Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
There are a few schools of thought on moving one’s stop to breakeven after entering a trade. Many adages suggest that breakeven is a great way to manage risk, while others describe it as the worst thing a trader could ever do. I think it falls somewhere in the middle, but ends up being more detrimental to a trader’s psychology than a trader’s account. And, naturally, when the psychological edge struggles, so does the dollar value in the account.
Scenario: The market is 10 bid, 11 offered. You have reason to go short—the momentum is there, bids are pulling and getting whacked in the process, and the CEO of Goldman called and told you that they were about to sell. You hit the bid. The market drops a couple of ticks on significant volume, telling you that there’s a combination of aggressive sellers and panicked longs running for the exit. In short, there’s significant momentum to the short side.
Now it’s 7 bid, 8 offered. You’re in a 3 tick winner with a free look at 2 ticks, so even if you had to bail out right now, you’d still make 2 ticks. So what do you do?
Option 1: Move your stop to breakeven. You protect that risk and ensure that, in the worst case scenario, you only lose commissions on whatever size you’re trading.
Option 2: Don’t move your stop. For argument’s sake, let’s say that hard stop is 3 ticks above your entry.
And now the market starts to move. Sellers start dumping size onto 7s, and the volume traded jumps from 1,000 to 6,000. Suddenly, buyers lift 8s by buying 1500, and now the market is 8 bid/9 offered. What do you do?
Option 1: Your stop is now at breakeven. This is a “free trade”. There’s no reason to actively manage the trade, because you have a “free look” at lower prices. Again—worst case scenario, you’re out commissions.
Option 2: Bid to exit at 8s. Buyers have shown that they’re ready to pick up 7,500 contracts, and they’re probably willing to buy more as the market retraces. Take the 2 ticks and reevaluate from the sidelines.
And, of course, the market now rallies back to 10s as buyers exit their positions. The breakeven stop is triggered. Trader 1 is flat on the day, while Trader 2 is +2 on the day.
What could they both have done differently? I believe that the psychology surrounding breakeven is damaging to Trader 1. He believes that he has a “free trade”, so he can sit and wait for a 5 tick winner with zero risk. Trader 2 sees the market absorb, waits too long, and ends up exiting a tick higher.
Trader 1 essentially makes two bets. His first bet is the initial trade. He wagers 2 or 3 ticks that the market will drop 2 or 3 ticks. His risk is ~1:1. His second bet is the move to breakeven. He bets 3 ticks that the market will print down 2 more ticks; I’ve obviously massaged these numbers to illustrate the inverted risk (2/3 R:R on the second trade) but the concept stands. Furthermore, as the market shows signs of reversing, Trader 1 actively decides to do nothing. He decides to risk 3 ticks on an increasingly unlikely proposition of the market continuing lower.
Trader 2 makes one bet and mismanages the exit. His initial R:R is near 1, just like Trader 1. When the market trades 3 ticks in his favor, he recognizes that larger traders are likely exiting, and that risking 3 to make 2 or 3 more is a losing proposition. Trader 2 trades poorly because he doesn’t bid to exit when the initial 6,000 absorb. There’s plenty of time for him to bid to cover in that case, and he also ignores the signs right in front of him. However, Trader 2 bids to cover once he realizes that the market is no longer pushing downwards. He sees that his opportunity is gone, and he takes his money off the table.
_____________________________________________________________________________________
Now, the market moves slightly higher. It’s 11 bid/12 offered. Trader 1 thinks he’s been had; “That SOB at Goldman tricked all of us, just to drive it higher. I’m glad that I used a breakeven stop, or else I’d be in a loser right now”. Trader 2 is prepared for another trade; “I missed the absorption at the 7s, but I exited at 8s and am ready for the next opportunity.
Trader 1 thinks he saved himself by using a breakeven stop, when he actually lost by not exiting closer to those lows. Trader 2 thinks he could have done better by exiting at the lows, alongside the large absorption.
If this exact same opportunity happens 10 times, the trader who moves to breakeven and ignores the order flow is likely going to lose. There may be outlier trades in which the market cracks 6 ticks, and let’s suppose that this happens 3 times over the course of 10 trades. Let’s also assume that Trader 2 also gets better at reading absorption, and so ends up picking up 3 ticks on his trades instead of 2. The results might look like this.
Trader 2 comes out slightly ahead of Trader 1. These results obviously assume that there are no losses, which is completely unrealistic. So, let’s assume that both traders have a strike rate of 60%, and risk 3 ticks on their trades. Trader 1’s breakeven trades are going to be included in his winners, because we will consider them as winners which “came back to breakeven”.
Trader 1 (Move to Breakeven): -3, -3, -3, -3, 0, +6, 0, +6, 0, +6 = +6
Trader 2 (Active Management): -3, -3, -3, -3, +2, +3, +3, +3, +3, +3 = +8
In this case, Trader 2 still comes out ahead of Trader 1.
__________________________________________________________________________________
So, what should a trader do? Should he take what the market gives him, and exit as soon as it shows signs of stopping? Or should he move his stop to breakeven, let it run, and swing for the fences on every trade?
Can you help answer these questions from other members on NexusFi?
Been at it for less then a year, but here's my thoughts on this to add to this discussion anyway;
- Trader 2's results should be more like +24 (I'm assuming all those +3 is when he queues up on the bid to take 3 ticks, they will get that limit fill maybe 50% of the time)
- Trader 2's method is more consistent and works better with normal human psychology (we like certainty, stability etc.). Trader 1's method feels like its undesirable for a trader because it has that "go for riches or broke" feel to it (go for the big win or stop out).
My answer is both. You start small. If it goes in your favor then add to the trade. Take some of your leverage off for a small profit, let the rest run for a bigger win and chuck a stop on it (either for overall breakeven or a scratch just on that 2nd position you let run). So in this scenario, Trader 3 could double his size with a 2nd entry 2 ticks away from his initial entry, take the 1st half of his position off @ 3 ticks, and manage the 2nd half of the position according to order flow.
IMPORTANT - I'm talking as someone who has experienced being trader 1 so the above is just an "opinion"
Isn't that the same concept though as the overall breakeven stop? Trader 3 sits in a winner, adds to it at some arbitrary point (I say arbitrary because I've done this too countless times), scales some to feel good about the position, and then lets the add on roll back to breakeven. Now you're feeling psychologically worked, because you were in a good trade and then lost money on it, because you feel the losing trade more than the winner, because you know better, and because any of a hundred different things.
Now there's another decision point. Is the trade still good even though the price is bad? If you originally sold 10s, added 8s, and now the 7s were absorbing, what do you do? Per the plan, you exit the first lot at 7s and then use a breakeven stop on the second contract. Suppose the market does exactly what I outlined earlier and it trades 10s. Now you exit the added contract at 10 for a -2.
The trade is overall now +1 on what was a +3. After commissions, you're probably close to +0.
Maybe it works for some traders, but it doesn't work for me.
I guess the main point I wanted to touch on was, what if the market reaches one of those times where the order flow shows indiscriminate selling? As in, people are hitting the bid 10-20 times whilst someone hits the offer once? If you're seeing that, you don't want to just be sitting on a 1 lot and riding that move down, you'll wanna add onto it ASAP. However adding onto winners is an extra skill (like how reading order flow is an extra skill Trader 2 has over Trader 1).
I guess you could say that we would then need to analyse Trader 3, who can read order flow and adds to his winners. But I'm thinking the primary point of your journal entry was to compare active vs passive management, in which case we both are agreeing that active is better then passive...so I think I went a little off track there =P
I've got a pretty awful cold which is keeping me from stringing together an extended post. I wanted to quickly update on my Four Month progress.
In January, I was down 52 ticks over 34 trades, with an expectancy of -1.53.
In February, I was down 7 ticks over 14 trades, with an expectancy of -0.5.
In March, I was down 0 ticks over 12 trades, with an expectancy of 0.
In April, I am up 2 ticks over 19 trades, with an expectancy of 0.11.
My edge slowly continues to develop. Trading order flow, to me, feels like the only way to trade. You can see everything right there in front of you on the DOM and it just really clicks for me.
It's really situational, too. The reason I sell in this moment might be a reason to buy five minutes later. The more that I see that it's "feel-based", the more I see how difficult it can be to pass this feel on to others who want to learn to trade.
My trades for the month went like this:
-2, -2, -1, -1, -2, +2, +2, +1, -2, +3, +1, +2, +1, +1, +2, +2, -3, +2
The bolded trades are trades which I executed with a 2 lot, so the actual +/- ticks should be +1 for each. After successfully digging myself into a hole at the start of the month (I traded NFP after being sick for a week and immediately had 2 losers), I hit a pretty decent run and I went from -8 to +6 (+4 after accounting for size).
My one issue with my performance this month is that I only had one +3 trade. With a hard stop of -3, it's very easy to hit a couple of losers and then need ten or more trades to dig back out of that hole.
From my still limited experience, the only way to understand how the game is played and to then successfully play the game is to trade order flow.
___________________________________________________________________________________________________________
Here's a thought I ran across this month and I figured it would be a neat opportunity to see what people think. I used to think that HVNs and LVNs were areas of high interest and low interest, respectively. But I don't think that's true.
I think it's more like HVNs are the only areas where traders can actually get trades off. If you look at a LVN area, what are the traditional characteristics of that spot? LVNs are typically highs, lows, and areas where it seems that stop runs occurred. Those are prices that nobody could trade! Who wants to sell the high of the day? Everybody, in hindsight. It's the exact same with the low of the day. Why do stop runs have such low volume? Because everybody is scrambling for the exit, large traders are continuing to push, and there is no chance to auction price around.
So, if you were a large trader and you wanted to get short, how would you do it?
You'd buy.
You'd buy the market because you will get a feel for positions of other big traders in the market. If you are bid 1200 at 05s and the total size bid at 05 is 1400, then you know at most there are a couple other people on your side at that time. Now, armed with that knowledge, you can take a shot. You can try to push enough size that all of the other big players get caught offside. Suppose you lift the offer, bid 1000 at the next price, and see that suddenly there are 2200 bid in total. Somebody else big is working an order there. Somebody big wants the same trade that you're putting on.
Now you've still got to get short size in this market. However, there's now buying pressure that you just created. You're creating the search for liquidity. You're pushing the market higher, expecting bulls to push with you, expecting bears to puke out, looking for the spot at which somebody big finally says "Screw it" and buys 5000 to cover their 2000 short and get long for new highs.
You've now found the liquidity. You found the LVN where everybody is now bailing for the exit. If you were short 3000 and the market is in your face, you can't just go buying 6000 to reverse if the market is only 1200 offered. You'll clear that price, maybe the next price, and possibly the third price above that as well. This is why LVNs happen. People need those prices so much that they're willing to just hit through them, which creates the general area where little trade went through.
So now as a large trader, you're long 5000 and the market is making highs. Buyers are pushing, shorts are puking, and you decide to sit a refreshing offer out there. You refresh to get out of 3000. The market pauses. A 5 lot pukes out. What do you do? You're now bid 1500. The total bid is 2500, you ARE the refreshing offer which is about 800 right now, and you know that everybody is stuck. This is the LVN. This is the price that everybody needs to stop the bleeding.
So what do you do?
You refuse to give them that price. You pull your 1500 bid, you sell everything at the bid which cracks, you offer 1500 down at the next price, and buyers see that they've been had. They bail. They now need to get out as quickly as possible to--once again--stop the bleeding. You sell right along with them, working yourself into 8000 short at an average price higher than where the market was in the morning. You worked over all of those traders, which is wonderful! You're making money!
I sort of look at correlated markets, if you mean UB & ZB & ZF. Otherwise, nah. I have an ES DOM up in the off chance that they get tied, but I don't really care about anything else. What is 6E doing? Where is crude versus its trendline? Is gold doing inflationary things? I have no idea. That information doesn't help me watch ZN's order flow.
Awesome man. That is a great feeling, to be making progress. Keep building on it.
I remember very distinctly one day leaving the office around 2005....I was maybe a 5 or 10 lot trader at the time, I think I made 10 ticks that day. This is probably exactly comparable to you being a ZN scalper w/ 1 & 2 lots, clocking 2 or 3 ticks in a day.
I felt F&$7ing great. It was only 10 ticks but I remember so clearly thinking "I'm doing it!!!"... Really feeling like I was on the right path and I just had to continue with it and soon enough I would be trading 100 lots making 100 or 200 ticks in a day.
And I continued working, focusing, and progressing, and sure enough I got there. And I have no doubt if you are willing to continue your work and focus, continue to build mental toughness and grit, you will get there too. You'll be swinging 100 lots in the ZN and looking to net out 5 figures in a good week. Its right there. You already have the knowledge and ability, at this point I think it's 1.) refining your strengths and weaknesses 2.) Always focusing on improvement and 3.) Grit and mental toughness to keep you centered.
That day I made 10 ticks, I was a junior trader and clerk, paid $400 a week (before taxes). I think I had probably had a couple weeks making about $1000 a week trading and then I was offered a deal by my backer. No more $400 a week, I would split my trading profits(or losses) 50-50 with my backer. Wow, I was nervous.
That wasn't "The Turn" for me though...I don't think so. I think "The Turn" happened a month or so later....I remember this moment distinctly as well. It was probably about 1:30 AM and I was just getting to my car to head to the office to trade the Euro session...and all of a sudden I realized....I'm not afraid.
Every single day prior to that, and there were many, before heading into whatever office I was trading at...there was fear. Fear of risk, fear of losers, fear of failure, fear of getting fired. Fear because I had experienced all those things before and knew I could fail again. As we all can.
But that day, the fear just left. I had confidence in my edge, confidence in my ability to execute that edge, and confidence that on that day I was going to walk in and take every good setup, manage every trade well, and in doing so over time I would be successful. That was "The Turn" for me. And I think it's at least a very important part of "The Turn" for everyone....that detachment of really any importance of an individual trade or day, and a confidence in your edge and your ability to apply that edge over time. After that...losers didn't really mean shit. They were just something you dealt with, accepted, learned from if possible, on your way to the next setup. You just get it out of the way and move on to the next one. Period.
