Monday, 21 June 2010

Inside out versus Outside in Trades

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There are some traders who only trade Outside In and others who only trade Inside Out.

Firstly, for those not familiar with my terms, let me give a high level definition.

Outside in trades are those where the trader is trying to catch the turning points in the market, the troughs and the peaks.These trades are lower win rate trades as you are anticipating a change. However, the profit per winning trade is relatively high.

Inside out trades are trades where the trader is joining a move that is under way. They are inside out because by the time the trader realises the move is under way, you are already inside the move. These trades are higher win rate trades but less profitable per trade as you have missed part of the move.

Specialising in one or the other can be both good and bad. Good because you get really good at something when you do it over and over again, and bad because you miss a lot of great trades.

Many years ago, I went through a phase when I used to have a hard time with long positions. I was always looking for a short, even in an an uptrend. I guess it was my Pavlovian response to the instant gratification of a short win against the slower gains from a long. I overcame this disability by forcing myself to only trade from the long side for a while.

As a professional trader, I realised I needed a full tool box to deal with whatever the market threw at me. I saw that unless I could trade every which way and loose, I would not recognise what was going on and be able to deal with it.

In teaching Kiki to trade, I took a holistic approach. We found, firstly, one setup that she could trade both from the long and the short side and she became CP with that. We then added a second setup and did the same. The first one was an inside out, the second an Outside in. We then added to this basis.

I'm confident that she is now a trader.

Without taking anything away from Kiki and the enormous amount of time and work she put into it, I am convinced that the way that we went about the process of learning had a lot to do with her emergence as a trader. This is what we will replicate in the training.

Today's trades in RTH were around the gap trade. Trade #1 was inside out, trade #2 outside in. I have increased size and am trading less. That's all for today, I'm watching the Wimbledon tennis. Federer currently down 2 sets and losing the 3rd, but the fat lady hasn't sung yet.


  1. Tom, i have some problems with a long outside-in trades, when i wiped out my entire account on the may 6. I had understood that there is always possibility of the war, the day like 2001/09/11, flash crash ans so on. There is a reason why put options is always more expensive than calls. And your trade nr. 2 was such a trade, there was a very good possibility that the gap would be filled without retracement isn't it? It is interesting where was your stop? Is it first red bar of VB indicator or 2 points stops? If we are waiting longer, we could expect 3-4 full points losing trade any day? What is your stop, Tom on such a trades?

  2. Hi EL,

    I took the same trade 1 you did. While you took profit and reversed where you indicated 2, I stayed in the trade and got stopped out BE.

    While I was in the trade 1, I can see 3+ point profit and couldn't find any reason to exit the trade where you did. there is no support, no POC, no VAH, nothing in its way down till Friday's high. So i didn't exit, it reversed and stopped me out at BE.

    Would you please please explain why did you exit and reverse at trade 2 location? I know you probably read order flow but would you please explain it? It is this piece that is separating me from you(CP)

    Thanks a bunch for a great blog.


  3. Andreyyy, Oversold and change in momentum. Look at the CCIs. BTW, a Put and Call are the same - you can make a call into a put synthetically with futures. I don't exit with stops. That trade was pretty sure to go up enough to gibe me time to get out.
    Chak. You could have scaled out once or twice and put your stop to B/E and had a profit on 1/2 or 2/3rds of your position. 3 points is a lot to give back. Trying to hit home runs on every trade is a losing strategy. High win rate with lots of smaller profits is what makes me money. Home runs come around 1 out of 10 times. Smaller profits are there 9 out of 10. Look at your trade plan and backtesting.

  4. Hi Tom, many thanks again for this excellent blog. Your way of reading order flow has opened my mind and I now see the markets in a totally different way.
    Could you please explain, why you didn't take the 2nd trade labelled "BUY S1"?
    I was also in trade 1 - but got out after the 2 points profit target.
    Thanks again,

  5. Peter, the CCIs didn't fit. Looked like the resistance would hold, and it did. If you had taken it you could have reveresed for only a few ticks loss, so no biggy.

  6. Tom, many thanks for your answer.

    Hmm, 6CCI is crossing 0 and in sync with 45 pointing upwards?!?

    Please help - I am making great progress but would like to understand the nuances to grow as a trader ;-)

    thanks again,