Small pullback trend
BPA trading room Q&A: February 8, 2016
Question: I bought many times between bar 44 and the low of the day. Could you talk about ways to have stayed out of trouble more effectively?
Video duration: 4min 00sec
Wide stop trading
I think this is an example of wide stop type trading. Starting bar 44, he started buying, buying, buying, and losing money. As you can see, it’s a small pullback bear trend. The pullbacks are small. By pullbacks, I mean the bounces are small, and that means it’s difficult to make money.
For me, if I’m buying early, taking a chance that we’ll get a bar 30 and follow through with bar 13 and follow through – if I’m doing that here, I’ve got to use a wide stop. At this point I’m very confident that there’ll be buyers below 21, low of the day, below 28. I don’t know if they’ll come in at the 21 low. I don’t know if they’ll come in 5 points below the 21, but I am really confident that they’ll come in.
So that means that if you buy the 44 high or any time after 45 and you use a wide stop, maybe 5 or 10 points below 21, the odds are very, very high that you’re going to make money. So if you’re buying early, you need a wide stop, and it’s probably better that you can scale in.
Low probability – wait for reversal
Otherwise, you hear me say all the time, it’s a possible low of the day. But the probability is low. I’d rather wait for the reversal up and buy after I see the reversal up. Traders who are buying around 44 or above 48. They’re doing it because they’re hoping, they’re afraid of losing money. Their account is too small, they worked really hard to get the account, and they’re really trying to buy at times when the signal bar is small so the risk is small if they put a stop below the signal bar.
That’s a mistake, because it’s overlooking a very important variable. There are three variables: there’s risk, reward, and probability. If all you see is risk – “Okay, I’m going to buy above 48 because the bar is small and I’m not risking much” – you’re missing an equally costly variable, probability. You’re buying above a small bull bar in a very tight bear channel, a small pullback bear trend. Chances are you’re going to lose money.
So you have to factor in probability and you have to trade small. You can say “Al. I can’t afford to risk 10 points.” Well, don’t take the trade. Wait until you get the strong reversal up and then buy. You see bar 30, then buy. You see bar 13, you buy. But then you see the bad follow-through, you get out breakeven, or with a point loss or something. Or you wait for bar 69 and you buy, or 70 and you buy.
If your account prevents you from taking trades that you really would like to take, don’t take those trades. It’s better to not take the trades than it is to pretend probability does not matter. If all you see is risk – “Oh, 48, it’s a buy, 9, it’s a buy” – if all you see is “small bull bar, therefore risk is not big,” you’re going to lose money.
Low risk, high probability
You have to say “Yeah, small bull bar, risk is not big. Hey, wait a minute. Al keeps saying that if the risk is small, the probability is low. So that means chances are I’m going to lose money if I buy above 9 or if I buy above 48.” So, if you’re going to be taking low-risk trades, you have to realize the probability is low unless you use a really wide stop. Especially if you can scale in lower; then all of a sudden the probability starts to get very high.
Buy, take profits, buy again…
Yeah, I do that all the time. If I’m swinging – let’s say I’m swinging a long and the market’s going up and I take partial profits, and then I get another buy. A lot of times I’ll try to put the scalp portion back on. I’ll try to swing part and scalp part. Sometimes I’ll do it with calls. Sometimes I’ll be long calls, and I just hold the calls and then I scalp the futures. So buy, take profits, buy, take profits, buy, take profits.