Help Center Blog Open An Account

Two Tricks How to Exit Positions and Stay Until Your Targets are Met Without Losing Original Conviction Behind the Entry

After observing many traders over the years both on the prop trading floors I traded, the CME exchange floor I visited as well as students of the markets they all seem to have one few thing in common.

No matter what strategy, time frame, technical or fundamental strategy they use, they / we all suffer from the same issue of Fear that the current open position that is initially profitable “could” turn against us or come down to breakeven (the later is a great success on behalf of the trader who can execute and move their stops to breakeven).

I myself over the years have worked on variety of creative ways to exits trades and after thousands of hours and thousands of trades setups I came to the conclusion that we simply DON’T KNOW and surely CAN NOT know nor do we HAVE THE POWER to move the markets and therefore we must ACCEPT that the outcome of the trade that we are in could either:

A) Continue further in our desired direction, hence reaching our Target(s);
B) Price reverses and touches our entry/breakeven (if we are advanced enough and are able to understand that Breakeven and locking-in no loss is as good as taking a small profit (The difference between the original STOP and the ENTRY. That money is literally made here and now but too many of traders are so fixed on the big target they miss the breakeven “gift trade”);
C) The market turns and it starts falling through our original stop and hence turning our little profit into a loss, further throwing our psychological state of mind into a what I call a “mini trading depression” as our mind gets stuck and fixed on being “green” from just a few minutes ago and now its a loss.

So, what is a simple trick and how to get better at managing this so common challenge?

Trick #1:
My trick is to exit gradually at many smaller and predetermined profit targets.

Yes, the overall trade profit is a bit smaller but only if the trade worked out 100% and providing I was able to actually HOLD to the target. However in many other cases (if the trade reverses before meeting our “big” Target, this method will sure make you more profit on the books while keeping your mind at ease".)
Knowing that the markets will challenge our conviction 100x a minute, the chances are that gradual exits “MINIMIZE” the psychological pressure quite effectively and while booking some “actual profits” our mind is more relaxed while waiting for the “big” target.

Trick #2:
The second trick is to obviously use more then One (1) contract to make this dynamic exit strategy work.

Micro contracts come very handy in order to help. Micros are 1/10th of the size of regular Eminis and hence offer us a brilliant way to use Dynamic Exits and to start trading with using the Psychology behind the trade to our advantage.

Keep booking partial profits and I am certain many of traders could experience a small nirvana and be able to hold their trades much, much longer then ever before.

After trying this exit method I could never go back to “holding” all of my positions till the Target.
It makes no sense, both statistically and more importantly psychologically.

I hope it helps some of you on your trading journeys.

Happy Trading,

  • Project 11
7 Likes

@Project11 I like this post, thank you.

You bring up a good point of “mini trading depression”. Aside from all execution topics or strategies, entries or exits, the psychological impact of a “win” or a “loss” can completely change the outlook of market data.

Triggers, associations and beliefs all fall into this category. James Clear takes a real-life example of this, how a small win can result in bigger wins. It’s a good 5 min read but well worth it if you don’t know the story of British Cycling and Dave Brailsford.

The fate of British Cycling changed one day in 2003.

The organization, which was the governing body for professional cycling in Great Britain, had recently hired Dave Brailsford as its new performance director. At the time, professional cyclists in Great Britain had endured nearly one hundred years of mediocrity. Since 1908, British riders had won just a single gold medal at the Olympic Games, and they had fared even worse in cycling’s biggest race, the Tour de France. In 110 years, no British cyclist had ever won the event.

In fact, the performance of British riders had been so underwhelming that one of the top bike manufacturers in Europe refused to sell bikes to the team because they were afraid that it would hurt sales if other professionals saw the Brits using their gear.

Brailsford had been hired to put British Cycling on a new trajectory. What made him different from previous coaches was his relentless commitment to a strategy that he referred to as “the aggregation of marginal gains,” which was the philosophy of searching for a tiny margin of improvement in everything you do. Brailsford said, “The whole principle came from the idea that if you broke down everything you could think of that goes into riding a bike, and then improve it by 1 percent, you will get a significant increase when you put them all together.”

Brailsford and his coaches began by making small adjustments you might expect from a professional cycling team. They redesigned the bike seats to make them more comfortable and rubbed alcohol on the tires for a better grip. They asked riders to wear electrically heated overshorts to maintain ideal muscle temperature while riding and used biofeedback sensors to monitor how each athlete responded to a particular workout. The team tested various fabrics in a wind tunnel and had their outdoor riders switch to indoor racing suits, which proved to be lighter and more aerodynamic.

But they didn’t stop there. Brailsford and his team continued to find 1 percent improvements in overlooked and unexpected areas. They tested different types of massage gels to see which one led to the fastest muscle recovery. They hired a surgeon to teach each rider the best way to wash their hands to reduce the chances of catching a cold. They determined the type of pillow and mattress that led to the best night’s sleep for each rider. They even painted the inside of the team truck white, which helped them spot little bits of dust that would normally slip by unnoticed but could degrade the performance of the finely tuned bikes.

As these and hundreds of other small improvements accumulated, the results came faster than anyone could have imagined.

Just five years after Brailsford took over, the British Cycling team dominated the road and track cycling events at the 2008 Olympic Games in Beijing, where they won an astounding 60 percent of the gold medals available. Four years later, when the Olympic Games came to London, the Brits raised the bar as they set nine Olympic records and seven world records.

That same year, Bradley Wiggins became the first British cyclist to win the Tour de France. The next year, his teammate Chris Froome won the race, and he would go on to win again in 2015, 2016, and 2017, giving the British team five Tour de France victories in six years.

During the ten-year span from 2007 to 2017, British cyclists won 178 world championships and 66 Olympic or Paralympic gold medals and captured 5 Tour de France victories in what is widely regarded as the most successful run in cycling history.

How does this happen? How does a team of previously ordinary athletes transform into world champions with tiny changes that, at first glance, would seem to make a modest difference at best? Why do small improvements accumulate into such remarkable results, and how can you replicate this approach in your own life?

## The Aggregation of Marginal Gains

It is so easy to overestimate the importance of one defining moment and underestimate the value of making small improvements on a daily basis. Too often, we convince ourselves that massive success requires massive action. Whether it is losing weight, building a business, writing a book, winning a championship, or achieving any other goal, we put pressure on ourselves to make some earth-shattering improvement that everyone will talk about.

Meanwhile, improving by 1 percent isn’t particularly notable—sometimes it isn’t even noticeable —but it can be far more meaningful, especially in the long run. The difference a tiny improvement can make over time is astounding. Here’s how the math works out: if you can get 1 percent better each day for one year, you’ll end up thirty-seven times better by the time you’re done. Conversely, if you get 1 percent worse each day for one year, you’ll decline nearly down to zero. What starts as a small win or a minor setback accumulates into something much more.

Habits are the compound interest of self-improvement.

In the beginning, there is basically no difference between making a choice that is 1 percent better or 1 percent worse. (In other words, it won’t impact you very much today.) But as time goes on, these small improvements or declines compound and you suddenly find a very big gap between people who make slightly better decisions on a daily basis and those who don’t. This is why small choices don’t make much of a difference at the time, but add up over the long-term.

On a related note, this is why I love setting a schedule for important things, planning for failure, and using the “never miss twice” rule. I know that it’s not a big deal if I make a mistake or slip up on a habit every now and then. It’s the compound effect of never getting back on track that causes problems. By setting a schedule to never miss twice, you can prevent simple errors from snowballing out of control.

4 Likes

@Project11 Compliments, nice topic you started. To except losses was in the beginning very difficult for me. I played alot of sports in my youth and winning was very important. I think that also influence my behaviour. I find out, the more i trade the more i except that it is a part of the game.In many literature you see this statement alot which woke me up. Just like cutting your losses. Having an edge in Psychology is important. Enjoy your weekend.

3 Likes

@Ben_M,
I enjoyed your post citing “the aggregation of marginal gains” and the British cicling team turnaround.

It seems to depict to the tee what we are all going through in our trading careers.

For example for a semi active trader, to improve by 1 Tick on each trade could mean 100-200% on P&L difference annually.

Also, I really enjoyed the realization that we have dozens of little (1%) improvements to make on a daily basis and those could add up to serious long term bottom line improvements.

Happy Trading

  • Project11
3 Likes

@Project11 I love this post and what you have presented here.

I have spent well over a year developing my system, or method, of trading. Having, now, executed my system in the live markets for half that time and experiencing my emotional responses to the unpredictable movements of the markets, I am also a member of that “fear club”, that you mention.

Although recently I have been wavering between defining those “emotional” moments in a profitable trade, as greed as opposed to fear. I find myself sometimes asking “am I wanting to much from this trade ?”.
Second guessing my trade structure, which is second guessing myself, I find to be very disabling.
These types of questions and thoughts that I have, inside an open position, appear to me as a lack of confidence. When I am feeling confident the wins and losses are just that, wins and losses. That is what trading is about, both. When my confidence is lacking, wins feel “lucky” and losses feel like I made a “mistake”.

So when reading your post this is what came to my mind. How can I convince, “trick”, myself to remain confident throughout the evolution of my trades ?. It will take some time for me to answer that question for myself, but it’s something I will strive to achieve.

As a side note, I like this approach for longer duration trades. Taking profits throughout the trade makes sense to me. Not only as an emotional regulator, but also as a means of sound trade management.

Thank you for the post !

John

3 Likes

Great post @Project11! This is a topic I’ve spent quite a bit of time thinking about too and it’s very interesting to hear how we all encounter similar hurdles and use similar solutions. Something I’d like to add that helps me is thinking in terms of the outcomes of a set of trades rather than the outcome of the current trade. To illustrate, say my stop is 5 points away and my target is 5 points from my entry, I’d need to win about 60% of the time in order for that to have a positive expectancy. However, if I recurrently take profits at say 2 points, even if there isn’t an actual reason to get out (i.e. simply being impatient or fearful), then my required win rate based on my risk/reward has to be quite a bit higher (particularly if I’m allowing the 5 point stop to get hit). So while I may take a trade and have it go in my favor and then against me in the current instance, over a series of trades I am better off by sticking to the plan unless there is a legitimate reason to get out rather than recurrently cutting winners short of the intended target.

A caveat worth mentioning is that required win rates, risk/reward ratios, and so on are impacted by both the initial risk (distance to the stop) and the actual risk (MAE) of the position. Depending on the overall context there can be times when it’s reasonable to take profits that are smaller than the distance to the stop loss. However, for simplicity’s sake this way of thinking about trades as being a part of a larger set can be helpful for holding positions for wider targets so long as the premise remains valid.

3 Likes

@Trader ,

I couldn’t agree more. It seems that focusing on just a few last trades is never a good idea nor a good habit from the statistical point of view.

It also depends on how often does one trade. If a trader trades 10-20/ Day then one might generate enough trades in 2-3 days to have a small but useful data sample. On the other hand if one trades 1-2 times per day or less, then it will take 2 weeks to populate recent data sample to measure and decide whether to adjust and/or tweak the approach.

I always run bunch of my own excel based stats for everything I do.
I always run both the actual performance with the “strategy” stats and keep comparing them.
One would be surprised to find out the vast differences between those two.
The stress, the hormonal imbalances during periods with actual money at risk causes our brain/mind to misperceive a lot of information that otherwise (afterhours) we see clearly.

Hence it pays off to keep strong journaling and statistics to “know and be aware” of which areas one’s trading may need adjustment.

Then you add slippage, occasional technical issues, data feed errors, fat finger mistakes and spilled coffee :slight_smile: … just to name a few things that you can’t backtest and model during backtesting and we have a reality of day to day trading business.

Just a thought,
Best,

  • Project11
3 Likes

@Project11 that’s a great way to look at it. It seems small at first but then you look at the affects overall and it’s mind-blowing.

Your comment makes me think about the 80/20 rule. I am speaking about the initial “overhaul” of someone’s trading habits, to achieve the most progress with the least effort.

For instance, let’s say your normal risk is 8 ticks and you shoot for a 4 tick profit. You may be accurate enough to make this work, but a slight change in accuracy could be devastating.

How could we implement the 80/20 rule with this. The first I’d say is looking at all your trades and analyzing performance, trying to identify when you had those bigger losers. Looking at the setup, if you would have taken those trades and ask if you can reduce the risk by:

  1. Improving your entry by looking at order flow.
  2. Not taking the trade at all if something was off after review.
  3. Increasing your take profit to further away to justify the risk/reward.

The 80/20 rule can be applied to anything. Let’s take internal dialogue. If you notice that the majority of your dialogue is something like “this is going to go against me”, after reviewing your trades identify with precision what trades DID go against you and by how far.

Ask if the internal dialogue is matching up with what is actually happening and you’ll find two things:

  1. The trade is ACTUALLY going against you and you were right to be saying that, now it’s an execution matter or patience, etc.
  2. The trade typically DOESN’T go against you and that internal dialogue is completely unjustified.

If it’s the latter, it would be a simple adjustment of what you say after you notice yourself saying “this is going to go against me”, you bridge that thinking by focusing on the research you did and realizing that typically the trade doesn’t go against you and you’ve proved that.

It takes consistency and repetition, but after forcing yourself to prove your own mind wrong, a positive association develops out of it and that topic is put to bed.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. The figures here represent an opinion. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. Please conduct your own due diligence if Futures are an appropriate instrument for you.

1 Like