(Continued from Part 1 – click here for Part 1)
In part 2 of “Trading With Space” Darren and Walter examine:
- How does the blame for losing trades change depending on your trading philosophy?
- Bad luck for casinos = a draw down for your trading system?
- Darren knows how many bad trading days he’ll likely have next week…
- Trailing stops and pip targets, which one works best?
- “Acapulco Trades” vs “Pinch Trades”
- Patience in trading vs missing out on the best turning points…
And much more in this episode…
Download (Duration: 20:01 / 22.9 MB)
In this episode:
01:15 – blame depends on your system
02:25 – “oh no! the markets have changed!”
03:22 – anticipating good days and bad days
04:38 – hit your weekly target, stop trading?
05:53 – hard work trading the 1hr charts
06:20 – months on end without a losing month
06:55 – a few “big winners”
08:10 – trailing exits
08:45 – breaking the “rules”
09:30 – why use other traders’ rules?
10:26 – inverse risk:reward trading
13:07 – crazy ideas are rewarded
14:25 – Walter’s use of support/resistance
16:45 – Rivo on the forum is testing lower tf trades
16:55 – Walter’s “space” trades simply defined
Look for “space” when trading chart reversals. [Click To Tweet].
Weekly targets mean knowing what the market may offer you. [Click To Tweet].
Know when to break the “trading rules”. [Click To Tweet].
Walter: Last time in part 1 of Trading With Space, you’ve heard about this idea of room to the left and what space is all about if you’re not familiar with that. Darren and I, disagree about the usefulness of space on your charts. If you haven’t heard Episode 29 which is part 1 of Trading With Space, please go back and listen because without an understanding of part 1 in our discussion there, part 2 here is not going to make much sense at all. If you want to be able to follow along part 2, please go back and do watch part 1. So, let’s get started and jump back into Trading With Space. This is Part 2.
Announcer: Two traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.
Walter: Yeah. That’s exactly what I was getting at, was that my instinct goes to say, if you trade in a way that I trade – what happens is, the blame lies on you right? Because you feel like you’re the one in control, you’re the one picking and choosing the spots to trade.
Whereas if you trade in the style that you trade, it’s more letting go and it’s more the blame has to do with the market. I could see where some of you, who’s trading your style would say, “the reason why you’ve had this losing streak because the market has changed, market done this, the market is not moving, the market is not..” You know what I mean?
Whereas, if you trade the way that I trade, there is an ability to blame the market but there is a tendency also to say “Well, I’m the one who decided to go in here so I’m the one to blame, I’m the one who took this losing trade”. I don’t really think that either of them are correct. I think that no matter how you trade it really should be blamed on bad luck.
You should just say “just like the casino does when they lose a bunch of money on Friday”. They lose all this money, it’s not that, the casino games stop working. It’s not that the gamblers have figured out how to make money. If you’re from the casino they’re all games of chance that have the odds firmly stuck in our favor almost universally across the board.
There’s no real reason to be upset. To me, I can see where someone trading your style would tend to blame the market. In one thing that might come up, I don’t know Darren. One thing that might come up would be, “Oh no! the market changed. It used to work. I’ve had two weeks in a row. I lost money.
Maybe the market have changed and the strategy is not to make money anymore”. Of course, that’s right before you have a really great week of profits. That’s the thinking that comes in is, the market have changed “how do I adapt to this changing market?” Is that something that you hear?
Darren: Yeah, definitely. I think that is like of any style of trading. You can’t underestimate the importance of practice and trial and error. When you’ve done enough weeks of trading in a particular style, you’ll notice that there’s randomness to have the good and the bad times that distribute it.
At the same time, you have a sort of, let’s talk about, you know, if I’m trading on a hitch one time from intraday. I know now, that the least likely thing to happen is to have five good days and the other least likely thing is to have five bad days. Generally, what happens is two bad days in every week. Maybe two good days in one that’s not so bad.
The only thing that really varies is how I’ll distribute it. So I might have a win or a lose, a win or lose and a win or I might have two losing days to start the week. I know that’s coming around the corner so you’re going to get a better dealing with it.
One of the reasons I really don’t like using figures too much because for instance, that’s a really good set-up for you. There will be some distribution on how well it works and if you test it over a long period of time, you might say “Okay, it worked out 60% of the time”. It doesn’t mean the next ten trades will have that kind of performance and so yeah it’s an issue.
Walter: Absolutely. When you do that, if you were to trade one week and you had 3 winning days in a row, would you just stop and not trade the last two days of the week?
Darren: This is a big the question at the moment. This is kind of the only thing that I’m thinking about in trading at the moment. I’ve been looking at this a lot. Again, it’s something that people tell, you shouldn’t do which is what instantly spikes my attention. Thinking might be on something quite good here because if everyone thinks it’s a bad idea, in my experience it might be quite good.
I can’t really say one way or the other, whether it’s better or worse to do that. I do know is that, even on the weeks where I end up losing, that’s usually, one or two occasion where I could’ve got out over my target for the week. I’ve kind of have a rough target of say, 150 pips for the week. That’s nearly always on my losing weeks an opportunity to do that.
Of course the argument is if you’ll gonna pull down your very big winning weeks. Those are pretty few and far between. Most of my winning weeks are around about the same Bull part figure.
It’s great because you could trade Monday and Tuesday and have the rest of the week off. Even when you’re trading consistently it’s really tiring and I’m exhausted. When I get to Friday, I am mentally drained. I find it hard work and doing this even, that is ingrained in me now.
I even look at it daily and trading from the start of the month on the daily time frame and having a target of 250 pips on a pair. You can go months on end without basically trading through your positive 250. Get months and months on end without a losing month. Then if you had like a day of months there was 2,000 pips lost then obviously I won’t buy that. I don’t really find that happen.
So I think possibly with my style of trading it could work I’m not sure if it would work for your approach though.
Walter: Right, so when you say that the big winners of you and far between that’s not really that’s surprising. We know for example, the trend following traders they typically will see your handful of trades, make all of their profit for the year really.
This is interesting. Do you think that if you change the way you exit out of your trades, for example, if you’ve changed your exit strategy so that you didn’t necessarily have a target each week but rather was more along on the lines of a trailing exit? I don’t know maybe you do, do something like that but would that probably reduce your win.
I wonder if that would lead to greater overall profits even if they are less consistent. In other words you might have more losing weeks but at the end of the year you have a whole lot more profit just because you have a few, like you say handful of these winners that you really milk. Is that something that some traders are doing?
Darren: Yeah. I see a lot of traders approaching the exit in a different way. They kind of all worked. A few traders that I speak to on a daily basis that just aim for sort of 50 pips or something each day. They really do well and they do consistently well. They use a much tighter trailing stop and they obviously have a higher win rate. The only difference would be their losing days would be comparatively larger compared to their wins. Then perhaps letting your trades run.
Even with the exit, I don’t think it’s one thing that works. I think again it’s something we’re told a particular way to trade. We kind of have to feel we have to stay within those bounds. When I look at variations in that, I just find that those rules are not true.
Walter: Give me some example. I understand what you’re saying like we were told certain things. If I had to guess, and I say “What are the things that you’ll read in every trading book?” Well I suppose there is somethings like, “always risk x percent whether that’s 1 or 2%”. That’ll be one thing.
Another one would be, “always let your winners run”. Another one would be something like, “you’ve got to trade with a high reward risk ratio”. If I would have to choose 3 things that I would say we’re always told, that’s what I would guess. Is that what you’re talking about when you say we’re told certain things?
Darren: Yeah. I think basically that’s all information that was working for that particular trader. Rather than it being, this is how market works. If you don’t do this then the market is going to be against you and you’ll definitely going to lose. I think those have been taking on board.
Again I’m not saying that they don’t work and they’re not excellent techniques to use but they’re not the only way. For example, an inverse risk reward okay, there is a general sort of feeling that, that is not a successful way to trade. I think that’s complete rubbish. I mean you can have a much wider stock than your perfect target and still make profit.
Any of those rules, question them and look at the polar opposites and see if it holds true. I’ve got one trader that trades with me that I’ve known for years. I showed him inverse risk reward strategy. Admittedly he’s gone on a little bit from it and made it his own. He’s added some elements where he still does get into some larger wins as well.
Essentially, I said to him take a daily buy and whichever extreme breaks out first you take a sell or a buy. Obviously, a buy if you break out high, sell if you break out low. If the day closes in profit then you close your trade. Often you’ll be in a daily bar on the Pandoli. You’ll be risking say a 100 pips and taking 30 pips profit. Obviously, there’ll be big days as well.
He went on to make that into a really consistent way of trading but people’s instant reaction to that, I mean, I shed the idea where have a lot of people and he was the only one who took it up. He’s going on from that now. If there’s some profits at the end of the day he might move his stock pot now and let it go for another day. You’ll never find anything in the trading book suggesting something like that because it goes against all of those rules.
Walter: Yeah. That’s funny. It reminds me, when you talk about like entrepreneurs things like that hear the stories about so and so winning and bought up all this land when it’s a worthless land or whatever. It’s kind of the same thing like he’s being rewarded for doing something that nobody else really thinks is viable or even a good idea. That’s is where he’s pulling his reward from.
It’s a good lesson like you think of… I think Warren Buffett essentially bought Goldman Sachs at the low of the GFC. Everyone just thought this is worthless company and all this financial companies are worthless. He went in and bought it basically because it was the absolute best time to buy.
Nobody wanted to touch those thing and that’s sort of what your trading buddy is doing. He is taking the strategy that you shared to all this people and nobody wants to trade except him. He will do it and so he is being rewarded for that. I think, that’s a good lesson in that.
Darren: Yeah. It was just like The Big Short… you’ve seen The Big Short haven’t you?
Walter: Yeah. Have you seen it now?
Darren: Yeah. Excellent movie. When he first goes into, I don’t know what bank it was, Deutsch Bank it might have been?
Water: Yeah, sure.
Darren: Says “I want to short the housing market”. They all laughed at him. There’s kind of a message in that. If everyone thinks your idea is crazy then it doesn’t necessarily mean it’s not a brilliant idea.
Walter: Absolutely. You know what Darren? That keeps me saying… Because every day people look at me like I’m crazy. It’s one of those things that you say like “wait a minute hold on. It’s a no brainer to invest heavily in the Australian housing market now ok, I’m gonna short the banks”. All this mortgage debt flying around.
It’s interesting but there’s a lesson there isn’t there? Where, if everyone thinks you’ve got this hair brained idea that is not going to work like who would do that. Usually you’re into something.
Darren: Can I ask you another question about your style of trading with reversals?
Darren: So you have your way of grading your set-up, your reversals, does it make any difference to you whether it’s support acting support again or it’s support acting now acting as the reverse? Almost a resistance, is one better than the other?
Walter: No. Doesn’t really matter. In fact I generally won’t even take a break out trade unless it comes back to confirm that level. For example, if the market is going up, up, up and hits a resistance level and then it finally hits a few 3, 4, 5 times finally gets through on the fifth go and it breaks through that resistance level. I still won’t take the trade unless it comes back and bounces off that resistance. It doesn’t really matter if it flips and goes the other way around. Doesn’t matter to me.
Darren: Do you like it to take a bit of time to come back? Cause when I tried trading that way I always found myself racing into it. “OK, it’s come back now” when it really hasn’t come back. I just broken out and kinda want to get into it so I could see it moving away and I was like “oh I should be in this trade”. Do you have a criteria for letting it move away first?
Walter: Yeah. I generally like to see that. What you’re talking about something I think a lot of traders come up against. There’s a strategy called the Acapulco Trade where essentially it’s a break out and a retouch that happens really very quickly. That’s one if you want to trade that way that’s fine. That’s one way to fit your view of the market into that type of setup.
The other way to do it is what, I think one of our members calls it “the pinch.” Denis calls it “the pinch.” That’s where it breaks through that level and it takes awhile to come back. I actually prefer that one. I will take an Acapulco if it looks like, the market has a lot of momentum. If it’s just really moving. The cameras aren’t slowing down. Sometimes you feel like you’re going to miss out so I guess you can have both ways.
If you want to get in with that quick retouch which is basically just a retouch on the lower time frame. You can trade as an Acapulco but if you want to stick to the higher time frame then you just have to wait. Sometimes it doesn’t happen. Sometimes it’ll go without you.
To me, in my mind it’s safer to wait for the retouch. I just wait it out.
Darren: Basically the space strategy on the forum is, they’re basically looking for a reversal in some space and then combining it with some price action, is that what they’re doing?
Walter: Yeah. I think Rivo on there, he’s talking about it. He’s basically looking at the lower time frames – the 15 minute charts. Yeah, he’s basically doing that. He’s got all of these numbers and you can see, he’s testing a stuff like that on there.
To me the whole idea of space, just to sort of wrap this up is that, you’re seeing on the chart, a spot where the market hasn’t been in a long time. Coupled with that, this is the spot in the chart that we believe the market tends to bounce off this area. It tends to find support here. It tends to find resistance here. It hasn’t bent here for a long, long time. The fact that it’s gone to this spot and the fact that it started to turn around, given us a some sort of reversal on the candlestick pattern.
Maybe it’s a good spot to get into our reversal. It may not work out. It may only go back for a little ways before it continues on in the trend. It just depend on you on how you adjust your trade.
Do you move to breakeven? Do you let it just stop you out? All those things are going to affect how you do with the worst case scenario, which is a situation where it looks like it’s a reversal. It reverses for a little bit then it keeps going and blast through your original spot. Those were always going to be the worst case scenarios.
That’s how I view it. It’s just more of a time thing. I guess you know what I mean?
That’s what space identifies for me. If you’re looking at candles that are not tick candles and you’re looking at time-based candles. If you’ve got space on the chart, it’s just telling you one thing which is “look we haven’t been here for a long time, we tend to reverse here, and we’re printing this pattern that says reversal.”
Those sort of things, are all the pieces that I use when I take those reversal trades. Yeah.
Okay Darren, let’s wrap this up. For you when you’re trading your reversals, the basic idea here is to take them all. That you never know which one is going to work out but you want to make sure you’ve got money on them. So when they do work out, you profit. That it’s okay to have some losing days because eventually the market is gonna go. It’s gonna give you some profit and the exits aren’t really that important.
Some people are going to make a little bit more money than other people in certain weeks and vice versa on other weeks. It depends on how aggressive they are with their target so the way they manage their exits? It’s essentially you’re leaving a lot, you’re letting go, is the way how I describe it. The way that you trade this way, you let go when trading this system and you let the markets decide.
Darren: I think I had to do that. I think it’s something I have to do and come up with a technique to allow me to do that. Also I can’t bloody wait for those levels mate, I just buy time when it gets there, made five mistakes already so that’s why I couldn’t have the patience that you have.
Walter: That’s funny. Alright. Darren we’ll see you next time. Thanks for your time.
Darren: Cheerio Walter.