Ashes to Ashes,Gold to Dust

After I answered comments early on Saturday morning I started telling Kiki about them and it got me thinking.

There have been a number of comments and emails about how I enter a trade.

Usually, I enter a trade on the close of the range bar. I do NOT wait for a new bar to form. Why? Because waiting and being sure would cost me money. I have said I enter aggressively, not because I eat a lot of red meat but because I make more money.

If I were to consistently enter late, my trading statistics would be hugely affected. Much more than you would think.

Let's say someone is trading my way and trading for instance 9 contracts.

Earnings per year would be, say, about $594,000 ($900 x 3, 220 days a year).

Number of contracts traded per year could be about 10,000.

If I entered 2 ticks late on half of those in ES, it would cost me 5000 x $25 = $125,000

If I adjusted my profit targets to compensate, my profitability would be greatly reduced as the targets 2 ticks higher often are not met and I would be stopped out at break even or worse.

If I leave my stops where they would have been with the "correct" entry, then two things happen:

I am assuming more risk and my losing trades lose more than 25% of the time, worse case. That could cost me another $125,000. Now instead of making $594,000, I'm only making $344,000. But it gets worse. Say I raise my stop so I am only risking the same amount as I would have had I entered at the "correct" price. Now I find that about 30% of the time I would get stopped out of a good trade and make a loss instead of a profit. Now my the whole maths of my methodology has fallen apart and I may be joining the 90% who end up blowing their account up.

What this post is trying to demonstrate is that trading is not just about winning and losing trades. Behind it all, there is a set of complex mathematics going on in the background. A trading methodology consists of a number components: setups, risk management, trade management which all together become your way of trading. Your way of trading will either give you a great living and build wealth or grind you to dust. Without understanding which, you are whistling in the dark hoping you don't fall down a mineshaft.

Trading is my business. I do what successful business managers do. I look at my profit margin, turnover, losses and a whole bunch of things, plug them into my software, be it MSA or a spreadsheet, and then do a lot of "what if's". My trading plan is not a wish list. Its a product of both my trading methodology and the data mining so I set myself up to succeed.

Today's trades were interesting.

Trades 1 and 2 could have been the same trade, depending on whether you were all in and all out or scaled. Now for Trade 3, it helped that I did the Profile split the way I did. Price was accepted within Value and motored all the way to VAH of the distribution. Trade 4 was selling into the hole but I had plenty of time to get out at a couple of ticks profit. The trade location is what saves me most of the time. Aggressive entries mean lower risk for me. Trade 5 was an entry against the DVAL and paid off well even though order flow was not completely clear. I went for it because of the trade location and the bounce off the 99EMA which gave me the sign that the swing was over after that consolidation between the 2 EMAs. I exited happily as the previous high was taken out just above the split's VAH.

 

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