Look Left To Anticipate The Right: Why Forward Isn’t Everything In Trading

Long story short, October has been a chop-fest for me. I could blame the markets being “slow”, “crowded” or lacking opportunity but those are just excuses in the end. A few trades a week is really more than enough. Our jobs as traders is to take advantage of the opportunities given to us by the market and to execute it in a systematic and probabilistic manner. We get into trouble when we deviate from our core rules and principles, but what if it wasn’t an oversight? What if I deliberately meant to deviate in order to make improvements to my strategy? In this blog I want to discuss some of the insights I’ve gained this month as a result of this exact concept.

Trading culture is a beautiful thing. We’re all focused on self-improvement, making incremental gains, optimizing our process and developing our self awareness. It’s a consistently positive experience but, with it, comes a set of psychological and emotional hurdles to overcome.

To elaborate, I think a lot of experienced traders know the feeling of getting overconfident and then getting humbled back down to their knees. There are many well-known mistakes such as sizing up after a green streak, but specifically I want to discuss the error I made: focusing on reward.

During June and July I made some significant improvements to my strategy and with that I was able to have the best months of my career. I have been consistently profitable for some time but these months were different and I’ll need to give you some context first.

If you’ve read some of my earlier blogs you’d know that I had a really rough conclusion to 2018. I knew quite a bit about risk, I was always risking my R and maintaining a 3:1 RR but I never quite understood how to protect myself from the worst case scenarios. I had no max loss set with my broker, I had never experienced liquidity issues with sizing up and I’ve never pushed my limits so far in trading. That lead me to experience, first-hand, all of the classic errors that lead to disaster. This prompted me to literally devote my entire focus and attention to RISK.

I was making every effort to systematize my trading business so there was no room for my emotion or ego to overwhelm reason. As a result I regained my consistency and kept pushing forward. Despite this, I would occasionally slip and fall flat on my face. I kept focusing, getting it together and making new parabolic runs. Eventually I started to land on my feet and recover quicker. This leads into late May when I realized that I was now very comfortable with the adjustments I made to my risk strategies.

I was lucky because the concept of risk/reward was ingrained in me early on. As far as I could tell my results thus far were a product of mathematical expectation and proper execution. Examined further, I believe the cliche “you must learn to lose first before you can win” is entirely true in trading. It’s kind of like the yin/yang of the market, there must be a balance. So at this point in time, I was thinking about taking my strategy to the next level by focusing on reward.

For about a year and then some, I was operating at a 3:1 expectancy. I was very militant about it, which lead to fantastic results. I never thought twice about considering anyone else’s opinion because, to me, I felt like I was on the right track and needed to continue in the same fashion. So I let a lot of the little nuggets of knowledge rest in the back of my mind. Adding to a winner was the one I decided to focus on moving forward.

I back-tested different adding strategies overall a large sample of trades over and over and over. I started to realize that, across the board, my average R could be improved with the same risk. In other words, I could take my average RR from 3:1 to upwards of 7:1. That would mean that I could still be wildly profitable with a mediocre winrate and I was not planning on losing that much more. I came to sample many of these calculators and found pretty immediate results to my bottom line. It dawned on me that I was ignoring something that was fundamentally important and spent a lot of time sharing that inspiration with others.

The more I talked about adding, the more I became convinced this was the next level of my strategy. I could see how it was now possible to murder some of my favorite setups with a “bit” of added execution. As a beginner to the concept I started out with low-execution strategies. For example, I would just two-shot, or three-shot my entire position which was easier to calculate and grasp. I used really fixed ratios like: 50% 50%, 25% 25% 50%, 33% 33% 33% and so on. Execution came easy enough and I was benefiting from it in a big way.

I felt myself thinking “what’s next” constantly and making adjustments to my ratios to become more complex in nature and less direct. This lead me to get punished on occasion by getting stopped out before a trend is complete and missing the entire move due to losing my previously built position. I decided that I needed to take a step back and keep it simple as I was just starting out. However, those thoughts planted the seed in me that I would eventually reach those heights and further beyond.

I decided to study how I felt psychologically, emotionally and if my execution skill could uphold the strategies. The key in this process was understanding my strengths and weaknesses. I examined which entries needed more weight, which ones I was hesitating on or that would kill my average too much, how I might be prone to chasing and what systems I can use to execute based on signals. I tested worst case scenarios in execution and came to a very humble two-shot process. It was a simple concept, a starter meant to act as a feeler and then a much larger add on confirmation. I had learned that too much weight on the starter meant more hesitation and larger losses when wrong. I learned that too much size on the 2nd add and the entire average would be far too risky. I learned that reducing my average meant accepting that I could be stopped out MORE often and thus have a lower winrate. Thoughts like those lead me to begin trading my simple strategy.

Using that strategy I increased my average R from 3->4 with minimal draw-down and swift parabolic strokes given market opportunity. I stuck to my system despite the urge to grow and develop it to the furthest extent because I had been burned. I was convinced that I needed a larger sample size to make this strategy statistically significant and worth developing further. With that I had two fantastic months where I made a lot of progress, not to mention my mental capital was perfectly sustained.

This lead me to feel that I needed more, I needed to keep improving, to get to the next level. I began tinkering again, adding more columns to my position size calculators and testing scenarios where it all seemed so simple. I could find opportunities to add, add, add and systematically bring my average down to nail a big move. Keep in mind that I was nailing these moves on a consistent basis, top to bottom for the past year and a half. I was confident that I knew what I was doing and that this might’ve been the biggest oversight of my career. I started to think, “How much bigger would my account be by now if I had listened earlier?”, “I should be making as much R as this guy”, and “What would my life be like if I had this RR?”.

It didn’t seem as foolish as it sounds now in hindsight, because I felt that it was real. Every back-test I would perform showed immaculate results that fueled a warm and comforting blanket of greed.

Let me ask you. Why is it very common for traders to recommend removing unrealized PNL from your platform? In my opinion it’s because it creates many emotional and psychological traps that can interfere with a traders objective plan. I don’t need to go over all the pitfalls as I know you’ve likely experienced them first-hand, but you get the point.

Is focusing on the reward almost like staring at your unrealized? I mean the trade is practically in the bag right? All it needs to do is tap your price target, like it always does. I would say that my price target hits far more often than it doesn’t and the back-tests aren’t telling me otherwise. So beautiful if true, but instead it is greed playing tricks with your mind.

You can see opportunity in anything if you rationalize it enough. Daydreams, fantasies and impulse lead to us making decisions that we probably wouldn’t make if we were totally clear. I mean, I was already doing fantastically well before I even got to this point. I wanted to add a bit of a cherry on top to make it that much sweeter and I never once thought of the emotional and psychological implications.

Traders are mostly different. We have our own strengths, weaknesses and emotional constitutions. To that effect, I feel that we need to be striving towards self-awareness. We need to answer questions like, “At what point will I start to feel off balance when it comes to winrate?” or “What is my risk tolerance?”, “Do I trade in shorter or longer intervals better?”.

When it comes to maximization of risk/reward there are multiple downsides. Winrate suffers for one. My average winrate dropped from 60–65% to about 50% but I was a lot more profitable. When I tinkered with my strategy, I often reduced that winrate to 40% depending on which mistakes I was making. I started to feel a bit uneasy at times, but whenever I would make that big win I would immediately be placated. That feeling fueled my drive to push forward.

Another downside is being unable to recover a great average cost and thus open yourself up to more emotions by being invested in price ranges you normally aren’t too concerned with risk-wise. Many times I had been getting excellent entries, only to destroy them later on and get stopped out or seriously nervous at my risk levels. You can’t just re-scale, re-add and get a similar risk/reward. I mean you can… but it’s gonna require balls of steel, which I don’t necessarily feel is my style.

Locate fees can add up big time, you start to realize that adding to winners requires more shares and more shares means coming to terms with bigger costs on average. If you’re not used to those numbers they might get to you. Yes, the calculator says you can make 8R if you double down or triple down from your original position but what are the associated costs and also what is the psychological impact? Well you might feel that you’ve thrown this money down the toilet if you don’t use it and it also adds to your bottom line as well. When you cut on larger size it becomes HARDER to exit positions on liquidity and slippage becomes more relevant so maybe that -1.1R or -1.3R can start chipping away at you because a dozen of those adds up to serious R’s. When you lose or hit a max loss on a position you’re now down your loss PLUS those locate fees which are larger, meaning you have to overwhelm those with that inherent risk/reward.

You must be consistent, if you cannot consistently stick to your plan then you’re going to affect your average winrate and reduce it even further. Emotional mistakes can cause your strategy to really nosedive. Say you take a trade that you weren’t even convinced was an A setup because you now view it as a potential reward instead of an outright risk.

I started to view different low range setups as big time opportunities because when you add you’re able to turn anything into a 3R+ trade! Literally the only thing stopping me was when the share count became to ridiculous for me to even fathom getting in or out of. I could take trades where, in hindsight, I’ve reviewed and saw I would’ve disqualified SOLEY on their risk/reward based on my older strategies. I started to take many different trades with the reward in mind and taking unnecessary losses which compounded on itself in terms of the fees I mentioned and, more importantly, mental capital.

You start to view the market as inopportune, harsh, and think about the hole you subsequently need to dig out of. This can spiral into a very difficult situation but the draw of R kept my head in the game. I was able to say this would take 1 or 2 trades to completely eliminate, and it was true as I was only really required to win 30% of the time to be profitable. However, you have to be able to focus hard on this and not let all these new thoughts cloud your judgement which is easier said than done.

As we all know, setups do not always play out to perfection. When I consider myself very precise and accurate with my trading, I was starting to develop newfound fears and emotions. Truth be told, I used to put on my positions, play some games, go to SLEEP and wake up to an alert that the price target had been hit or my stop. It was a seamless process that balanced my hilariously awkward west coast sleep schedule with a somewhat balanced napping schedule to keep well-rested. Instead I was now sitting at my computer all day managing all my expectations and speculating on the trade, reading tape, checking my indicators and so on. I was a slave to the trades and when they didn’t work out exactly as I planned I might take a minor profit if at all. Previously I was able to take a pretty reasonable profit even if my price target wasn’t perfect, but that was with a superior average. Those small little profits eliminate all the little cuts, little slippages and locate fees along the way in the long-term which goes a long way in your overall equity curve.

With all of this on my mind, I was just riding the advantage of my previous strong profits to stay positive. Very luckily so, I had checked my overall PNL curve and realized that I was performing a lot better in some of the toughest times of recent memory than I would’ve in the past. My equity curve basically evened out but never dipped below my profits.

One of my favorite ADF quotes:

I felt that even though I was not performing my best, I was still managing risk extremely well. I was cutting where I needed to and cutting for less than an R generally. My max losses were always honored and the strategies and systems I’ve developed have given me a safety net that will live on forever.

I also learned to wire out profits over my predetermined account equity and that feeling of taking profits and banking them has given me the ability to do two things: I am able to feel secure in my financial responsibilities and it also keeps me HUMBLE and fearful of PDT.

As I dip towards PDT I am able to remind myself that I need to get my shit together seriously and that I am absolutely NOT going to wire my profits back in if I can fuckin’ help it. That’s MY money and I made that mistake last year.

When your account grows and grows you start to view it as a “cushion”. You start to rationalize mistakes and become complacent, but I found that consistently resetting my account KEEPS me focused and accountable to my failures.

This was the breaking point for me recently where I was like “What the fuck Brian? Wake up.”

We always think that we need to keep on moving forward and pushing the limits, doing more and more. I’ve spent countless hours of study in trading and developing systems, efficiencies and mechanics that I can rely on that have compounded on themselves because they carry themselves throughout. Being 1% better everyday can really make a difference 2 years in and beyond. I started to realize that there was less to “study” and more to experience. I needed actual market experience to test, develop and hone my skills and not read another trading psychology book or change some arbitrary values. I back-test regularly to make sure my strategy is relevant to the market but aside from the workload that I’ve always done I’ve been able to significantly reduce the amount of time it takes to review and do my entire process so I’ve had more and more time to just hang out for a bit.

This is nothing new to me, as a ex-professional gamer I reached mastery (NOT SAYING I MASTERED TRADING) from putting in over a decade of deliberate effort and focused practice. Getting better becomes more difficult and stagnating for a bit is expected as the next A-HA moment or insightful reflection can come from any experience or just plain luck. It’s just our duty to be constantly looking and open to new ideas but not necessarily FORCING random thoughts. So in regards to trading, I started to realize I had to focus on just one or two things I wanted to work on like trading execution: things that actually require market timing, planning and repetitions.

So in this case, I felt the best action to take was to go BACK and not forward this time. I went back to the dated google sheets versions of June/July and checked exactly what I was doing, thinking and how I was performing. I understood that it was partly due to opportunity and not just pure skill but I was mostly interested in my systems. Since then, I’ve recuperated my old calculator ratios and systems and have not felt BETTER.

This is not the first time I’ve done this and I absolutely LOVE google sheets for this historical feature. Each and every time it helps me ground myself in what works and re-aligns me with my core competencies.

I’m not exactly out of the woods yet, but I can already feel the powerful feeling that I’ve had before and the positive mindset that I had rejuvenating my spirit. I know that this is exactly what I needed and I wish that I could’ve realized it sooner but the experience of failure is something that I will hold with me dearly and I am always glad to have experienced it sooner than later.

I sincerely hope my stories can help engage and inspire those of you with similar situations and help you.