Trading room Q&A Wednesday May 19, 2021
Q: I’m consistently messing up with good high probability trades with bad stop and bad risk/reward management. Other than recommended no more than 1%, is there a usual number of points I ought to risk for a trade for the Emini or the Micro Emini? Can you suggest a number of points for me?
So how many points to risk per trade?
So he’s saying, is there a standard number of points if you buy above 1? How many points do you risk? I think it’s better to use price action stops. Base your stops upon lows. So if you buy above 1, you exit below 1. If you buy above 3, you exit below 3. If you buy above 9, your stop is below 10. It never got hit and you would’ve made maybe up to somewhere in here, so you would’ve made 30 points.
But as I said, I would not buy above 1. Because of all the bull bars that we were getting here, and we were far below the Moving Average, we probably were not going to go down very far. So if we go down, there’ll be buyers below.
That’s why if I’m buying above 5, I’m not getting out below 5. I might get out below last week’s low, or if we get a couple big bear bars closing on their lows – which we did not. We had a couple bear bars. One of them was big, not the other. So in all these reversals in here, I think the odds are we’re not going to go down a lot more. But that’s hard, to buy above 5 and then basically not use a stop or use an extremely big stop.
Time is limited – stuff happens quickly
You don’t have much time. You can say, “5 minutes? That’s a lot of time. I can think about things 100 times in 5 minutes.” It might seem like a lot of time, but it’s not a lot of time. Stuff happens quickly, and bars are changing constantly as they’re forming. So you don’t have that much time. But as I said, if you did not buy above 1 and you bought above 3, and you get out below 3, and then you take a second attempt above 10, in general, if you get stopped out repeatedly like that, if you get stopped out below 10, then you’re probably buying in a bear trend. It’s probably not worth it.
Consider the Walmart trade
And you can see the bulls kept 15 from going below 10. So you could do the Walmart trade. You buy above 3, get stopped out below 3 and you lose a whole bunch, and then buy more above 9 or 10 and place a stop below 10 and go to Walmart and come back in a couple of hours. All of a sudden you come back and the market’s up here and you’ve more than made up your loss from buying above 3.
The market often does that. It really just takes a lot of money from traders. You don’t have much time. By the time you realize that the bar is 20 points tall, you’ve already taken the trade and you’re thinking, “Oh my gosh, I should not have traded a full size. I should’ve traded 2 or 3 Micro Eminis or 1 Micro Emini.” That’s just what happens on the open. You get all these big bars, and you get stopped out and the bars get smaller, and it becomes really hard to make back what you lose early on. That’s one of the reasons why on the open, it’s better to not rush.
Easy to lose a lot on the open
But I understand what you’re saying. Especially in the open, it’s really easy to lose a lot and then never make it back for the rest of the day and feel bad all day, feel bad the next day. I remember 35 years ago, 30 years ago, I would feel bad for several days after I did something that was a mistake. I was too eager to buy. I used too tight of a stop. I traded too big of a position. Take your pick. Any one of those things, all three of those things. They can just be really upsetting, painful. You feel bad. You just wonder, “Can I do it?”
One of the most important things – I talk about this every now and then – is trade small. However you think is small, whatever size you think is small, trade a quarter of that size until you’re consistently profitable. The argument is, “Al, I can make a living trading 1 or 2 Eminis. I cannot make a living trading 1 or 2 Micro Eminis.”
Well, if you’re not making money, your first goal is NOT to make a living. Your first goal is to make any kind of money, become consistently profitable. Your second goal is not to make a living. Your second goal is to slowly build your account and then increase your position size.
So you don’t go from losing money to making a whole bunch of money in a matter of a month or two. It’s a process that takes a long time. A year. Could take longer. So the first goal is to consistently make money and get rid of the pain, the emotion. The best way to get rid of the emotion is to not put yourself in a position where you can have these bad feelings. Trading too big, using stops that are too tight, getting out too soon, taking bad trades that you know are bad and you just take them anyway.
Get rid of bad trades to become consistently profitable
If you get rid of the bad trades and trade really, really small, that gives you your best shot at getting consistently profitable. Also, swing trade. Don’t take any trade with the intention of scalping out for 2 points. Every trade that you take, you’re hoping that you’re going to get a reward at least twice the risk. You’re hoping you’re going to get at least two legs. You’re hoping you’re going to stay in the trade for at least an hour or two.
That’s how to trade. Do that for a while and see if you stop losing money. See if you start to consistently make money, and then see if you’re doing it well enough so that your account is starting to grow for several months, many months, and then start to increase your size. At that point, you’re in a position to start to make money – make significant money, enough money to live off.
People put themselves under a lot of pressure. “My account is small. I really need to win quickly. It looks so easy, but I’ve really got to get good fast, or otherwise my dream is going to die.” But that’s not going to work. You cannot rush the process, and the best advice is to trade very, very small and swing trade. If you’re trading really small, you can always scale in, like I did today – buying above 5, buying more above 9, and I think above 15.
That’s what I would do. Trade very small. The smallest you possibly can trade. Look for swing trades, and use reasonable stops. If you get stopped out, just take the next trade.
All right, hope everybody has a good night.