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Is Patience Really Key For Traders?
47

Is Patience Really Key For Traders?

by The MoleMay 8, 2017

You probably can remember at least one campaign in your trading career you regret having missed out on. It’s the ‘one that got away’ despite your best efforts to grab a position when conditions started to align in your favor. For me personally it continues to be one of the biggest psychological as well as technical hurdles to grapple with: When is the perfect time to get positioned? Well, that’s easily answered of course: Just before it starts taking off!

Now seriously speaking there is a bit more to this than meets the eye. The answer to the above question actually does not like at the core of the issue and can be easily answered with ‘as soon as your entry rules are satisfied‘ which also implicitly means that you do have them. From there you can simply bite the bullet and take on a full position or attempt to get a bit more fancy based on recent or historical volatility patterns. Unfortunately however what sounds great in theory does not always translate well into practice.

2017-05-08_soybean_oil

Once again I will use a current example to depict some of the real life issues at hand. Here you see a daily and weekly panel of soybean oil which my subs and yours truly had been coveting for a while now based on a weekly formation I hoped to exploit in the near future. We got a literal break last week when ZL pushed above the upper range of its weekly price channel and seemed ready to take off.

Momentum Chasing

And here it is right there, the crux of the issue. You look at a price formation like that and just know that the odds point toward escape velocity without it ever looking back. Especially when it is exactly that which happened the last time around (see my comment on the weekly panel on the right). My rules told me to wait for a retest as taking the first spike can work but in many cases gets sold and thus may inflict a loss.

Position Sizing

But wait there’s more and it is often not immediately apparent to novice traders. A higher entry does not automatically advance the entire risk range (i.e. break/even to ISL in ticks) higher as well. Unless new short term context has already been established (which is rare as the first spike is directional) one is tempted to focus on technical context in the form of your favorite indicator reading, a spike low, or some correlated long term price levels. Whatever you use, most likely it’ll be further away from your current entry price than if you had been taking the entry near your desired inflection point. And that means that your risk range is wider which implicitly also means that your position size is smaller. Feel free to play with our handy futures risk calculator – there’s also a forex version.

Entries Matter After All?

It is true that in theory entries in essence do not matter, what matters is where you exit. But in reality how you enter actually matters as it will either affect your position sizing or put you at increased risk of being stop run. Getting stopped out may also psychologically affect you and anchor you into not taking an entry when price actually returns to your desired entry range. And finally if you wind up missing out on an entry you may resort to ‘revenge trading’ which in part is a destructive practice based on subconscious self punishment and an obsession with a particular symbol. In other words – your ego or intellect was proven right as price moved exactly in the direction you had anticipated/predicted. But you feel cheated or deprived of receiving the profits you believe you deserve.

Auto Systems To The Rescue?

So yes, entries most definitely matter very much. In case you wonder, when it comes to fully automated systems you are simply shifting from one set of problems into another. As most auto systems may not be as good as human operators  in assessing price patterns (some are actually better but they usually aren’t found in the retail domain) and cross market correlations (humans are usually better) attempting to optimize entries via complex rules can quickly send you down a very deep rabbit hole.

On the other hand at least automated systems have no compunctions whatsoever about taking entries based on a set of given rules, no matter what. Which is great during periods when things go your way but can turn into Chinese water torture during extended losing streaks when that very same system stubbornly insists on taking every single entry. Clearly this is a huge topic in itself and we have covered some of it on various occasions over the past few years.

Back To Business

So back to soybean – what to do? My default approach always has been and continues to be to simply stick to my guns and accept the possibility of not getting positioned over getting positioned ‘badly’ (I concede that this is a very subjective perspective). In my personal experience getting a desired entry after the first emotional spike up (or down) is extremely rewarding and has the added side benefit of increasing the odds in my favor. Which IMO greatly outweighs the few times I missed out on what later turned out to be a very profitable trending pattern.

Campaign Updates

2017-05-08_soybeans_update

Actually we’re not quite done with soybeans just yet. Here’s soybean meal which has been a difficult patient but the current gyrations may turn into a benefit later (i.e. more technical context) should our trailing stop survive.

2017-05-08_EURUSD_update

The EUR/USD campaign also has been a bit sickly but is still looking positive after the ‘sell the Macron election news’ seems to be rather muted. My stop remains at break/even for now. Should we push higher from here then I’ll advance it to below a recent hourly spike low.

Entries

2017-05-08_spoos

The E-Mini is looking like a nice long but only if price agrees to drop a bit lower into ~2390. My stop would be set < ES 2377. This incidentally is yet another example of what I have been talking about in my introduction. The odds actually support acceleration higher from here but last Friday was clearly not a good time to enter and for now it’s best to hold off as we may see a bit of volatility near the open.

More entries below the fold for my intrepid subs:

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About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • BTrader

    Thanks Mole for the post. Is the zero ok it seems to have a blue screen right now.

  • randomuser6789

    Is Disqus working?

  • Ronebadger

    There was one comment earlier, then it disappeared, then yours just showed up

  • BobbyLow

    Entries do matter and exits matter even more. However, I’m beginning to think that trying to work a manual system as if it was automated has it’s own share of problems. This is where discretion comes into play. If and when rules say it’s time to do a certain thing but for reasons words cannot describe the chart just doesn’t look right, it might be time to ignore what your rules say and do what your instinct tells you to do.

    In another matter, I’m not French but “Vive la France”!

  • http://www.captainboom.com/ captainboom

    “…and do what your instinct tells you to do.”

    I can see Scott giving you the Atomic Elbow Slam over this statement. :-)

  • http://evilspeculator.com Sir Mole III

    Apparently 😉

  • ZigZag

    I’m having severe cognitive dissonance today. Virtually everything I watch is down, except for Aapl, which is up 2.75%, basically keeping all the indexes up.

  • Mark Shinnick

    Discretion indeed a very two-edged sword. I’ve found its only appropriate for model rules which have yet to get coded into the algorithm.

  • http://evilspeculator.com Sir Mole III

    Mmmmh – very interesting. Market’s got bad breadth…

  • http://evilspeculator.com Sir Mole III

    You mean ‘vive l’europe’ because that’s what they voted for.

  • Mark Shinnick

    Didn’t this same essential phenomena also happen in past famous market tops?

  • ZigZag

    bonds down, vix down, grains down, most stocks down, emerging markets a little down; it’s like all the market participants woke up today and decided that it only makes sense to have 100% AAPL in their portfolios. And they may be right.

  • http://evilspeculator.com Sir Mole III
  • http://evilspeculator.com Sir Mole III

    What you mean? Markets only go up, right?

  • http://evilspeculator.com Sir Mole III

    I’ve seen him bitch slap people for less.

  • http://evilspeculator.com Sir Mole III

    I didn’t mod anything so maybe there was a problem, yes.

  • BobbyLow

    Please read my answer to Captain.

  • BobbyLow

    Not really Captain. For example, listen to what he said in the webinar link he posted the other day when he talked about stops. He basically said that when a trade is going against you but has not hit your stop yet. “All” of the reasons for your entry might not still be there and the trade is no longer as appealing as it once was. So in this case, let’s say that I’m only .5R Down at this point. It might not be necessarily a good thing to wait and eat the next 1/2 R down and hit my stop. This is where discretion would come into play and would not be absolute in terms of being the correct thing to do but it surely is an option.

  • http://evilspeculator.com Sir Mole III
  • http://evilspeculator.com Sir Mole III

    I was just yanking your chain. But this is actually something where Scott and I disagree. I rarely touch my campaigns as he’s technically correct but the threat of misuse is too great.

  • Mark Shinnick

    Actually, the centralization of buying into a so limited number of favorites.

  • BobbyLow

    Or perhaps it was a vote against Le Pen. I know I’m in a minority here but the slightest chance of another loose cannon elected as a head of state is bothersome to me.

  • ZigZag

    #Timestamp.

  • BobbyLow

    No problem Mole. It’s a hard thing to describe but I believe you once said something like it only takes a few seconds (actually almost instanteously) to look at the same chart that you’ve seen thousands of times to recoginize at what levels a trade is working well or working badly. So there is intuition at play here but this intuituion is based on seeing the same thing happen over and over again. If this makes any sense. :)

  • http://evilspeculator.com Sir Mole III

    Well, IF you can derive a repeating solid rule from it then it can be integrated into your campaign management. But think about it – IF you allow discretion then where do you draw the line? It is so easy to convince yourself of something when that little voice in your head is screaming at you to sell sell sell!

  • http://evilspeculator.com Sir Mole III

    Well, he’s certainly no ‘loose’ canon – just one forged in the bowels of investment banking 😉

    My skepticism is not directed specifically at Mr. Macron but at the European Union and its general agenda. Nothing they have touched over the past 10 years has been successful or even came close to being a good idea, quite to the contrary.

    Ascribe it perhaps to my advanced age but my favorite memory of Europe was that of the early 1990s before the monetary union which apparently turned into an administrative/bureaucratic union further down the line.

  • http://evilspeculator.com Sir Mole III

    I was being facetious. Do you remember my posts on market breadth? Which is what we’re talking about here.

  • http://evilspeculator.com Sir Mole III

    Seriously LOL

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    One of the Rabbit’s owners was retired Wells Fargo executive Mark Oman?!
    Now that’s sending a message! (as in, Keep your mouth shut.)

  • Mark Shinnick

    These really are fascinating times.

  • Darkthirty
  • Mark Shinnick

    That’s why I pay you the big bucks for guidance in the most cleverly-devised psychotic environments man appears capable of producing.

  • BobbyLow

    This might sound crazy and I don’t know if I can call this a solid rule or not but there are certain traits both positive and negative that have been firmly entrenched into my trading over the years. Rather than continue to try to constantly fight them or try to do away with them, I’ve decided to make these traits part of my system. For example, during former back tests, I would always work the best case scenario and things would look fantastic. However, time after time in real life trading for one reason or another, the best case scenario did not work as well as planned because my entrenched traits would always overrule. This is because of the obvious reason that on paper it’s easy but with real money – not so much. :)

    So now when I do a back test and a trade gets to a certain point, rather than do what the perfect trader would do, I cut the bullshit out and do what I know in my heart that I would do under a real money situation. What I found in comparable back tests using both the Perfect Trader Scenario vs. What I would really and honestly do in real money trades, my performance did not suffer.

    I know this probably sounds screwy, but like Yogi Berra once said “When you come to a fork in the road, take it.” :)

  • OJuice

    The range for /ES this afternoon looks like quiet low volume after hours trading… Crazy.

  • Darkthirty

    Nobody’s selling today….pump’s turned off. Watch for a drop and immediate rebound. For that matter back test my “theory” for the past 30 days

  • http://evilspeculator.com Sir Mole III

    Let me get my magnifying lens… 😛

  • Scott Phillips

    Absolutely correct. A system is not a suicide pact!

    This is a misunderstood aspect of system trading, and Ed Seykota explained it to me at a trading tribe thing. Ed allows himself very small limited discretion to bend his system rules, usually exiting a trade which “is a gonner” or “banking some profits on an upside capitulation”.

    He keeps track of his discretion, and on balance it’s basically a wash, sometimes works sometimes doesn’t.

    It does serve the purpose of allowing you to trade systematically while not going crazy

  • Scott Phillips

    The less moving parts a system has the easier it is to just trade it.

    Thor is quite challenging to trade, and needs some tweaking. While in drawdown it requires me to be a little more cautious, and the oppposite in superperformance.

    My mean reversion system is the opposite, it’s simple, scalps for 1R and the best strategy is just to shut up and trade it

  • Scott Phillips

    What I do is to revisit the discretion as part of the monthly review.

    If discretion is positive for my equity curve, I’m allowed to keep doing it. My equity curve graph for the year is below.

    It makes very little difference

    https://snag.gy/nZIwNV.jpg

  • aka_ces

    The “DOES SCALING-IN WORK?” entry of 24 Mar described scaling-in for contexts of position-size management, and when assessed probability of trade success is ambiguous.

    If we consider the scenario of today’s entry, where the assessed probability of trade success is high, then we have another context for scaling-in.

    When confident about the probability of a large move, but uncertain about the extent of pending retracement, one can risk small-R, say 0.20R, on an immediate, pre-retrace entry, and distribute the remaining 0.80R on one or more entries at better prices during a later retrace.

    If there is no retrace, you get on board for a potentially high-R ride that may give you a minimum 1R win, as opposed to 0R and regret. If there is a good retrace, then you get 80% of your risk at superior price(s), and don’t feel so bad about that small 20% R chunk that wasn’t at such a good price.

    This approach does require more work, and may not be practical depending on leverage and traded time-frame, but if those bugbears are moot, this is an appealing approach, for mental health and more consistent returns.

  • Scott Phillips

    Entering counter trend BEFORE retest/retrace is fraught with danger. Most times it is simply not an edge.

  • aka_ces

    right — this entry concerns “where the assessed probability of trade success is high”

  • http://evilspeculator.com Sir Mole III
  • http://evilspeculator.com Sir Mole III

    “When confident about the probability of a large move, but uncertain about the extent of pending retracement, one can risk small-R, say 0.20R, on an immediate, pre-retrace entry, and distribute the remaining 0.80R on one or more entries at better prices during a later retrace.”

    There are actually two aspects to that. I often see formations that point toward an impending resolution (my speak for range break out) but volatility is still high. Thus entering small gets your foot in the door and doesn’t sting too much if price drops lower and perhaps even stops you out. If there is no further retrace then fine – you grabbed a lower probability but higher payoff position which I can live with.

  • http://evilspeculator.com Sir Mole III

    Yeah, I think that you handle it as best as possible. But not everyone is capable of a) resisting emotional whims and then b) learning from them.

  • http://evilspeculator.com Sir Mole III