What up rock stars. So question, comment came in about making adjustments to the trade while you’re in the trade and was that indicative of a system failure or not having a good set of rules to begin with? And so that’s a really great question. I think Blazin’ Saddles came up with that one. That’s not his or her real name, but I think if you’re pro, there are a few things or adjustments that you can make that I would say are within the parameters of professional behavior. And that would be one, there’s three. I think one would be you have your risk unit and you know what that is and you know what your R is and R is to me, kind of two things. It’s an ATR value and it’s all the amount of money that you’re willing to risk on a particular trade. So therefore you’re able to calculate the number of contracts or shares as your position size, what I call a risk unit, and you can normalize that across many, many instruments, although the number of shares and contracts might be different because you’re always conjugating it to volatility.
So say you put on a corn trade and it’s 13 contracts of corn and the vol is 20 cents. I don’t know, I’m making it up. And while you’re in the trade, you find that the vol expands to 25 or maybe 30. And so now when you look at that and you take that ATR value and you plug it into what you’re willing to risk on a trade, you can see that you might have to adjust the number of contracts down to 17 to have that volatility adjusted position size. So therefore you would go into the market and at the market trim three contracts off of your position. Did I say 20 contracts? Whatever number I said, I said the vol was 20 cents or 13, right? I said 13. So in this case you’d chop off three just at the market at your first instance that you could and go with 10 because 10 contracts with 25 vol might be the same as 13 at a 20 vol, right?
So trimming or pruning the hedges, as I would say is totally legit. Now, if your account’s up 50%, because you also have other things rocking and rolling, you can always say, well, my one half of 1% has grown, has the ball grown? So I might not have to make that big of a trim. And so if you’re looking at the difference between 13 and 12, that’s a discretionary call. If you’re a purist and you’re running a pure system, then by all means you’d trim that one extra contract because in the scheme of things it matters. But that come
From backtesting and fully understanding that that type of trader is 100% systematic. If you’re discretionary and you have a cast iron stomach like me and my equity in my account, remember I said you always have to trade your equity curve. I’m presuming that you’re trading with your defined trading edge, otherwise you’re acting out emotionally. And so I would probably hold it myself, but that’s because I have that temperament. I also know that if it does work against me and I lost incrementally a little bit more than I would have if a smaller position was stopped against me, I don’t get to bitch and bellyache because I know enough ahead of time how to make those decisions. You see? And so you got to be responsible and understand that we live in a paradigm of personal responsibility and whatever happens in your account is by your own doing.
Sometimes unfortunately, well, it’s not unfortunate, but sometimes you get to figure out why you do things only after the fact, and that could be seeing where your subconscious is kind of coming in into play without your fully understanding it from a conscious standpoint. So that’s what I would say about that part is that when volatility expands, it’s totally okay to trim the position you see and drop it down. It’s a little trickier when it goes the other way. When vol drops and you already have your initial risk unit on you just know that if your risk unit starts with, say in that example it was 13 and now vol dropped from 20 to 15, now you might be able to say that your R risk unit is now it could be 14, 15 contracts. So at that point you could increase if you’re adding to your winners, you could add rather than just going to the market for example, I would wait for the entry criteria to be met before you edit that. Now slightly larger risk unit, that too is an adjustment that is legit.
The second thing that you can do that might not even need to be said is adjust your protective stop. That’s a mid-flight kind of change, right? You enter your order, you’ve got your protective stop, and then you’ll have to figure out a rule whether it’s one ATR, a half ATR, or a dollar value, maybe you want to trail structure. There’s a lot of ways to do it. As long as you act consistently, you should get consistent results. So adjusting your stop higher, what you don’t want to do obviously is when it starts to move against, you buy something at a hundred, your stops at 95, at 96 or 95, 70. You’re not like, man, I don’t want to get knocked out and then I have to come back in my face. No one
Cares about that. All you can do in the ever evolving moment of now is protect your capital. Your job is to place superior defense. Don’t negotiate with your protective stops, especially when you’re losing principle rather than having the a hundred name go to 1 25 and you’re trailing with five bucks, stop, so you’re stopped at one 20. That’s a different game. So those are the three things. Adjusting for volatility when it increases, adjusting your position for vault when it decreases, and then adjusting your protective stop higher while you’re holding onto your winners. There could be another one in that if you really risk on risk off and you want to experiment with adding to your winners, you’re in experiment mode. So that’s like booting up your computer in safe mode. You might be trading one or twos and now you want to add one more just to kind of see how it feels to me.
You can do that again by looking at the data. What would it look like if after a certain point you added a contract, and then what did that do to your overall account balance? Because again, you want to trade your equity curve. There was another part to that particular comment that spoke about like if I was getting to a spot where I knew I would take off profits, I don’t really have those profit targets in mind. I don’t look at the charts and say I got to get out here, or if it achieves a certain level, I know I’m gone because I don’t predict the market, even though I have an enormous sense of intuition and a great feel for things, I’ve always surprised myself to know that the markets can go much higher for much longer than you can possibly guess. So I typically let the market tell me when the move is over.
If you want the hint, I’ve mentioned it before, you can look and see and study the differences between pullbacks and absolute reversals. So you can look at those as for better exits on your winners rather than using as the comment or question was, do I use a cell limit? The answer is no. Haven’t used the cell limit in over 30 years. So for those of you that don’t know about limits versus stops, when you’re in a name at a hundred, you put in a protective cell stop at say 95, A sell limit actually goes above the market at some target, for example. So if I knew I wanted three to one, I could put in a stop, a sell stop at 95 below the current market value of a hundred and put a sell limit in it one 15 above the market. So then if it traded at one 15, it would get executed at one 15 or better. And when you’re selling better is higher. So
One fifteen, ten one fifteen oh five sell stops work a little differently in that once that they’re triggered or the price trades added through the stop price, they become market orders. So you could get your stop price, you might get slightly better or slightly worse. It’s nothing to worry about in terms of slippage your skid, but that’s a good question. It is. So this is under the chapter of managing the trade, which is what do you do while you’re in the trade? I don’t look at the screen and my p and l and watch it and fall in love with my reflection because that’s how you fall victim to taking small gains.
And I don’t want to feel good about myself by taking winning trades off when there’s no money in it and it doesn’t impact my account balance as a percentage, several percentage points of my overall account balance. If I’m adjusting my stops and I inadvertently get knocked out because of that, then that’s fine. That’s the market communicating with me, but I’m not going to go into the market and impose my will and try to make such a trade that way. I hope that answers the question. It’s a good question. Anyway, please like and subscribe. If you haven’t already gotten a copy of the audio book version of the invoice trading, you’re welcome to get it for free at Martin Chronicle, and thanks very much for being here. I will see you tomorrow.