High Probability Trading Strategies

I recently had a High Probability Trading Strategies book reader and DT Forex Report Subscriber inquire about stop loss placement on a potential trade setup we noted in a recent report. His question was regarding a potential trade setup in the report and the potential initial capital exposure. The initial stop loss would have been too far away from the entry to limit the initial capital exposure for his trade plan.

Firstly, our DT Daily Forex Report uses 60m data to identify intermediate term swing trade setups. We only make general trade strategies, not specific trade recommendations because the report is just issued once a day. Readers that apply the trade strategies taught in the book can usually identify setups with much lower initial capital exposure when the trade execution conditions are made.

But, the real lesson here is what if an ideal setup is made, but the objective entry and initial stop loss will result in more capital exposure than allowed by your trading plan as described in the book? Perhaps the lower time frame momentum did not make a reversal until the market had moved a considerable length away from where the stop is to be placed.

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Jordan posted a comment to the Win/Loss Ratios, Risk and More blog piece. I began to make a brief comment to Jordan’s comment which turned out not to be not so brief. So, I thought I would post it as a blog piece instead.

Firstly, I appreciate everyone who comments on the blog commentaries. Especially those who use there actual names and include a picture! Thanks Jordan.  

Don’t confuse win/loss ratios with reward/risk ratios. There is a section in High Probability Trading Strategies that clearly shows how bogus pre-trade reward/risk ratios are. There is no objective method to determine the potential reward for a potential trade. So there is no objective way to determine a “risk/reward” (reward/risk) ratio before a trade is made. The risk portion (better called capital exposure) is defined by the difference between entry price and initial protective stop price. It is known in advance.  But, the “reward” portion is nothing but a best guess. All risk/reward strategies are bogus.   

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A reader posted the following comment and question following one of the blog articles. “This past year, although my percentage of profitable trades is higher, because of the greater capital exposure, sometimes one or two losses can take out the profits of four or six winners, especially in the volatile markets and complex consolidations. What suggestions would you make in this regard?”

I’m going to post my answer with some additional comments as this blog contribution.

If one or two losses wipe out gains of 4 or 6 winners, the average losing trade is obviously much greater than your average profitable trade. A lot of factors go into a net profitable performance over time but in all cases, the average profit should be greater than the average loss. I know, technically you can have a profitable performance with a very few number of large gains against a large number of relatively small losses but you will not have long term success just relying on a huge gain now and then.

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In High Probability Trading Strategies, I teach how to identify high probability trade conditions or setups and the trade entry strategies to take you into the trade and set the initial protective stop-loss. The two trade entry strategies taught in the book require the market to make some movement in the direction of the trend the setup conditions imply before a trade is entered. Both entry strategies identify an objective stop-loss price which results in minimal capital exposure. The trade management strategies taught in the book prevent any trade from having a capital exposure more than 3% of account.

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What time frame is the best to trade? There is no right answer for this. But, as I explain over and over again in the book, the longer the period, usually the better the opportunity for greater profits for whatever your account size. I often quote W. D. Gann, “The big money is made in the big trends.”

High leveraged, futures or forex day trading has the least potential for a good return on your account size and time than any other type of trading. There is more BS taught about day trading than you can shake a stick at. People usually day trade out of fear. Fear of holding a position which often results in taking small profits when a trend may develop for a large gain. Fear of holding a position over night which is absurd. It wasn’t that many years ago when few traders had a computer and charting or trading programs and we drew our charts, one bar at a time, trading futures off of daily and weekly bars.

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