Hi,daedalus
thanks for your reply.My second upload image is continious to my
previous demo trade.Look the total move of the pair and make your
comments please.It was better to close the trade at 87% fibo or
something else?I’m confused with the 89 and 200 EMA’s as you
have mentioned in previous post.Are they helps you to trading instead
of the 21 and 34 EMA’s?
thanks in advance
Scaling out of Trades: Stupidity in its finest form.
Alright gents. This is a topic to expand on trade management. And this refers to the trade management steps outlined in posts #17 and #18. The fib levels used, entries, stops movements, all are the same!!! What changes is the scaling out of the positions. Let me explain.
First let me preface this by saying that MANY people disagree with this notion of thought. This is just my view on the situation. And yea, i’m aware I told you all to scale out. What you weren’t told is that I have never scaled out of trades before last month. I was an “all-in” - “all-out” trader, and for good reason. But I thought, hey, what the heck, i’ll give it a shot. Most forex traders do it and there must be good reason for it. However, my experience has been less than satisfactory.
I was taught to trade by a brilliant mentor who NEVER scaled out of a position. He was all in or all out. This is contrary to most traders out there in the world, its contrary to many service providers like Trade the Markets, and other teach-you-to-trade companies and systems. Most advocate taking quick small profits and then “hoping for a runner”. I never bought it. My mentor always explained it to me like this (forgive the S&P500 ES math; 1pt = 50.00):
50% Win Ratio Using Two Contracts
Two ES contracts: 50% win ratio
+4pt profit target = both contracts: $400
-2pt initial stop = both contracts: ($200)
Average winning trade: $400
Average losing trade: ($200)
Average trade: $200
Ten average trades: +$2,000===================================
Two ES contracts: 50% win ratio
+2pt profit target = one contract: $100
+4pt profit target = one contract: $200
-2pt initial stop = both contracts: ($200)
Average winning trade: $300
Average losing trade: ($200)
Average trade: $100
Ten average trades: +$1,000We easily see that scaling out of trades at different stages results in worse performance than the straight exit strategy.
The idea is that by scaling out you are limiting your winning profits, but still taking the full hits on failed trades. Seems strangely logical doesn’t it?
Further examples extrapolate the problem further:
Perhaps that’s just an anomaly for systems or methods with a 50% correct profit expectancy. Maybe results are far different when it comes to trading methods with a higher percentage of accuracy?
80% Win Ratio Using Two Contracts
Two ES contracts: 80% win ratio
+4pt profit target = both contracts: $400
-2pt initial stop = both contracts: ($200)
Average profit per trade: $200
Average profit x eight winning trades: $3,200
Net loss x two losing trades: ($400)
Ten average trades: +$2,800===================================
Two ES contracts: 80% win ratio
+2pt profit target = one contract: $100
+4pt profit target = one contract $200
-2pt initial stop = both contracts ($200)
Average profit per eight winning trades: $2,400
Net loss per two losing trade: ($400)
Ten average trades (total): +$2,000Scaling out exit tactics with high % win achieved are nearer the straight exit results than examples in 50% accuracy methods, but still inferior. Worse yet are the standardized results for traders who are working too hard at getting out of performing trades in stages for too little net gains.
We can see that even higher % win rates don’t improve the overall profit outcome with scaling out. But what about a system with a lower win rate? Maybe thats where the profit lies…
Is there any reason to use partial-profit exits? Perhaps the true magic of this approach lies in systems or methods with less than a 50% correct profit expectancy? Care to guess how those raw data results might calculate?
Two ES contracts: 40% win ratio
+4pt profit target = both contracts: $400
-2pt initial stop = both contracts: ($200) net
Average profit per four winning trades: $1,600
Average loss per six losing trades: ($1,200)
Ten average trades (total): +$400===================================
Two ES contracts: 40% win ratio
+2pt profit target = one contract: $100
+4pt profit target = one contract $200
-2pt initial stop = both contracts ($200) net
Average profit per four winning trades: $1,200
Average loss per six losing trades: ($1,200)
Ten average trades (total): $0
These results are the worst by far. Why? The reason is simple: maximum profits are essential to overcoming the greater net percentage of unprofitable trades. Cutting profits short in a system or method that wins less than 50% of the time will actually accelerate losses. The worst possible scenario is a multiple-contract trading approach based on a strategy of partial profit exit levels.
So what does all of this mean? Don’t scale out!
So how does this change our approach? Not that much. I still advocate removing risk once 38% is hit and putting the stop to he 62% level, if not your actual entry point so worst case you have a spread loss (marginal).
Everything else stays the same. Take the same entry. Manage the stop the same, move them as the fib levels are hit, but don’t take that initial profit on half of the contract when 38% is hit. It feels good, but it is hurting you more than you know.
How will this change your results? Over the past month of scaling out I went back through every entry and recorded how the outcome would’ve varied using a no-scale out management. The result was an additional 220 pips of profit!!! Here is what will happen. The trades that don’t clear the 23.6% level and continue on or stop at the 38% level are now going to come back and take you out at breakeven with no profit or a tiny loss instead of a small amount of profit. BUT - As soon as you get a trade that goes onto work to a -38% target profit level or a secondary exit it MORE than makes up for any small losses you’ve accrued and then some!!!
Think about it? If we pull that one contract off at 38% and the trade goes onto work in our favor we just cut out 50% of our profits!!! But we still took on that initial risk didn’t we? We just weren’t compensated for it!
Once again, I know I am flipping on what I told you all to do, but I have spent the past month trying to convince me that this management style was correct. But I just can’t get past the hard core numbers, logic, or risk:reward that gets thrown off using this method. We’re still systematically reducing risk in the highest probability manner possible, and locking in profit rationally as it accrues, but we will be paid for the risk we have taken on.
Still doubtful? Lets put this into picture book format. Lets look at the exact trade I showed you all post #17, and #18 in the AUDUSD on the 4 Hr charts.
Image 1: The outcome of the trade based off the management I told you to do and scaling out of contracts. +205 pips right? Not bad.
Image 2: Lets not scale out! You are rewarded with an extra +141 pips of profit for a grand total of +346 vs. +205. The proof is in the pudding.
Yes, you will accrue more small losses of 2-3 pips if it fails at 38% and comes back to your entry, you will get knocked out. I actually am putting my stops at my entry price once 38% is hit. I’ve still removed virtually all the risk on the trade but if i’m right, i’m going to be paid what i’ve risked to find out. Scaling out is the poor traders psychological escape to feel like hes won, when in reality, nothing has been decided yet and hes just handicapped himself if it turns out he IS right.
Hope this helps folks. I know its a novel, but I think its a concept worth thinking about. Cheers!
Daedalus, a compelling post and one that lends more weight to my own (unformalised until now) reasoning on trade management. Many thanks and continued good trading to you.
Thanks Cowaboi! Its nice to get positive feedback. I spend a lot of time writing posts for this thread and its nice to know that some people out there appreciate it (whether or not they like the method).
As a side note I just thought I would mention that I have switched MA values once again on all the charts. Not a big deal, and i’m sorry to keep doing this, but i’m now using a 61 EMA and a 78 EMA for trend bias. Keep in mind that the MA’s are just a guideline and because of that, its really not that big of a change. The old MA’s work just fine, I just wanted my charts to hold the trends a little bit longer so I wasn’t getting flipped around as much. As with any setting, changing the MA’s will cause you to miss some trades the other settings would catch, but catch an entirely different set of trades with the new settings. The point is, that over 100 trades, it will probably work out to be about the same.
Remember, respect the chart pattern FIRST AND FOREMOST and you will be just fine!
Cheers Folks!
This is an excellent thread, your thorough in your explanation and provide regular updates, what more could a person want. Your work is very appreciated.
I’m interested in your option hedging strategy, that i think you’ve mentioned in a post somewhere, what’s it about?
Data Mining: Day Two - The Revelation of Probability
I’m afraid i’m altering my management once again. But I promise its for good reason and it will improve your profitability. If you don’t feel like lynching me after this I really think you’ll make a lot more money!
As many of you know, I used to trade the e-mini’s in the Russell 2000 and S&P 500. Their price action is very different from that of Forex. Yea, they all make swings and measured pullbacks, but how those swings play out happen in two very different ways. The indices’s like to move and if they go they go. No stops they are straight up to swing highs or the -38.2% without two much of a fuss. And that happens a fair amount of the time. Enough to try and hold for the big runners as I have advocated in this thread. However, the forex markets act much differently.
I’ve found over the past month of familiarizing myself with these markets that they will make nice swings, but commonly fail after a nice bit of profit only to retest the level you originally got in at and continue on, or not. But I think anyone who has looked at applying this method to the markets can agree with me that it really is not that high odds that each swing will go onto take out the -38.2% extension. Don’t get me wrong-it does happen, but according to my data only roughly 1 out of 10 or 15 trades will fully play out that way. And when it does - you’re rolling in the dough right? Right. But what if we gave up that 1 in 15 chance for big money to make slightly less big money 8 out of 10 times? Would we make more? Actually… YES.
Don’t believe me? Go check your trade journals and retest the outcomes of your management if you took profit at the 23.6% level EACH time. (You ARE all journaling right? 
)
I did that analysis on the trades i’ve taken this month. Result? I would’ve been not 1, not 2, but over 3 TIMES MORE PROFITABLE!!! (Actually 3.3x’s but who’s counting eh?).
Just look at the swings - they speak for themselves. How many go up and hit the 23.6 without too much of a fuss? A hell of a lot. How many quit there? Quite a few. Compare that to how many actually go for a big runner. See what i’m getting at?
Were playing the odds here boys. We’ve got an edge and part of that edge is understanding what the HIGHEST PROBABILITY outcome of each trade is going to be. I feel that that outcome is the 23.6% price level being hit. And just as importantly it also means that it is a risk of 1 and a reward of 1.5 on each trade we take (Risk: 87%-62% = 25%, Reward: 62%-24% = 38%, ie. 38%/25% = 1.52). I like those odds. That means I only have to be right about my trades less than 50% of the time and I still make money. I like those odds!
Look… either way you will make money. But I feel you will be making much more money by siding with the probabilities here; and they say the same thing… 23.6% is much more probable than -38.2%.
The results from this months entries using the old method of holding for gold: 114 Pips.
The results taking profit at 23.6% on each trade: 372 Pips.
The average trade win went 19 pips to 62 pips!
But don’t take my word for it. Tell me what it would’ve changed on your setups - i’m honestly very curious. But I think you’ll be impressed with the change.
Hope this helps folks… Cheers!
wouldnt it mean that i would have to make more trades instead of letting winners run?
To hit the same profit overall? Honestly I don’t believe so. In fact, my data says the exact opposite for the simple fact that a big winner just doesn’t come along that frequently.
Actually what this does is get you in and out quicker which as far as i’m concerned is a good thing. Real world in my live account I only have so much margin buying power to work with. And if i’m in a trade and another setup comes along I have to sit on the sidelines and watch it go by because I can’t afford to put on both trades. By getting me in and out more quickly I can take more entries, over more markets, and make more pips. Today alone I was able to take 4 different trades, all which were winners because I was able to be more nimble with my entries and exits. Am I getting every ounce of a move out there? No. But I am getting a nice meaty chunk in the middle and moving on to the next setup.
Here’s the other thing. Ease of management. With this new take profit strategy once I get to 38% I put an OCO (Order Cancel Order) in with a limit order for the 23.6% target, and a stop loss at my entry. Then I can completly leave and i’m either stopped out at break even or I take my target profit. Thats the kind of management that I can let ride while I sleep!
Let me know if you have more questions. Like I said, you can do it the old way and you’ll be fine! I just feel that this will yield more profits, and my backtesting supports such a conclusion. I wouldn’t come in here and tell you something that I don’t feel the logic and numbers can’t backup. Go find one currency and take the last 5 setups on it. Record the outcomes of the trades using the “hold for gold” management, and then using the “23.6% take profit” management. The results should tell the story and compliment my argument.
Cheers!
daedalus, what time frames do you use the most, 4 hour? I dont have ticks.
You are a huge help i dint really use fibs intill this thread.
Well give a 15min, and 30min a try and see how you like those. Those are pretty close to what a 233t and 512t could be compared to. 60min is good as well. I like the 4 hour as well, but obviously less setups occur because it takes 4 hours for each bar to form.
Cheers!
Alright, ill try them all.
THNAKS!
how many pips do you take on an average trade? if your using the equivalent of the 30 min, 15min chart.
If you trade off a higher time scale eg 1hr, would u still make more pips if u sold at the 23% level as there is less noise?
Eh my 233 (10-15 min) trades probably average around 10-30 pips, 512 tick (30-60 min about) is probably 20-70 pips, and 4 hour setups are probably 50-120 pips.
This all of course falls back to the size of the grid you are playing. I could take massive swings measured out on the 233t, but the way I play it is the smaller swings I play on the small chart, bigger swings are more suited to bigger time frames, and so on.
Yea, i’ve looked at the results across all time frames, and even the 4 hour setups yeilded better profits, though it must be said that of any time frame the longer term it is, the more profitable the swings are on average, and the more you are rewarded for holding longer.
I just find its easier to stay consistent with my approach… And now for the novel of the day:
[B]Adding Size: The nightmare that is going to unlock your dreams![/B]
But think about this… Do i really care that I miss out on the extra 40 pips or something from a full -38.2% move? No. Because I can make that up just as easily (and almost certainly more quickly) on another setup. And if you’re worried about the profitability think about this.
My goal is to just add size where I can pull 20 pips out of the market each day and gross 7 or 8 figures a year. Why kill yourself emotional, mentally, and with time commitments of trying to get every pip possible out of every move. Size is the answer that pro’s use.
I’m fairly confident that I could do six figures a year trading 1 standard lot, and certainly with 2. Think about it. You want to make 100 grand this year. Now figure that uncle sam (or whoever your PM is in London 
) is gonna take roughly 33% of your profits. That means I need to actually make 133k to net 100k after taxes.
There are roughly 20 trading days a month, which means I need to average a profit of 554.00 a day to make that much money. Ok, so there is the goal. What is the easiest way to achieve it?
Trading 1 mini lot I need to make 554 pips a day. Thats hard. But lets add size.
1 Mini = 554 Pips
2 Mini = 277 Pips
4 Mini = 139 Pips (Maybe on a good day?)
8 Mini = 69 Pips (Doable - but not every day)
1 Std = 55 Pips (Attainable)
2 Std = 27 Pips (Ummm… HELL YEA!!!)
Why kill myself trying to get every pip out there? I’d rather just add size and call it a day after my 27 pips knowing i was gonna be bringing in after tax profits of 100k. And thats before I write off my commissions, internet usage, apartment/house, trading seminars (i.e. vacations) off as tax write offs.
The truth of the matter is these markets can handle more size that you can throw at them. But most people don’t think about it this way, they think they need to accrue massive pips each day to be successful. Why not just get a couple in the bag with big size and make tons more money. I know you’re not there yet (i’m not either) but thats where i’m going and it should be on your list of things to do as well. My friend is trading 100 lots with nil slippage and I can tell you he doesn’t really have any care for money anymore… Hes got his system down pat and trades enough size that it is like having his own personal ATM in his office. He doesn’t even worry about daily quotas. He stops trading for the month once hes up 300 pips. (He says he doesn’t want to get greedy - and honestly, how much money can you burn a month?). And then he goes on vacation for the rest of the month.
It seems like a pipe dream to a lot of us now, but there ARE people who live this way. And it IS possible. Will it happen overnight? Nope. Emotionally it would take me a year or two to be able to accept a 60-70k loss on one trade, but when you’re used to is, its no different than a 60-70 buck loss on one of our trades right now.
And in case you were wondering 20 pips a day with 100 lots is a cool 4.8 million a year. Yea. Start thinking about this stuff now, because it is the ONLY way you are ever going to make a living at this. Its hard to put bread on the table trading mini lots, but that is where we are at right now. Lets try and push ourselves past it and out into the big world of ridiculous sums of cash.
Very compelling post, but doest adding more lots mean taking on more than an uncomfortable risk per trade.
ok let’s say you have a starting account of $1000 on 100:1 leverage
if i bought one standard per trade i would have no room to make any losses before i get a margin call.
Wouldnt buying more lots only be beneficial if you have a high starting balance.
Yes yes yes! You can’t add size without the account balance appropriate for it or without the emotional aptitude to handle those kinds of losses and gains. I am in no way suggesting you go out and over leverage yourself on your account. My rule of thumb is 500.00 per mini contract. As your account size grows, add on another contract, and so on. But at the same time, you can’t trade 1 mini lot for the rest of your life and expect to make a nice income.
Playing big size isn’t something you do when you start out… you stay small until you are earning 100% returns on your account. If you can double your account size, then you are good enough to add on another contract, double it again and add another contract. Start small and work you’re way up. Its also the easiest way to start training yourself to handle the additional risk and reward of bigger losses and gains in a controlled manner.
I posted this up for two reasons.
1: That traders don’t fall into the “I need massive pips to make a living” trap because it just isn’t true and 90% of traders think that making more and more pips will make them better returns. The truth of the matter is it is probably putting them in more trades that they don’t need to be in, ie more risk that they don’t need to take.
2: That we need to understand where we are going if we intend to make a living at it. We need to have this in our objectives if we are ever going to attempt to get there. By understanding the overall goal of adding size to the equation we can better prepare ourself now for that evolution to our trading.
Cheers!
I quite agree that one needs goals, money management, and a time frame to reach those goals just like operating any business.
I’m just trying to wrap my mind around the leverage, lot size and pip value and, if I understand correctly, this is how I just calculated my way to over a millions in 6 years starting with $5000. Feel free to correct me if I misunderstand how it works. 
Assuming I can attain 55 pips/day to start and 1 pip = $1
[U]Year 1[/U] - 1 mini lot
55 x 240 days / year = $13200 + $5,000 initial margin = 18200
[U]Year 2[/U] - 1 mini lot
another $13200 + 18200 from last year = $31,400
[U]Year 3 [/U]- 2 mini lots (could do 3 but being conservative)
55 x 2 lots = 110 pips
110 x 240 = $26,400 + 31,400 from last year = $57,800
[U]Year 4 [/U]- 2 mini lots again (could do 5, but still conservative)
another $26,400 + $57800 last year = $84,200
[U]Year 5[/U] - still 2 lots
another $26,400 + $84,200 = $110,600
[U]Year 6[/U] - now using 1 standard lot (100K) so now if I only do 20 pips /day I should make $4,800,000?
If this is correct… WOW :eek:
You’re math is correct, but the logic is a bit unrealistic. And not in a bad way, I just think if you spent an entire year making 55 pips a day and only traded 1 mini lot you would be certifiably insane. Lets assume you open up a 500.00 account with EFX and use their standard 100:1 leverage. That means that on most markets you can buy 3-5 lots with your 500.00. I’m NOT saying that is wise - it isn’t, but you can use that much. With your 5000.00 account that means you COULD purchase 3-5 STANDARD lots. Thats A LOT.
If you KNOW what you’re doing, there is no reason to realistically trade 1 mini lot an entire year. You’re just wasting your time and not getting compensated for it. I mean, I do consider myself to generally know what i’m doing and i’m trading two mini lots on an account that is currently just above 1 grand. I doubled it from 500.00 last month trading 1 lot. I made a 100% return, another 500.00 so i’ve added another contract. My risk is exactly proportionate to my account size as it was last month so whats the harm? So if i do another 100% this month that means that next months i’ll add on another 2 mini lots for a total of 4 mini lots (2k / 500.00 per lot = 4 lots)… and so on and so forth. I should be well over 2-3 std lots by the end of the year conservatively.
What i’m trying to say is yea, you’re math, logic, that is all correct, but if you can do 55 pips a day - well you don’t need to be playing your sizing that conservative. I mean look at year 4, you’re now generating 110.00 a day on a 57,000 account! Thats a .002% return daily! I mean look at your first year you were making 55.00 a day on a 5,000 account which is a 1% return - not huge, but proportionately a [B]5X’s bigger return on your capital than year 4.[/B]
I’m all for playing it conservatively, but your scenario is TOO safe, and the risk isn’t proportionate throughout. Realistically, the results should be MUCH higher.
But talk is cheap folks! Its one thing for me to say this, its another thing to do it. I intend to do it. And you all have a front row seat to my success or failure in this very thread. So sit down, kick back, and lets make some money!
I suppose that is the difference between demo and live accounts? or between brokers?
My $5000 demo acct is with North Finance using MT4 and when I make a trade, it only allows me .10 as a volume (aka ratio?) which is the lowest option they offer. If I try .20, I always get a “Not enough money” message. I will have to contact them about how that works.
Glad to hear my math is correct, and even more encouraged that the results could be much higher if I learn the leverage part better and what my platform/broker is capable of.
Thanks for the inspiration! 
and I look forward to your “mini” novels as well as your journey and insights.
Ok, I understand better now. When I originally setup my demo account, it did ask for the leverage I wanted to use which I obviously didn’t put very high, if at all. :o
I’m either going to start over with a new demo account or try and reset the leverage higher so I can see the difference it makes and psych myself out some more. I’m glad I asked and thankful for your most helpful response 
Daedalus - Yes, I agree. However I would add that the key here is based on what you are prepared to lose. Take the largest losing streak in your system and double it (the market can always do far worse in the future than in the past and we need a margin of safety). Lets say the historical worst is 10 losses in a row. If you were to face 20 what % loss of your account would you be comfortable with. For those who trade a 5% risk model they have just been wiped out! This gives you a maximum past which you would not go. Taking your approach Sweet Pip (love that handle) would be ultra conservative but very safe. If you can attain your goals whilst keeping the risks to an absolute minimum then fantastic. Most professionals seem to risk around 0.5% or less which is worth thinking about.
Daedalus - I find your posts some of the best and most constructive on the site