Show Me the Money

Money Management and Trade Management are two sides of the same coin. I gave an example in a previous post of a local who was prepared to take any side of a trade and then manage it. I have said that I put my positions on in one trade but scale out of it, usually in three steps. I do this because of the Mathematics of Trading.
Let’s look at the difference between taking the trade off all in one step or scaling out using hypothetical examples and then looking at yesterday’s results, which were pretty good, and seeing what would have happened taking the trades off at the first target.
Assume that T1 (first target) for the ES is 2 points. Stop loss is also 2 points and percentage of winning trades is 70%.

All in and all out: of 10 trades,
Stopped out on 3 lots for 2 points 3 times = -18 points
        7 winning trades for 2 points for 3 lots = +42 points
         Nett one or 2 t’s? profit = 24 points

All in and 3 scales out:   
Stopped out on 3 lots for 2 points 3 times = -18 points
7 winning trades, 1 @ +2 points, 1 @ + 4 points, 1 @ +6 points = 72 points
Nett one or 2 t's profit = 54 points

Quite a difference. Of course there are other permutations such as making T1 but then being stopped out at either a loss or break even, depending on your rules.
What I am trying to say is that if you don’t gibe yourself a chance to make a bigger profit then you certainly will not make one.

Now let me tell you how I apply my trade and money management. I actually combine both of the above, DEPENDING UPON THE PROBABILITIES OF THE TRADE.

Yes, this does require some additional thinking but that’s what we, as traders, get paid for. Bad money management is one big part of the statistic of 90% of traders failing.
Looking at yesterday’s trading chart, you can see that there were trades when I exited all at once and times when I scaled out. Why? How did I make that choice?
It depends and depended on my entry trade location, the direction of the trade when looking at the trend (very subjective because there are different trends according to timeframe you are looking at) as well as looking at order flow.
The trade yesterday of Short @ 1038.75 was a trade that occurred against a higher volume point in the previous day’s value area from Market Profile and peak value in my smoothed volume tool. I had the expectation for the market to trade to the Value Area Low of the previous day. This VAL was also matched by the only Fibonacci number I really look at. But I also have rules about taking profits along the way so I scaled out twice until I got to the VAL. I gave myself the chance of making a bigger profit.
Then I traded the retracement of that move – a countertrend. It would retrace as we got closer to the RTH open, but by then the trend was down. My expectation was that there were just a few points in the move and I exited accordingly looking at order flow and support and resistance in the market.
Had I just exited each trade yesterday at just T1, the profit would have been only $2016 instead of $2791 unless I re-entered after the exit. Re-entry during a trend has additional risk if you re-enter at what turns out to be the end of the move. However, there are some good re-entry techniques I use but it requires more effort and stress. I try to avoid that and trade relaxed. Don’t make it more complicated than it needs to be.
Looking at the profitability, in both cases we have a very small Risk per Trade of $300 in total for 3 Contracts. Return on Risk for yesterday 9.3 to 1.

Today's trading was fairly quiet waiting for the FED. Europe didn't do anything really and then it was just grinding out my day.

 

Click to enlarge

This chart shows my trades only on a 3 contract basis. In fact, I trade a multiple of 3 lots mirroring those prices. K. trades 3 lots and as I add her trades to the left hand column, a comparison can be made between a newbies trades and someone who has been trading for a long time. Now, I'm going to wait for the FED. We have finished trading for the day. Yes, they showed us the money.