Uncertainty and Risk in Short-Term Trading 5237

Trading and risk go together. Short-term trading denies the trader the strategy of minimizing risk by holding a position over a longer time period. Short-term traders must learn to use momentum and volatility. Volatility can force short-term traders to become scalpers. I know; often I am one of them. However, the scalping, in turn, causes a lot of "noise" in the market. When enough people are scalping short-term, the market becomes full of noise. At that point, prices begin to fluctuate rapidly and risk is increased. In that respect, scalping can work against short-term trading.

All of us have a built-in aversion to risk. Traders, if they can still pull the trigger, have no problem entering into what seems to be a sure win -- but when it comes to a trade with a clear possibility of loss, they hesitate. Traders in general don't like taking losses, and will do anything to avoid taking them. They will take even greater risk in the hopes of avoiding a loss. We see it all the time: a trader holds onto a trade while the losses continue to mount. They will pretend that the losses aren't really there. Rather than realizing a loss, they stay in the market and hope they will not be wiped out. The ultimate manifestation of this is seen in the dead accounts; accounts that don't trade, which amount to money in the billions held by brokers, simply because the trader leaves the money rather than close out the account and admit defeat. There is always the "hope" that some day, sometime, they will try again.

If you are going to be a professional trader, you cannot avoid risk and losses. They are simply a part of the business of trading. You don't have to learn to love them, but you do have to learn to accept the fact that they are a reality of trading, and work at disciplining yourself to keep them to a minimum.

see, now this is a bunch of crap......whoever is posting these has the nerve to make a new post ( commercial) for Joe Ross yet they can't respond to the other thread....seems real wrong to me.....Was it last friday that the other thread started? Too much of coincidence.......I'm telling!!!! LOL!!

its a bot ban joe ross.

Traders in general don't like taking losses, and will do anything to avoid taking them. They will take even greater risk in the hopes of avoiding a loss. We see it all the time: a trader holds onto a trade while the losses continue to mount. They will pretend that the losses aren't really there.

As I mentioned in the stops thread, the next natural step is for the trader to average down the open loss by adding to the losing position. This reflects the traders inability to accept responsibility for the original mistake. The original mistake is not the busted trade because we know going in some trades will simply fail, instead, the mistake is the traders inability to clearly pre-define and accurately control the risk in the trade. The problem is the inability (psychologically) to take a small manageable loss. What drives this behavior ? I personally think it's a manifestation of our ego, our need to be right.

This (not taking a small loss and compounding the problem by adding to an open loss) is the one of the top two problems I see traders struggle with. We cannot really trade freely until we get past our need to be right.

I accept a percentage of the trades I enter will fail and result in a loss. I don't personalize a loss because, as Joe's bot points out, losing trades will happen and are a reality of trading. The sooner a trader can truly accept this reality the better.

This is where using a small hard stop loss order works to my advantage in a big way. I never need to worry about an open-ended potentially catastrophic uncontrolled loss with my name on it coming around the next corner. My small stops take care of themselves which frees me to focus on taking trade setups as they present themselves and (hopefully) booking profits.

This is where using a small hard stop loss order works to my advantage in a big way. I never need to worry about an open-ended potentially catastrophic uncontrolled loss with my name on it coming around the next corner. My small stops take care of themselves which frees me to focus on taking trade setups as they present themselves and (hopefully) booking profits.

This sounds really good, but there is an underlining problem with stops. If it is to small (I would say 1-2 points for the way I trade)trading is more like trying to hit a bullet with a smaller faster bullet. If the stop is to large say 4-8 points then it would greatly reduce my bottom line if not totally demolish all profits for the way that I trade. So lets say 3.00 points is a good stop size since my avg win is 4-5points, do you think a 3point SL would work in all markets at all times? Sometimes I can pull the trigger at -.50, 1.00 what ever.
And the scenery of trading constantly changes. Like we have been in a trading range for a few days and boxed the same prices but traders are getting a lot more edgy now since we have been ranging in the ES, same prices same traders different mind set than monday....everyone is looking for a break which tells me its most likely gonna be a head fake knee jerk....
I thing the problem with traders is a few newbies go for the gusto without stops and then blame there sorry a$$ trading on them not using stops so now they can stay in the market for a few more months and slowly burn there money through small 1-2point losses. And they think this is a better way to trade, to loss over the long term rather than trading what the market tells you to do. Just think about it how come every salesman and neophyte trader/book writer/system salesman swear by Stop loss? While the super traders with audited results don't use them for fear they just get ran.

Joe,

I plan to post in the stops topic on this, in response to what you wrote, I just need time, as it will be a detailed post. Let me just say that in the Trading Advisory Services area PT and Phant both brought up how one simply can't compare hedge fund traders to small retail traders like most of us in this forum. If that holds true (they make a very strong case, as they have in the past, it's apples to oranges), then what all the 'big' traders in the Market Wizards books do has essentially no relevance to what us little retail traders do, it's apples to oranges. All you guys are going to lose me if you say it's apples to oranges for some aspects, and very relevant for other aspects...

So, Joe, go to the topic in Trading Advisory Services and convince PT and Phant you can compare them, or PT and Phant, come in here and convince Joe you can't. But I know what you guys are going to do, you'll say for rate of return you can't compare them, but for trading style aspects you can. There's a break in logic to that that I can't get beyond. If the aspects of their styles are all comparable, then the results, with the exception of liquidity issues due to size, should be comparable. Look for my post maybe tonight explaining exactly how and why I look to use stops as I do, all technically based and adaptive to existing market conditions, including volatility, and also why I think we are not on opposite sides of the coin, but perhaps on the same page. Very good teaser, eh?

My short term ES trades are based on specific price pattern setups that form on the short term price charts. Part of the price pattern setup will include a natural stop loss point which for me is the point at which the pattern breaks down and fails. Every price pattern has an associated failure pattern, which in itself is a setup as well. Often, the failure will offer even more profit potential than the traditional setup, lending credence to the need for a stop loss point. In any event, when the pattern fails, im out.

Each setup has various price targets that are based on the overall price structure as it present's itself in real-time. The decision to take the trade setup then depends on the risk - reward a setup presents. I prefer 1:2 or better risk:reward ratio, because I want to consistently maintain an average win/loss ratio above 2. If this criteria is not satisfied by the price structure, then I pass on the setup and wait for a new pattern to form.

Running a tight win/loss ratio of 2.0, the method simply cannot withstand the occasional "6-sigma" 15 or 20 ES point loss which will blow up the long term profitability of the method.

For the record I am not talking about hedge fund mangers. I am talking about retail traders who have stated publicly that they don't use stops. Floor traders, day traders making hundreds of trades a day. If stops work for yall more power to you...but its not the only way to trade profitably. and I am not talking about doubling up or holding a trade until its a winner, I am talking about assessing the situation and not making predetermined cut in stone choices. Set and forget never worked for me.

I posted my stops post in the stops topic, as promised.