Today, when I woke up at 5am, I saw a set up. I’m busy so not I’m trading very much at all. But traders gotta trade. So, to scratch the itch, I said to myself, “Let’s jump in here and see where we are at the end of the day.” Price took off and ran for 30 pts (volatility is pretty ridiculously high today).
15m Later: Price got to VWAP and I immediately wanted to sell at a $2,800 gain. I stopped for a second and told myself. “Well, you said END OF THE DAY. Who cares. Stop out at break even or let it run like you planned. Leave it alone.” I was indifferent. I didn’t care much about this trade.
30m Later: It formed a pivot and broke VWAP and the daily open. I thought, “Move stop to below the pivot, below the EMA15, or even below the VWAP/daily open.” But that wasn’t my plan was it? I had no plan in place for it going this high, but I do normally move the stop up as pivots are formed and take something out along the way. Then I remembered, “45 min ago, you said ‘lets, see where we’re at by the end of the day’” Its not the end of the day. Now its October 24, 2022 6:37 AM (EDT) and I’m up about $6,000.
I haven’t looked at TradingView, but at this point, I imagine the 30m chart is curving up, its probably a good looking 30m candle. Price has broken above the open and above VWAP. Volume delta is only increasing. All bullish signs on a higher timeframe and I’m in very close to the dead low.
But I am just compulsively and persistently looking for reasons to take profits. I WANT TO TAKE PROFITTTTTT!! At least partial profit right?!
Here’s the truth about this trade. 95% of the time this wouldn’t work. You’re not going to take a trade, be in about 6 ticks from the low of the next 2 hours, and thereafter it runs 30-40 pts very often. In fact, maybe even 99% of the time it won’t work. But 1% of the time it will and that will be a very big win. On the face of it, that’s not a sustainable strategy. But you can make this a strategy that works.
Out of the 99% of the time that you didn’t pick the dead low and it fails, how often can you stop out at a tick over even vs. lose at the stop loss without missing the bigger move? That’s math worth figuring out. Because that consistent sacrificial bunting will eventually lead you to massive 30 to 60 or even 100 point win with no additional work after entry. Back of the envelope math says if you can stop out at break even 60% of the time and risk less than 2 pts, then you have a winning strategy. If you can stop out at break even 80% of the time. You’re golden.
Now I could say “When I achieve $1,000 gain I will take profits” or “At ‘n’ gain I’m exiting the position and enjoying the win.” but then I wouldn’t be up $6,000 now because I would have diluted my position size or have been sidelined. When the market runs another 60pts, how much have I sacrificing by taking profits early?
Otherwise stated, how much “Unknown” gains am I sacrificing for “Known” gains. Well, of course I have no way of knowing. That’s what makes them unknown. There’s another trading concept that says, “How much risk am I willing to take to find out?” In my trade today, easy math says if I leave the stop one tick above the entry all day like I originally planned, I’m willing to risk all of it. But, am I really willing to risk losing a 50:1 R:R win? Judging from my impulses, it doesn’t seem like it. Every time I look back at a chart with a profitable position I see another place to move the stop or another reason to get out of the trade or have the compulsion to take partial profits or consider honoring some “Always get out when…” rule.
I was indifferent at $2,800 gains. I started getting worried about protecting my position when price broke above significant levels and I casually resisted. But, now I get to $5-$6k in gains and all of the sudden I am panicked! I want to take these “known” gains off the table. I want to walk away with the win.
But stop. Wait. Isn’t that just fear of the unknown? Sure, its wise, pragmatic, smart, and all that to take partial profits. A bird in hand is better than, blah blah blah. But, if I KNEW that the price was going to run another 60 pts there’s no way I would get out. That makes sense. But I don’t know if it will or won’t. Now let’s go back to when I took the trade. My original thought was to take a flyer, scratch the itch, who cares, I’ll buy, see if I can get enough space above me to move the stop to one tick over entry and see where we are at the end of the day. So, what is compelling me now to take profits? Rationality? Pragmatism? Intelligence? or is it really just fear?
It is probably wise and rational is to let those who said it best say it again:
“In speculation, when the market goes against you, you hope that every day will be the last day and you lose more than you should had you not listened to hope … And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.” - Edwin Lefever, Reminiscences of a Stock Operator
I could take a trade like this every day and 99 days out of 100 it would just stop out. But I would still be massively profitable for the year if I a sufficient number of those positions do nothing more than just stop out at one tick above the entry price.
Arguments Against This Strategy:
(1) One thing for sure is your actual returns would underperform your max-runup by ungodly amounts. With no strategy to take advantage of winning trades in progress, it seems that you will have a LOT of trades that just stop out before the end of the day.
However, what are the conditions you stop out?
(a) You do not catch the low of the day. Thus, no matter how high it runs, it runs lower. (b) You do not buy at sufficiently low prices (low price of a pullback) in a bull trend.
(2) You will basically spend all day every day in losing trades with a winning day being a very rare exception (stopping out break even isn’t a win unless you consider ‘not losing money’ as a win, which, even if true, is a losing mindset).
However, if you know at the end of the year you will have significantly increased your wealth, does the losing still hurt? Isn’t the problem just that you honestly don’t KNOW ? You only have hope, and no proof that your hope will be substantiated. Isn’t that just a fancy way of saying scared? Is that the appropriate emotion for the strategy?