In the beginning of this blog there were screen shots from my phone of trades I was holding that were at a loss. I intend to explain it all, but I must warn you I am pretty tired at the moment and do not have the energy to go into the detail I wish to.
I am pretty sure I already covered how holding your losing trades is basically a cardinal sin of professional trading, however I am here to explain how it can be handled and why I was/am even experimenting with it to begin with.
The bulk of my trading experience has been quickly cutting losers and doing my best to hold onto winners as long as I can. Random side note: My ability to hold onto a winning trade has often led to it turning into a loss, but you'll understand why later.
About a year ago I started listening to "The Traders Podcast" with Rob Booker. I have such a horrible memory about what I have posted or not on this blog its pathetic. What I am sure of however, is that I have not explained to you that Rob sells a trading course for the paltry sum of $27 on his website. He calls it "Trifecta" and has 3 versions of it, which the 3rd is the version I purchased.
Trifecta, as it's name implies, is a trading system built on 3 key ingredients: Divergence, Missed pivots and the break of a trend line. For now, ignore the phrases you don't understand (or Google them) and lets get to the point. When these three ingredients line up, you take a trade. And once you're in a trade, you have to manage that trade...
In the Trifecta course Rob strongly encourages a risk management method he calls "Rollover Trading", which is trading without using a stop loss. Rob has been trading for 14 years and has tried and created lots of different systems. I first read about Rob in a book I bought years ago called "Millionaire Traders". (I rather enjoyed the book even though it really didn't get into anyones methodology specifically in a way the reader could even attempt to replicate.) Damn... I really know how to branch off, can you tell I am unable to really focus right now?
Anyways, over Rob's trading career he's employed several risk management practices and at this point in time prefers trading without using stops for the most part. Now it's basically Heresy for any trading educator to encourage other traders to trade without using stops, but in the case of Rollover trading Rob is very careful to warn traders to trade so small that the market moving against them 500 points (also called PIPs in the currency markets) would equal only a 5% drawdown in their account. A 500 pip move is relatively rare so yeah, it's not much to worry about.
The philosophy behind trading super small positions without stops is based on the markets tendency to correct. All this means is that markets bounce around and change direction a good percentage of the time. Depending on the over all state of things, a market can stay within a relatively predictable range of price fluctuations before breaking out of that range and trending for awhile.
Lots of traders get frustrated by taking losses over and over, just to see the market eventually go where they had originally thought it would. So not only were they right in their direction, they now have a loss on the books instead of a profit.
If you are trading small enough as Rob suggests, the market can move against your position and rather than exiting your trade with a loss, you can actually add to your position and effectively average your entry price. The idea is that when the market finally turns in your favor your average entry price will be closer to current price and you can move into profit and close the trade. Because of averaging your entry price closer and closer to the current price, you can often exit at a profit before the market has gone anywhere near your original profit target.
So, in the charts I have posted where I have not mentioned the trading robot (Basically all charts where the account balance is in the $5,000 range) I am breaking out of the risk strategy I have pretty much always been comfortable with and giving the rollover method a try.
There are things I would like to comment on considering Rob's Trifecta course and things related to it, but those will have to wait. For now just let me say I don't really enjoy this method of trading even though I have made profits with it, and for various reasons have actually come to enjoy Rob and his podcast less. I am sure over time I will elaborate in detail my thoughts. I mean, that is what I am here for anyhow.
I have recently been much more interested in trading with the robot, but just to challenge myself I think I will keep picking out trades to attempt to manage into a profit. I will have to close some at a loss as I did with that last EUR/USD trade, but that's okay.
By the way, I do need to clarify that I am not trading the Trifecta system at all. Once again I will explain why later, but I find no value in trading his method. It has only piqued my interest in trading without stops and only because that enables me to have positions on over a long period of time without having to be at a computer screen for hours managing them. I hope this has brought something to think about and as always please leave a comment or question down below :) I enjoy a good trading dialogue.
-Francisco
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