Master Day Trading in Just 30 Days: Lesson #13
In this lesson we’re going to talk about setting up for the big wins. In prior lessons we learned how to make small scalp trades and how to select the best scalp trades. This should be enough for you as a day trader to make some profits and even to make a living if you have a decent size account.
But, if you don’t want to be scalping all the time, there are ways to play for a bigger win. In fact, if a trader uses our rules from the last lesson to select trades then chances are the majority of the moves that result are more than scalp moves.
Trading Is A Numbers Game
Well, before we discuss this we need to set expectations. There are some realities to the “numbers game” that is trading – realities that you need to understand before you try shooting for bigger wins.
To start with, trading is a NUMBERS game. It’s a game of probabilities. And depending on how you construct your trades the probability of winning or losing on each trade varies dramatically. So, here are the key ideas you need to keep in mind when deciding what kind of target you’ll be shooting for:
- The smaller the profit target, the larger the win rate. This mean if you want to win on over 80% of your trades, you cannot shoot for bigger targets.
- The further away from entry that you have your protective stop order, the larger your win rate. This means that the more room you give your trade to move around, the higher the win rate. But it also means larger draw-downs.
- Trading breakouts, where the really really big wins generally originate, will get you, at most, about a 40% win rate! In other words, you will have, at most, 40% of your trades being winners. Put another way, most of your trades will be losers. So while trading breakouts is the most consistent strategy over the last 150 years, most traders can’t use it because they can’t handle the low percentage of winning trades.
So, in this lesson we will discuss how to set larget targets to get bigger wins on trades that are NOT breakout setups.
Shooting For Bigger Wins!
One of the keys to bigger wins is the use of something called a “trailing stop”. It is better for us to demonstrate the idea rather than try to present an academic discussion of the concept.
So, lets assume that you’re in a trade and that you’ve chosen a long trade that meets the criteria in our prior lesson. In other words you are in a trade that is bouncing off a support level and has formed a trend reversal.
An example of a chart that is bouncing off support levels is shown below – this is a Daily Crude Oil Futures chart where price flushed into a support level on Trade Date November 9th 2016.
The chart below shows the price action on a lower time frame – the 200 tick chart – shortly after price started to flush into the support area shown on the chart above.
Point 1 on the chart is the trend reversal from DOWN to UP. Hopefully by now you can see why that point is the trend reversal point.
Point 2 is where a trader would have initiated the first LONG scalp trade according to our scalp trading guidelines. The target for a scalp would have been a few ticks because this is a 200 tick chart which is a very very small time frame.
But, what if the trader wanted to play for a bigger win? How could that be done?
Constructing The Bigger Win
Generally speaking, to give your trade room to run for a bigger target, you need to make your stop level wider. This means that you might have to trade smaller sizes in order to keep the amount you risk on a trade consistent.
In the chart above, for a normal scalp trade your initial protective stop order would be placed at point B. But, if you are shooting for a larger trade you START with your protective stop order at point A – exactly TWO swing points behind the current/entry price.
As price moves in your favor you would keep the protective stop order at point A. The next time you move your stop it would be to point B as price moves above 44.00. You will be “trailing” your protective stop order level to exactly two swing points behind the most current price – never moving it down, only moving it up!
You will notice that price flushes shortly after hitting 44.40, came close to point B but did not fall below it. Prices have a nasty habit of running back into the prior swing high/low areas which is why we keep our protective stop order 2 swing points away. Once price starts moving back up, you’ll eventually be able to move your protective stop order to point C. You can see that price ran away after that.
“Playing the game this way can double or triple your profit from the trade but your win rate can drop by double digit percentages! You need to decide if you’re comfortable with that and play the game that gives you the calmest state of mind.”
Get More Examples And Learn More About Other Methods For "Big Wins"
There are many ways to construct bigger winning trades. The above technique is just one method. We cover multiple methods in our book MARKET STRUCTURE. Check it out by clicking the button below.
Yes, we cherry picked a wining trade to demonstrate the technique. There are losing trades where your protective stop order gets hit and you exit the trade for a loss so you need to be prepared for those. BUT, if you sized your trade so that you only lose the same amount as a normal scalp trade, this should not concern you that much.
The other caveat is that you should only shoot for bigger wins on the very best trades. This means that you only do this on trades that strictly meet the criteria we outlined in the prior lesson!
You now know one method you can use to construct a trade specifically for larger targets. It involves widening out the initial level at which the protective stop order is placed and moving the level up slowly as price advances (aka a “trailing stop”).
There are multiple ways to construct trades for bigger targets and bigger wins including pyramiding and different methods for advancing stops. Even the trade selection process can be modified. For this series though, we’re only going to show you this method – you’re just getting started in your trading career so you only need ONE technique in this area to get started!
Coming Up Later
- Money management and risk control
- Using multiple time-frames to fine-tune your trading entries
- Determining how to set your stop points and the trade-offs of each tactic