What I'm about to discuss is something seen quite often with traders who have established some consistency in their trading, and are now working on "scaling up" their position size to earn more: Despite the market environment remaining nearly unchanged, traders often struggle when dealing with adding size to their trades as the additional risk can push the trade out of the trader's comfort zone.
Once a trade is past a trader's comfort zone, the trader more likely to start making poor decisions and may start deviating from their regular trading behavior or trade plan. Next thing the trader knows, they are scaling back down to the position size they previously felt comfortable thanks to losses caused by poor performance. Quite often this hurdle can stall a trader's development, even for months or years, until they can overcome the negative emotional association with the added trade size and risk.
When I was first starting my trading career in the prop trading industry, one of my floor managers had a method of dealing with this; straight up repetition of the nerve racking stimulus, by forcing you to handle risk that's beyond your comfort zone until it no longer bothers you or registers in your unconscious as something to be nervous about. This works, but it's far from perfect... Not to mention, when you're a retail trader trying to make it in this business while trading your own capital, this method can be quite an expensive lesson if you're not a quick learner!
Later on, I met another manager who took to a different approach: A method that not only made sense as a step between "building consistency" and "scaling up", but became a skill I think everyone should learn regardless of how far along they have developed as a trader.
"Being more aggressive doesn't just mean taking on more shares." -- This is what the other manager told me one day after I hit my risk limit trying to scale up in a stock. That day, I got in a heavy position which did not give me much margin for error, and our risk software flattened me out (at a loss) long before I would consider the trade itself a loser. It wasn't the risk software's settings that were at fault; I messed up, and while it was not a very costly mistake by my standards today, it was a sour loss in my mind for sure because I was the one who chose to apply too much size too soon in the trade.
I asked the new manager what he meant by "being more aggressive", since I understood what he said at face value but didn't quite how to apply it. He then showed me his trading history on the stock I was closed out on, and read off the numbers. Most of our directional trades choices were the same (as we were following pretty basic breakout ideas at the time) but he had taken 140+ executions that day vs me at only 30.
The difference illustrated by comparing our transaction numbers instantly hit me: we had the same ideas, but he was able to work far more profit on a per 'idea' basis than I could have ever hoped to do even if my larger sized trade worked out. All he was doing differently was being more "aggressive" in taking some of his position off where it made sense to lighten up, and put it right back on where it made sense to add again... all along the way he was lowering his overall risk on the day while banking profit.
In short: If you are expecting a run from the current price of a security to a given future price target, and it's reasonable to assume price doesn't move in a straight line directly to your target, then it's possible to increase your return without having to increase your size (risk) by working into and out of exposure as the market fluctuates toward your target.
The "big boys" who manage multiples of millions have to do this almost by default, as the amount of volume they do leaves them little choice. A super large trader simply cannot just execute their positions all at once without impacting the market (which would in turn give them unfavorable fills.) So large traders at institutions learn to do this out of necessity. Scaling into and out of positions as the market works for, or against them. As smaller market participants, all we're doing is picking up the important parts of this skill and applying it in a way that can help us improve our trading performance well before such a skill becomes required due to our size impacting the market.
The best part is, at no point does this active method of trade management increase the risk of a trade. It can only serve to reduce risk on winning trades, or lock-in some profit before the trade turns bad anyway.
To illustrate: Our main goal is to take off exposure at price points you've identified as possible levels the trade might turn against you (or at least struggle with,) and putting some or all of that shed exposure back on when price shifts back to possible levels that look like a good place to enter again.
What makes the 'price levels' up is based on your experience and observations. It could be support and resistance lines you've pegged out, or maybe it's where you see a large trader hit the tape (time and sales in equities and futures) in a direction counter to your trade. What matters here is that you've observed whatever this is having worked against you in the past and you want to account for this in your trade management going forward.
(Despite how this looks, this illustration has nothing to do with wave theory. The numbers are just for reference as I walk you through this example.)
Working the trade like this netted you more overall return than if you had passively managed the trade with one size, one target, and one stop.
Some alternative outcome could have gone like this: (Remember to think about possible outcomes before each trade, have a decision tree made up for them in advance.)
In all, unless you're targeting just a tick or two of profit per trade, then you'll probably conclude that applying active position management like this article explains can directly help you scale up your profitable days and profit expectancy in situations where price does not move directly from your entry to your target in a straight line.
You can always scale your position sizes higher to increase profits (and risk) when that time comes, but as a step between "gaining consistency" and "sizing up", this skill fits in perfectly.
Comments and discussion welcome!
Once a trade is past a trader's comfort zone, the trader more likely to start making poor decisions and may start deviating from their regular trading behavior or trade plan. Next thing the trader knows, they are scaling back down to the position size they previously felt comfortable thanks to losses caused by poor performance. Quite often this hurdle can stall a trader's development, even for months or years, until they can overcome the negative emotional association with the added trade size and risk.
When I was first starting my trading career in the prop trading industry, one of my floor managers had a method of dealing with this; straight up repetition of the nerve racking stimulus, by forcing you to handle risk that's beyond your comfort zone until it no longer bothers you or registers in your unconscious as something to be nervous about. This works, but it's far from perfect... Not to mention, when you're a retail trader trying to make it in this business while trading your own capital, this method can be quite an expensive lesson if you're not a quick learner!
Later on, I met another manager who took to a different approach: A method that not only made sense as a step between "building consistency" and "scaling up", but became a skill I think everyone should learn regardless of how far along they have developed as a trader.
"Being more aggressive doesn't just mean taking on more shares." -- This is what the other manager told me one day after I hit my risk limit trying to scale up in a stock. That day, I got in a heavy position which did not give me much margin for error, and our risk software flattened me out (at a loss) long before I would consider the trade itself a loser. It wasn't the risk software's settings that were at fault; I messed up, and while it was not a very costly mistake by my standards today, it was a sour loss in my mind for sure because I was the one who chose to apply too much size too soon in the trade.
I asked the new manager what he meant by "being more aggressive", since I understood what he said at face value but didn't quite how to apply it. He then showed me his trading history on the stock I was closed out on, and read off the numbers. Most of our directional trades choices were the same (as we were following pretty basic breakout ideas at the time) but he had taken 140+ executions that day vs me at only 30.
The difference illustrated by comparing our transaction numbers instantly hit me: we had the same ideas, but he was able to work far more profit on a per 'idea' basis than I could have ever hoped to do even if my larger sized trade worked out. All he was doing differently was being more "aggressive" in taking some of his position off where it made sense to lighten up, and put it right back on where it made sense to add again... all along the way he was lowering his overall risk on the day while banking profit.
In short: If you are expecting a run from the current price of a security to a given future price target, and it's reasonable to assume price doesn't move in a straight line directly to your target, then it's possible to increase your return without having to increase your size (risk) by working into and out of exposure as the market fluctuates toward your target.
The "big boys" who manage multiples of millions have to do this almost by default, as the amount of volume they do leaves them little choice. A super large trader simply cannot just execute their positions all at once without impacting the market (which would in turn give them unfavorable fills.) So large traders at institutions learn to do this out of necessity. Scaling into and out of positions as the market works for, or against them. As smaller market participants, all we're doing is picking up the important parts of this skill and applying it in a way that can help us improve our trading performance well before such a skill becomes required due to our size impacting the market.
The best part is, at no point does this active method of trade management increase the risk of a trade. It can only serve to reduce risk on winning trades, or lock-in some profit before the trade turns bad anyway.
To illustrate: Our main goal is to take off exposure at price points you've identified as possible levels the trade might turn against you (or at least struggle with,) and putting some or all of that shed exposure back on when price shifts back to possible levels that look like a good place to enter again.
What makes the 'price levels' up is based on your experience and observations. It could be support and resistance lines you've pegged out, or maybe it's where you see a large trader hit the tape (time and sales in equities and futures) in a direction counter to your trade. What matters here is that you've observed whatever this is having worked against you in the past and you want to account for this in your trade management going forward.
(Despite how this looks, this illustration has nothing to do with wave theory. The numbers are just for reference as I walk you through this example.)
- Around point 1 we get a buy signal (in this case, price moved above some arbitrary MA.. I donno.. the eleventy-four period weighted moving average offset with sprinkles
) and your system tells you to buy and hold out for a take profit price near a major resistance level on a higher timeframe. - You've identified the higher timeframe's resistance as the upper purple line near point 4.
- You've also identified some near term resistance on the lower purple line near point 2.
- As price moves in your favor, you come up against the near term resistance. At point 2, you take a portion (say a third, or half) of your trade off the table. At this time you've probably already moved your intended stop loss to your entry price (break even.)
- Price then falls from this near term resistance at point 2, and approaches your arbitrary MA line. Here prices seems to find some support (notice near point 3 that price is struggling to move down lower.) So at this point, 3, you decide to put the exposure back on and increase your position to the amount you started with. You've also adjusted your stop to account for the additional risk.
- Price breaks through near term resistance and hits your target at point 4. Enjoy the extra profit from the same or reduced risk.
Working the trade like this netted you more overall return than if you had passively managed the trade with one size, one target, and one stop.
Some alternative outcome could have gone like this: (Remember to think about possible outcomes before each trade, have a decision tree made up for them in advance.)
- Price moves instantly against you! (Darn, and here you thought that price crossing your special moving average twas 'teh' holy grailz! ) You've been stopped out. You'd lose just as much as you would have passively managing the trade with a plan to be aggressive since you had no chance to really take anything off the table in profit.
- Or.. Price moves to point 2 and then sharply down to your stop level just after setting your stop to break even. Here, you wouldn't have made a dime, but the aggressive and active method presented in this article would have still put a few bucks in your pocket for the trouble.
- Price rockets straight to point 4. You win overall but don't quite make as much profit since you took some exposure off at point 2. Managing the trade passively would have worked out better for you here, however, trading is about probabilities... and probabilisticly-speaking it's unlikely for this outcome to happen the majority of the time unless some sort of catalyst or news causes price to drastically be reevaluated. Of course this also depends on your timeframe and the security you're trading... so you will have to judge the likelihood of price rocketing to your target as it relates to the setups you take and your experience.. Go back over your trade records and crunch the numbers.
In all, unless you're targeting just a tick or two of profit per trade, then you'll probably conclude that applying active position management like this article explains can directly help you scale up your profitable days and profit expectancy in situations where price does not move directly from your entry to your target in a straight line.
You can always scale your position sizes higher to increase profits (and risk) when that time comes, but as a step between "gaining consistency" and "sizing up", this skill fits in perfectly.
Comments and discussion welcome!
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