Today I received an email from a trader who was struggling to get profitable

"... for protective stops and targets which was what I used when I did simulator trading and worked wonderfully but we all know that simulation is simulation, valuable but not real."

A thread...

If you know me, you know how much I value practicing your craft, whether you are a golfer, a basketball player, an infantryman or an artist.

You have to practice to get better

But for some reason most traders think practicing is worthless

I disagree completely

Here was my longwinded response, hope it helps at least one trader.

Let me give you some perspective here.

Story time…

I’ve been trading for 21 years, it took me about 8 years to get to the point where I was consistently profitable. I went from a couple of good trades to a couple of bad trades and repeated that over and over.

My mindset was, I just need to be in winning trades and ride them forever. Then I’d get frustrated when that didn’t work and I’d go looking for a new indicator, or add another indicator to my charts, figuring that if I just had the right mix of indicators that I’d figure it out.

If I go back now and look at all my trades from back then, I was trading well but I wasn’t trading like a professional. I had this expectation that I could make hundreds of thousands of dollars per year (month) on a little $5-10k trading account, which is completely unrealistic.

As I look back to those trades with what I know now, and how I trade now things would’ve been a lot different for me, much sooner in life. But as the saying goes, when the student is ready, the master appears. And I wasn’t ready to understand just yet.

The most frustrating thing for me and the moment that it all changed was when I decided to remove everything from my brain housing group that I thought was right about markets, and started really rigorously testing things.

I removed all the indicators from my charts and focused on learning what each and every bar was telling me about the movement of the market.

This was tedious and challenging and I really sucked at this at first, especially because I had so many unuseful biases about what I believed about the market.

I stopped trying to predict what I thought the market was going to do, because I kept proving to myself that what I thought was going to happen, didn’t happen.

That frustrated me and took a while to get over, then I had the realization that I don't need to predict what the market will do, I need to figure out a way to put myself into a position to “luck” into a winner or “luck” out of a major loser…before it became a major loser

So everyday I would wake up, do my morning routine, get myself mentally and physically prepared and sit down for hours and hours of scrolling through charts, one candle at a time.

When I would find a move that happened I would go back a few candles before it and start looking at what characteristics where there, I’d take notes, print out the chart and give the setup a name.

I allowed myself only two setups that I was looking for.

One was a trend continuation, and the other was a trend reversal.

This is actually pretty broad, but it was very useful because at this point I was able to eliminate all the other candles on the chart and just look for those two setups.

Instead of trying to figure out what needed to be done every minute of every day I simply had to wait for the potential pattern to show up and then I could make a decision.

That was the first step, the next step was figuring out a way to get pulled into only the trades that actually had an opportunity to work out for me, and skip every other trade. I accomplished this with a very simple technique

Using stops to ENTER Trades, that is a buy stop 1 tick above the previous candle to go long and a sell stop 1 tick below the low of the previous candle to go short, ONLY on those setups that I had. With this simple technique it removed a lot of my losing trades.

So the next frustration I had was believing the old phrase that everyone says but doesn’t know why they say it…they just say it.

"Cut your losers short and let your winners run"

It turns out this is both great advice and horrible advice.

I started documenting MFE (Max Favorable Excursion), that is how far did my winning trades go in my favor at their best before I got out of the trade.

The “trend continuation” trade had a much larger Max Favorable Excursion than the “trend reversal”

I wanted to know where my best opportunity to hit a price target and overpower my losses would be, call it the sweet spot.

Surprisingly (at the time) the sweet spot was, and I’m just going to generalize here:

“Trend Continuation” +100 pips
“Trend Reversal” +50 pips

At this point is when I implemented the single greatest tool that made me a consistently profitable trader.

I manually backtested these two setups and only these two setups. I setup a simple spreadsheet

• Date/time entry
• Date/time exit
• Symbol
• Long/Short
• Continuation/Reversal
• Stop Loss
• Profit Target
• Pips (for trade)
• Total Pips (a running total)

And then I went back and started collecting hundreds, thousands of manually backtested trades.

The thing about doing this, is that this is THE HARD WORK. This is the stuff that most traders (who don’t succeed over time) don’t do.

This is where I learned how to wire the setup into my mind. Knowing how my real time trading should perform compared to my backtests, if my real trading wasn’t successful it was because I wasn’t trading according to may plan, I was guessing, I was gambling, I was forcing it.

So I paper traded it until I was performing almost identical to my backtests before I went live.
Then when I was I started trading with $1 positions until I was performing almost identical to m backtests, then I’d slowly ramp up my position sizing to the appropriate levels.

If my performance ever dropped compared to my backtests I’d go back to paper trading only.

Trend Continuation win rate was 53% with 3.3:1 risk/reward
Trend Reversal win rate was 72% with 1.2:1 risk/reward

Now here’s the part that blows most peoples mind…

I have been doing at least 1 hour of manual backtests for over 12 years, EVERY SINGLE DAY

I still do this every day, in fact I’m up to 2-4 hours a day since 2020 started. I have hundreds of thousands of trades in spreadsheets, I have backtests going as far back as 1873 on the SPX, I have backtests on every bull market, every bear market, every asset, every time frame.

This is how I got and continue to be profitable!

Once you’ve read all of this and gone back and implemented some of these ideas, select a day/time on my calendar to talk about all of this

This is the framework for the trading thunderdome and EVERYTHING we do at http://pollinatetrading.com 

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Stuff that you won't find on Real Vision, CNBC, Bloomberg or anywhere else

Btw, how epic is 2020 to trade!

Disciplined traders playing the sniper game with huge 80-90+% win rates

Noobs chasing vol and getting smoked

Magicians making bank but scared to think that the market will return to “normal” and they will give it all back

Fun times