BarroMetrics Views: Questions from Readers (2)
This is not so much a question from a reader; it’s a question from a student. But I thought the question and answer would be of interest to the readers here. I have observed that many newbies judge the correctness of a decision by the results of the decision. Since the trading is a probability game and therefore the same action can produce two very different results, such a decision making process is inherently flawed.
In the answer to the student, I have set out what I believe is a better process. The question posed is in the attached Word document.
Thanks for post. I’ll answer this on two levels:
- A generic answer applicable as a general principle
- An answer based on the specifics of your trade
Firstly, you need to set a policy BEFORE you take a trade. Otherwise, you will judge a trade by the results and that is not what you want to do – as Aussies say, you will be on a hiding to nothing.
The policy you set is based on your personality and values. Your trading needs to be a reflection of these values. This is why I ask students at the BarroMetrics Barros Swing course to create simple statements reflecting their trading philosophy. This trading philosophy will set the policy.
For example, I am by nature ‘risk adverse’. So, my first statement is: “Preservation of capital” first and foremost. This means I am only willing to take a trade if my perception of a trade’s risk falls within my risk parameters – i.e. I am willing to miss a move if it does not. Taking this further….
….You will recall that as a matter of policy I don’t take breakout trades because they have a low win rate. Note however that in years where there are strong trending markets, breakout trading will enhance my bottom line. But in years where there are ‘whippy’ breakouts, my Expectancy Return drops dramatically. As a result, by excluding breakout trades (in most situations), I have a smoother equity curve in return for a lower net return based on my results since 1990.
Turning to real-time example……
In the chart attached, you have the GBP/JPY with an Upthrust Change in Trend Pattern. The pattern was triggered on Aug 11 09. However, since I like to place my stop above the Maximum Extension, an entry at 157.80 and a stop at 165.77 was not possible. My money management allowed for entry above 160.2. I chose 160.47.
The chart shows I missed my entry by 13 pips on Aug 13.
I did not chase the market. I won’t say I did not feel regret as the market headed south. But I also know that the miss is the price I pay for my the plan I have.
What about the current situation? The same policy applies:
The market has broken below B. I now have to wait for a WPC etc. Could the market:
Explode to the downside resulting in another missed trade? Or
After waiting for the WPC, zone, setup and entry bar, could I be stopped out?
But just as is possible, the WPC (Whole Point Count) etc could form and I could wait for the zone, setup and trigger to enter.After my entry, the GBPJPY could then move strongly in my favour.
In other words we will never know what the future (right hand side of the chart) will bring. All we can do is formulate a set of rules and execute them as consistently as we can, given our state and temperament at the time of execution.
That’s the generic answer, let’s turn to the specifics of your trade.
Firstly let me say that I use a tool that you may not use: I keep a set of stats for impulse and corrective swings of the various timeframes.
In the chart you sent, the questions I’d ask myself are:
Statistically, has DP (DuPont) move greater than mean +1 (if it has, the theoretical probability of a bounce is 97.5%)? I may take the trade without a bounce on reduced size.
Statistically, has DP move greater than mean +2 (if it has, the theoretical probability of a bounce is 99.5%)? I don’t take a trade without a correction.
I would also note:
- My entry is at the Death Zone. This increases the probability for a rally to the top of Value (67%).
- DP was down for 5 consecutive days within a congestion zone. The consecutive moves may increase the probability of at least a 1-d rally.
Given the above, I would have waited for a rally to sell (looking for a zone and setup) knowing and accepting, that by doing this, missing a move is on the cards.
Hope this helps.
FIGURE 1 Student DuPont Chart
FIGURE 2 GBPJPY 18-day
FIGURE 3 MY DP Chart