I took a significant loss in the fund many months ago. Although consistently profitable at the time, I had to restructure my trading system to build the fund back up as quickly as possible while removing the likelihood of such a loss from ever happening again.
Now I rarely have a losing week, and an out-of-sorts loss, I know, will never happen again. So how have I done this?
Successful trading is about precision. It is about risk and reward and being very good at judging probability. We derive expected value (EV) from risk, reward and probability. In addition, all three variables are constantly changing, and my decisions must reflect these changes in real-time.
To calculate EV, we take the estimated win rate as a percentage and multiply it by the reward minus the same calculation with the risk. I do this for each significant bar or phase of the trade. So, for example, if a percentage win rate is 30% with a reward of £250 and a risk of £20, then EV is £60.10.
EV=(250 x 0.3) – (20 x 0.7) = 60.1
However, EV is dynamic, so the calculation is done through experience as the trade progresses.
Appreciating what the EV is in the moment provides an immediate decision: exit, hold, take some risk off, or even add to the trade.
An advanced concept introduced by Lance Breitstein, but one that has made a significant difference to my results. Other aspects from Lance are exponential size on graded setups and a regular video review of my best trades.
How am I finding the all-important time over price structure?
The first chart I view is a line drawing, and surprisingly, that has markedly improved my win rate. A potential structure is generated from time-over-price and shows up very clearly in an uncluttered line drawing. A line provides the closes. In other words, you don’t see the wicks, and of course, with a line chart, there are no long and short coloured closes as in a candle or bar chart.
I’ve spent the longest time viewing charts with different tick and minute bar durations. As a result, I’ve chosen a 300-tick chart as my basis for the line, and I have the line more compressed (covering a more significant period) than I would have with a candle chart.
Once I find a potential chart structure, I review the higher charts for context. As my overview, those higher charts are the 30-minute and the daily candle charts. Both higher timeframe charts must agree with the trade direction for the line chart structure to qualify.
Therefore, I find that my review of some fifteen FOREX charts and the GER30 chart via the line drawing first is the best way around for me.
The setup is next.
With a qualifying structure, I switch to a 300-tick candle chart. The setup is usually a break in the desired direction. For me, a measurable target is a necessity. However, being practised in the many price action conventions is also essential. Before an entry (or immediately after), I’m aware that the trade satisfies my VSSS (See previous blog post). I’ve changed the A to ‘the right side of the V’ by Lance Breitstein).
In addition, the trade has to have a measurable target and a suitable stop position with a worthy risk/reward. As part of the process, I’m looking to the left to clarify the win percentage through prior chart structure and or significant support and resistance levels. And an awareness of the grade I have given the trade, and therefore the trade size gleaned through hundreds of hours of chart video.
In many instances, to achieve the all-important EV, trades happen in the blink of an eye. Under these conditions, mistakes happen but are minimised through practice and waiting for the proper setup.