize that there's a little bit more to it.
I'll give you an example. So when he said that he was consistently losing because he couldn't quite get a handle on price action, my response was, “Were you sure that, that's it?” Because typically you know, there are three things: there's the system, there’s the risk rules and then there's you, basically.
How you interact with the system, your psychology which is what we talked about here. He was focusing on the system and specifically the entry rules. What I said was, “Look, it may not be that.” It could be that but it may not be that. It could be that what you find is if you do the exact same things you're doing right now but you change your exit rules, things are getting better.
It also could be, if you do exactly what you're doing now but you change your risk rules, you would be on a different path and have a different sort of a draw down. You won't get to those deep draw downs that perhaps you're having right now and that's why you're thinking, “Oh, it's not working. I need to quit.”
So that's the thing, it is that you know and then obviously the last bit is it could be that your relationship with the system is not you know in lock steps. This often comes up when traders go, “Okay, what I want to do is trade. So what do I do? I need to find a really good system. Let's check on the internet. This one is really good you know; this guy's done really well with it. So I'm going to use it because obviously it's the best thing I can find. It’s the best thing I can find.”
Well that's obviously as you know that's tricky because I didn't really build it and I'm just using something out of the box that someone is given to me. Unless it really matches up with my beliefs about how things work in the markets, I'm not going to trade it long term. I’m going to give up on it eventually.
So the reason why I bring this up is because I think as traders, we need to start thinking in these three buckets: Is it system, which is entry and exit; is it me, which is how I interact with my system and my belief or confidence in my strategies and then finally is the risk, which is the risk kind of amplifies it. And it can make my system have higher peaks and lower drawdowns and all sorts of things when you start to get into that realm.
When you run into an issue as a trader, it may not be that you just need to change your entry; that's probably the number one first port of call for most traders. It is to go, “Oh, I need to change my entry” but it may not be that.
I just want to talk about, I mean, I know you had some experience in this and so what have you found in terms of that? When you're looking at systems and trying to diagnose you know, what are some of the things that you've run into?
Hugh: Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.
At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.
So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.
Hugh: You've covered most of it pretty well but a couple things to add. First, I know a lot of traders think they learn the system correctly but then when they actually go back to the educational material or whatever strategy the person was using, sometimes they notice, “Oh, I'm not actually following the rules and I started with this guy this week. He's been posting his trades; he's been showing me what he's doing. I can see sometimes he follows the rules, sometimes he doesn't.” He's been losing and he's frustrated, obviously.
I told them, “Go back, take a look at your journal; see what you're doing. Are you actually following the rules? Did you actually interpret whatever that book or that YouTube video said correctly? If you didn't, then that's one place to start also.”
The second thing is I think, we really underestimate the mindset part of it. We don't take a look at: Am I in the right state of mind when I'm trading? Do I tend to over trade? Do I tend to under trade?
The same guy I talked to, I told him, “What's the difference between your back testing and your live trading?” One of the things he listed was FOMO and that's something he didn't identify before but it's something that's really common with a lot of traders.
You want to get into the trade; you want to make a million dollars right now, you just take these crappy trades. So I think those are two things that are really underestimated but we really have to be aware of.
Walter: It's so true. It's tricky because sometimes as traders we feel like, really we should be pressing the trade more often because of what you said like FOMO. I used to think of it, the way I know how to explain this is, I used to think of it like I would sit down with my trading buddy. We would get on Skype and we would pull up our charts. We would look at the same charts and our question was: buy or sell?
That's not how I do it anymore. Now my question is: Is there a trade? It's a very different approach. So it's not always the case. If you have a low win rate, you can have the issue of not wanting to pull the trigger but in most cases what traders are doing especially in the beginning is they usually trade with a high win rate. Because they take quick profits and so what they're really trying to do is trade a lot.
The question is: Is it again going up today or is it going down? That's the question and they're not really looking at it from a system point of view. The other thing I want to mention is, what you said to that guy is great. One way you can quantify that about looking in your journal is scoring.
So if you score your entries and score your exits, you'll actually have a quantifiable data set that you can go back and look at and say, “Oh, this is where it was. It was here or it was there” and that's a really good way for you as a trader.
Especially if you're like you know something's going on, you don't know what it is to see and zero in, “Oh, it's my exits” or “It's my entries”. Or, if you're missing trades, that's a sign that maybe because you're at work or away from the screen or sleeping or whatever it is, that's a sign that maybe you want to adjust your time frame.
Instead of trading the four-hour charts and you miss two candles or whatever, or you missed two candles while you're at work or what have you, you can move to the eight-hour, the twelve-hour or the daily or whatever it is.
A different time frame and usually still trade the same rules and that way you don't miss any. It's really hard to miss twelve-hour or eight-hour trades; you can see them like do you know what I mean? If you think about it, if your charts start in the morning eight hours later, you're still going to be awake. Most of us are awake for about sixteen hours.
So if you’ve got eight hours of sleep in theory, you could catch that second candle or whatever. The point is, it's possible to quantify it. It's possible to quantify your entries and rate them on a scale of one to ten or whatever and your exits. It's possible also if you're missing trades, to adjust your lifestyle so that you don't have to.
One of the most ironic things about trading is that when you're trading the lower time frames and the reason why traders want to do that of course is because they want to be in and out. They want to be flat for the day. They want to come back tomorrow and live to fight another day. They don't want to have open trades while they're sleeping or over the weekend; that's why traders trade scalping lower time frame sort of strategies.
The ironic thing about that is, that is more like a full-time job than trading the higher time frames. You can easily trade the twelve-hour charts if you have a full-time job. No problemo. Even the eight-hour charts, probably not a stretch for most traders because it might only be thirty minutes a day but if you're scalping, you've got to dedicate hours.
If you're working all day and then you want to come home at night or get up in the morning before work or whatever, that's the quick road to burnout. So it's really tricky and I think you really kind of want to think about how my system is fitting with my lifestyle?
How is it fitting with my beliefs? That's a big deal and that's why I think it's really cool that you know once traders realize that, they can zero in on what where they can impact their trading the most and get better at this.
Hugh: I think the missed trades is a big one too because it can be a real bummer. If you didn't get any trades this week or you lost this week and then you look at your missed trades and you're like, “Oh, okay I could have done pretty well if I just took those trades”. So just figure out how to get them, right?
Walter: How to get, exactly. How to modify so that you get that, that's right. I know traders who would go to work and then when the four-hour candles print, they would go to the toilets and check their phone or whatever. That's possible, a lot of people can do that. Actually nowadays, a lot of people are working from home anyway.
Hugh: That's true. Okay, cool. Thanks, Walter. See you!
Walter: See you!
Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.
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