Small frequent winners, or large and infrequent?

Hello All,

I’m looking for a general understanding of what the masses do/use/prefer for their day trading… do you:

  1. Trade less frequently in search of large winners in the realm of 100> pip gains? The assumption here is that you user a smaller lot size to align with wider stops.
  2. Trade more frequently in search of 10/20 pip winners? Conversely the assumption here is that you use a larger lot size given the tighter stops.

The above scenarios both work on the assumption that good money management and trading behaviours are practiced, i.e justifiable positioning of SL/TP’s, 1:1 R:R, <1% stake, etc.

In recent months I’ve adopted the latter method as I find that whilst I do not trade as frequently as a scalper, opting for a larger lot size with tight stops provides shelter from larger market movements as a result of breaking news, etc, whilst offering comparable potential as the less frequent but more pronounced trades. However, intrinsic to having a tight SL position there is little room for error in the timing of market entry, so I ask the question with an inquisitive mind as to what the masses prefer?

Regards,
CPY

By default, i trade infrequently because my focus is to identify low risk oppurtunities under certain market conditions that will allow me to capitalize in the event that a trade turns in my favor while minimising risk as much as possible in the event the trade turns against me. Because I only enter the market under the best possible conditions with respect to my trading strategy, the number of trades i make yearly is relativley low.

I found that my most signaficant improvement as a trader came when i started trading less and when i stopped focusing on win% and instead focused on trading only under optimal conditions and made risk management the foundation of my strategy.

As a result my win% has declined but my results have improved

I think this is an extremely sensible post, thank you.

Whether one trades with a long or short term perspective, it is always wise to identify and trade only the best setups that one’s trading strategy offers.

It is only natural when one is keen to trade that one enters every signal that suggests there could be a profit, and even go as far as [I]anticipating [/I]that a signal [I]might [/I]be coming and try to get in early! This is perhaps particularly the case with short term trading such as 15m timeframe where there are often many setups appearing during a day’s trading, but only a few actually result in a good move whilst the others quickly eat away any gains made.

The important point here is the underlying development of that most wonderful of all psychological factors - positive expectancy. We all know that every method will produce some failures, and the more times a strategy fails through poor signal selectiveness by the trader, the more we lose confidence in its viability. This creates doubt and thereby inhibits willingness to increase position size and we get stuck in a small-time trading scenario.

By only trading the best setups and improving one’s success rate and overall profitability, we build our confidence to trade larger sizes.

This is good advice fromPanchoVilla84, and worth repeating:

Thank you for your feedback and kind words.

I agree very much with your thoughts on positive expectancy as it relates to trading psycology.

For me, eliminating emotion from entry/exit comes from becoming as mechanical as possible and eliminating emotion from the outcome of any individual trade comes from experiencing the benefits over time that come with employing a proven edge, executed w discipline while aggresivley managing risk.

Hi cpy - Pancho’s reply is great.

I have to add, don’t day-trade, its just a way for brokers to make money.

I would also try to steer you away from fixed pip profit targets. Its amazing how many people will take say a 20 pip profit simply because its 2.0 x their 10 pip risk, and they’re fixated on r:r, win rate % and not letting money go back into the market. The question should really be answered by the chart - it is “Now price has gone up to where it has (giving me a 20 pip unrealised profit), is price more likely to continue higher or to reverse and go lower?” If price is more likely to continue higher, why close a long position?

Bottom feeder. 5 pips here, 5 pips there.

As I think about this, I think its impossible to trade your own system but to decide arbitrarily whether to make many small winners or a few large ones, the system covers that for you. The only ways to alter these ratios would be to over-trade or over-leverage; or, what we hear less about, under-trade and under-leverage. But these are human preferences imposed on the market, and the market doesn’t respond to what we individually say or do.

Maybe not “impossible”, but certainly, I would agree, inadvisable and unnecessary! As you say, surely one’s trading system is designed specifically for a specific type of trading, which would include the typical targetted profit level - which in turn is linked with the stop levels used.

But this depends on what one understands as “arbitrary”. The term “arbitrary”, to me anyway, suggests an element of undetermined or unsupported. Whereas “discretionary” whilst similar in meaning suggests there is an underlying reasoning of logic behind a calculated decision.

I think there [I]is [/I]scope, and maybe even an advantage, to applying discretion based on one’s own analysis of the surrounding situation however mechanical a trading method signals are (unless, of course, it is totally designed and intended as a 100% mechanical system).

Such discretion may well be applied in situations where, for example, there is a very clear and strong underlying trend and one decides to run a position instead of a fixed target. Or, if one has a longer term trading method and sees a clear reversal due to a specific event and which is clearly showing as reversing on a shorter term model then perhaps it is prudent to override the trade rules and get out.

Perhaps the overriding issue here is: Does the trading method rule your brain or does your brain use the method as a tool in decision making? Maybe that is one criterion that should be clarified whenever one is designing a strategy! :slight_smile:

But, in general, I do agree with you that (too much) personal intervention in the trading method’s structure actually destroys the principles upon which the method has been designed to work over the longer term.

I do actually keep a record in my own trading journal of the occasions when I personally “interfere” with my trades and act “manually” and analyse how often that decision had been right or wrong, i.e. whether I would have hit my target if I had left it alone. Rather humbling for me was to discover that my own interventions are only correct about 50% of the time! So I tend very much to sit on my hands, or count to 10, or go and make coffee whenever I think about exiting manually! - and, as you say, let the system cover it. But are we then saying that trading should always be “set and forget” - or is that another issue of it’s own? :slight_smile:

Oooh, now, I was in the arbitrary territory, while you’re taking us into discretionary v’s systematic.

All in all, I look at discretionary as, if not arbitrary, as at least subjective, and I don’t feel good with any subjective element in my trading plan at all. The ideal plan can be reasoned out before the trade, and it shouldn’t be that hard for any system - price can only go up more or less, or down more or less. It should be possible to foresee the range of possible developments and decide in advance what we do when and where.

This will feel like a loss of control and therefore an acceptance of unquantified risk for many people, but I’d say to them the rule is Ready, Aim, Fire, not Ready, Fire, Aim.

This is perhaps the key issue here. Sure, it not only [I]should [/I]be possible to foresee possible events, but it most definitely [I]should [/I]have been considered before [I]any [/I] trade is entered…but there is also the unforeseen, which, by definition, will occur [I]after [/I]any original assessments. Are we to deny ourselves the right to interfere with the original scenario settings based on a changed situation?

Fortunately, (or unfortunately!) unlike with a rifle, our shot is more like a cruise missile than a bullet and if the intended target happens to unexpectedly move whilst in flight should we not then readjust our aim accordingly whilst still possible? - especially if the target has now moved onto our own doorstep!

But I think this, in practice, is more an issue for longer term trading. I doubt that anything so dramatic has time to occur in trade durations of mins and hours rather than a few days or more?

But, as you say, this is a subjective matter. Personally, I do not allow my charts/method to override my own thinking - but I also don’t allow my own thinking to act against my charts, no matter how strongly I feel about an issue. In other words, I do not trust in gut feel or reaction, but I do believe in retaining the discretion to adjust my trades as and when factors change from those originally considered.

In addition, as was discussed earlier, there [I]is [/I]the discretion to assess whether a setup is optimum or not, and that I [I]do [/I]think is very important in day trading - which was the OP’s concern. Not all setups are equal.

But I am stepping out of my domain, so I will zip up now! :slight_smile:

Its a good argument Manxx, but for me if unforeseen (because its unforeseeable) stuff occurs after a trade entry, and it doesn’t show up in chart price action, I’m not going to act on it anyway. So I’m back to recommending to traders - no, dictating to traders - set your plan before you enter the trade so that if price goes up you do this, if it goes down you do that. But I am becoming a bit of an extremist in my gathering years.

Well that [I]is [/I]something we share in common then, I think I’ve already gathered more than I care to think about :smiley:

If by extremist you mean disciplined, then I think you are spot on. :slight_smile:

This is really only another of those issues that are good to highlight because every trader should be aware of it and decide whether, and how much, and in what circumstances they are going to be discretionary - if at all!..

Failure to do so usually results in a tendency to chase markets and we all know where that ends up…:slight_smile:

Thank you tommor.

Well said and I couldnt agree more. Ive never used set profit targets. I let the market take me out the trade

Exactly.

The back and forth between you and manxx about arbitrary/discretionary balance has been very interesting to me. Theres a ton of wisdom being thrown out by the both of you

Thanks, PanchoVilla,

That surely is the key benefit of a good forum discussion. That people can share thoughts and opinions. It is not a matter of having to agree or disagree, it is purely about raising issues, and considerations relating to those issues, that provoke thinking also among other traders about their own trading. It may raise points that have never been thought about before or other angles on issues that one previous thought were straightforward :slight_smile: - and out of the confusion arises a more perceptive being! :slight_smile:

I am actually in two minds over many of these issues. On one hand, I stick rigidly to what my charts are telling me because they are telling me what the [I]majority [/I]of active traders are currently doing - that, afterall, is why I [I]have [/I]charts, I don’t want to go against the majority just because my personal view might be different! [I]Having [/I]a view and [I]trading [/I]a view are very different matters! :slight_smile:

But, on the other hand, (sometimes I think I must have about five hands!) I do not want to put my brain in a hat box on top of the wardrobe and be a slave to a bunch of lines on a chart. I [I]like [/I]thinking about my trades and I [I]like [/I]to have an understanding of what is going on in my markets. Otherwise it is (for me) so boring just to watch a chart that does not talk to me.

But, again, I find this fraught with contrary issues. If, as everyone seems to agree, one should consider all foreseeable factors before [I]entering [/I]the trade, which I assume also includes non-analytical issues, then why should it be wrong to bring into the picture unforeseen issues when they later appear whilst the trade is still open, i.e. when exiting trades? If “all things” is ok for entries then it should also be ok for exits, too?

But, but, but, if one mixes up personal opinion and technical analysis too freely then there is a tendency to even try to “outsmart” one’s own technical model and pre-empt signals even before they are formed. However, as PanchoVilla has already wisely said, it is important to evaluate entry signals and only take the optimum setups - but [I]how [/I]can you do that without a process of discretional appraisal? and if you accept discretional appraisal for entries, why would you wish to deny it for exits?

One example of such a process is visible in Crude Oil right now. The bulk of professional opinion is negative on prices, but the charts continue to give a continuous supply of up and down signals in line with the various bullish/bearish releases. However, if one assesses how the market actually responds ( or doesn’t) to these releases, it is possible to assess how strong the underying sentiment really is in either direction. I.e. if a potentially strongly bullish release does not create any enthusiastic trade response then one can assume the bearish view is dominant. This means one can exercise greater caution with a buy set-up than with a sell set-up and either ignore it totally, or adjust profit targets prudently.

But a truly systematic chart trader will argue that this is totally irrelevant and unnecessary because the system itself accounts for this in its design which produces a profit over the long term in spite of these specific trade matters that only affect one specific trade at a time!

The core principle is that there is no right or wrong with these kinds of topics, there is only a matter of being aware of the pros and cons of each and deciding which of many approaches fits one’s personality, objectives, time constraints, capital constraints, etc.

I don’t lie in either camp 100%. I think, like with most things in life, compromise (and moderation, but that is another issue) is usually the best overall solution, and according to circumstances - and generally not to let rigid rules override obvious commonsense just because they are rules.

Regarding exits, for example, if I am in danger of ramming into the back of the car in front which has just braked sharply, do I brake manually or close my eyes and rely on the car’s automatic emergency braking system to do it for me because that is what it is designed to do?

I

if you accept discretional appraisal for entries, why would you wish to deny it for exits?

Great point Manxx. I admit that although I strive to be as arbitrary as possible in my trading, there remains a certian amount of discretionary analysis involved, esp in my trade selection. The key for me is that any decretionary decision has to be made within the framework of the arbitrary factors involved

if I am in danger of ramming into the back of the car in front which has just braked sharply, do I brake manually or close my eyes and rely on the car’s automatic emergency braking system to do it for me because that is what it is designed to do?

Another great point. keeping with the example you used… What if the car’s automatic braking system is designed to brake the instant the circumstances at hand are enough to trigger a manual braking decision, instead of being designed to brake when the danger is more apparent. The need for manual braking is elimnated because the second that manual braking even becomes a consideration, the auto brakes have already been engaged.

Yes indeed! Is this not akin to the principles of automated trading? If one wants to trade in an entirely 100% automated manner then those types of systems are available. They function fine if programmed correctly, but that does not guarantee that the rules that they are 100% obeying are always correct and actually produce a profit consistently.

There are driverless cars already in existence but they only seem to work if all other cars are also driverless and the road network itself is fully adapted to function with them - in our analogy that would translate to the entire market (road network) moving according to a pre-determined and controllable set of rules that the trades positions function within - hmmmmm… but that would then require that we have to also pre-determine who is going to lose and who is going to win! :smiley:

At least in my car, prior to the automated braking actually being initiated it gives a warning if a car in front, or from a side turning, presents a threat of collision, leaving the decision to me how to respond- unless I am asleep, which is when it takes over (as I understand it, never tried it yet!!!) - which is, I guess, the equivalent of a deep stop position in the market?

Whatever, joking aside, the serious point we are all making here is that the question of how much or how little discretion we allow ourselves is something every trader should have thought about and incorporated into the trading principles and methodology and the overall risk and money management rules/guidelines. There is no right or wrong approach, but there should be a [I]consistent [/I]approach that is always applied.

It is little use trading a method that enters and exits on certain rules and set-ups, and then to intuitively jump out on a sudden unexpected spike in the opposite direction just because it “might go wrong” (which of course I have [U][I][B]never [/B][/I][/U]done :26: haha! :slight_smile: ) . Actually, I think I mentioned here somewhere that I once did an analysis of all the times that I manually overrode my system exit rules (and still do) and in fact the result was a surprising , and humbling, 50/50. In other words only half of my discretionary interference actually proved to be beneficial. As a result I did manage to rationalise the reasoning behind my discretionary “intrusions” and that success percentage is higher now, fortunately.

Hello Folks,

First of all I must apologise! Whilst sat here thinking no one had been interested in replying to my little old post (as I’m new to Baby Pips I’d expected email notifications to inform of replies - but that isn’t the case!) the post has actually received fantastic response.

Secondly, thank you for the depth of reply! Reading through your responses has been a great insight…

Quite possibly one of the best things I’ve read on a forum has come from PanchoVilla. The below quite literally made me have a light bulb moment in saying ‘Yeah, why have I not been doing that!?’, which is exactly why I wanted thoughts on this question…

Again, another fantastic piece of advice which has been interesting to ponder on for a similar reason as above…[quote=“tommor, post:5, topic:84854”]
I would also try to steer you away from fixed pip profit targets. Its amazing how many people will take say a 20 pip profit simply because its 2.0 x their 10 pip risk, and they’re fixated on r:r, win rate % and not letting money go back into the market. The question should really be answered by the chart - it is “Now price has gone up to where it has (giving me a 20 pip unrealised profit), is price more likely to continue higher or to reverse and go lower?” If price is more likely to continue higher, why close a long position?
[/quote]

Thank you all for the cracking contributions, I appreciate you taking the time to reply!
CPY

Thank you CPY. Words of wisdom from members like tommor and other experienced traders is the reason i love this site.

Im glad I was able to be of some assistance and im always happy to contribute in any way I can.

I wish you success and happy trading. Best of luck to you!

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