Best Way $1 Million Traders Let Winners Run

Everybody, happy Monday. Hope you had a great weekend and you have great plans for this week. Remember, winning is a mindset. In case you didn’t see I was with my friend Alex Bustos over at Be The Trader, so it’s over on his channel on YouTube. He’s a great guy, he’s really smart. He’s doing really good things with his channel, so you should check it out. I think the interview is about 35 minutes. He’s a good buddy. We’re going to make plans to meet up in person sometime shortly. What else? Okay, I want to get right to it. Question came in from actually as a comment by Jonathan Strom on the video called How the Fear of Failure creeps into your Trading in your Life. Appreciate the content I’ve been trading for four years now. Haven’t really developed an edge, dah, dah, dah. Do you have any tips for holding winners longer for someone who has developed a habit of cutting them to quickly?
Should I automate 2023? I’ve tried trading smaller to overcome this habit, but still not there yet. Thank you in advance. Well, Jonathan, thank you for writing in. I appreciate it. I’m going to heart the thing right now. So look, there’s points of contention, right? Because of the timeframe. What’s your timeframe? If you’re trading 10 or 15 minute bars, your timeframe coming into the end of the trading day might seem like an eternity because that’s how you’ve calibrated your system. You have hair trigger responses and it’s a lot better. The more you make it last, it’s more better. So my advice, if you’re holding things overnight, you have to position size to take into account that there could be volatility overnight. Now, in my experience, everything that I ever feared never really came true, and you’re looking at a guy who I’ve been long futures and had limit moves against me.
It’s painful and it’s scary, but it’s not that bad. You survive it. That’s part of trading. It gives you thicker skin too, but you have to position size accordingly. You might trade larger during the day because you know you’re going to offset. You might be one of those people who puts on big size and only give it a few ticks against you before you offset it. So that’s a different trading style. When you’re taking things overnight or you’re a swing trader, you have to position size. One way to do that is to look at the average true range or a standard deviation, something like that, to give you an idea of what the instrument’s personality is. And the A t R can tell you that a popular one is
20 days, but you can use whatever you want. I would tend to pick one and be consistent and use it over and over and over. That makes your discretionary rules lean at least more to the systematic side. If you stick to one number and have that discipline, you got to start somewhere. So be kind to yourself. Pick one number and stick with it. Personally for the shorter term things, I know folks will say, well, I trade 65 minute bars, so I’m just going to look at the 65 minute a t r. To me. You lose the integrity of the a T R when you go lower than a day or a 20 day 20 period. You see, because the shorter timeframe that you’re looking at, the more random the data is. Now, randomness is everywhere. You can’t really escape it, and there’s a good book on randomness if you want to really study it and kind of get to see how it’s really prevalent in many things in life.
You could of course go check out Nasem Taleb’s book, fooled by Randomness, but all of that, not withstanding the way the prose do it, the way the million dollar traders go on to make bigger money is by putting in protective stops. They let the market tell them where the move is over. Typically by looking for a reversal at the top of the near term top right, it doesn’t have to be an absolute top, but it could be multi period, could be weekly, monthly. You could see where does the market stall at previous levels of resistance, for example. So it’s not necessarily a price target, but you could look and watch the behavior when the instrument gets to those levels. So if you’re looking at say, cocoa or sugar right now, for example, just as a study, you can go back in time and kind of see where has the march.
March right now is trading like circa 27. You can look back in the history of sugar and see how many times it did that and how it behaved. So as we come up to those higher timeframe prices, you can watch the behavior around there. If the market reverses down, which it kind of did last week, it kind of put in a new high and then came back all the way back and I think closed down on the day. That was a reversal. We’ll see how it really behaves this week. But for all the bullish fundamentals that are out there right now, the chart was incongruent with what the fundamentals are, or at least what we know them to be. There might be others that we don’t know that’s welcome to trading. And so some of the biggest money that I’ve ever made on trades when I didn’t anticipate making big money in those trades, you never know, is simply to kind of ratchet your trailing stop, which is a little time intensive in that you have to do it manually without being hypervigilant.
You don’t want to get spooked into like, wow, look how much money I’m making. I better take it. I’ve never been at this level. You can kind of condition yourself to learn how to be with the uncertainty. The more you kind of keep your hands off the keyboard and your hotkeys and the mouse, or in my case the phone because I’m still a little old school, but I would just say, okay, for every half a t r or one a t r, once I was fully loaded, mind you, I would move my protective stop up so that this way if it did have a move against me, and it doesn’t have to be a sharp move, yes, sharp moves can happen, but in my experience, things kind of, they’re like tides. They ebb up and they ebb down, and that’s the nature of markets, right?
But yes, you do want to have a circuit breaker on there where you have a protective stop where if the market does move against you quickly, you can get knocked out of your position and you could figure out what the hell happened after. You don’t want to have to sit there and think about things on the fly. So the importance of protective stops can’t be overstated, but I would just adjust them usually at least once a day. If the market’s moving in my favor, I would take the risk home the next morning I would say, okay, where’s my likely how much of my unrealized gains that I have right now in the trade, am I willing to risk in order to stay in the trade? You see, because once the markets start to groove and they start to trend, which you can’t really predict, you can only anticipate.
You want to try to have your optimal position size on and then stay out of the way. Let the other folks do the work for you. That’s the great part about trading is that you can make a lot of money by just anticipating what the move is and putting a damn trade on. It doesn’t matter if you add to your winners, if you have risk on and a big wave of buying comes in behind you, it could put push prices higher, which is exactly what you’re hoping for. Now, I can share with you after 35 years that the market has, when the wind is at your back, that way you can make a lot of money for not a whole lot of hard work, just being in the right place at the right time. And when you are there, you want to milk that for everything that you possibly can because you’re willing to take the risk on in the first place when you really never knew what was going to happen because why? Well, the outcomes of trades are probabilistic and you’re going to have to take your losers with your winners. But what happens is is that if you’re looking at stopping your equity at one R here and taking your winners off at three R here, what you can do if you let your winners run, what you can actually do is to skew
Average win much higher by just taking several outlier winners over the course of the year. So even though you might have a cluster of three R winners, if you let a couple of them say 10 once a month, you let something run if you can between five and 10, that skews the average winner higher. So that changes your expected value of a trade, and all you have to do is learn the tactic of adjusting your trailing stop, whether it’s one a t r off the close, whether it’s two ATRs off, the higher, the close, whatever it might be. You can do that that way. You might also do a study, I can’t do it here in where you look at say a 20 period exponential moving average and measure the distance in ATRs that the security is closing in futures. We call it settlement above that and see how long over time that’s been sustained, you can kind of create your own overbought and oversold indicator that way. Hint. So it’s very simple. I wish there was a PhD level answer for it that would make it sound much more sophisticated, and you read it in market Wizards, especially the first two books, I think Jack made all the points he had to make with the first one. The second one is certainly interesting. I think my interest in them has waned after the first one myself, but they’re all valuable in their own way.
So again, I would get your position size down, Jonathan, because that’s really where we make and lose our money is you have to be able to sleep at night. So as I’ve advocated, if you’re not there yet, you can always try one share or one micro contract to that extent to try to get used to that feeling because once you get used to that feeling, you thicken your skin, which is a good thing, and you also develop a sense of confidence, you’re also a step closer to developing your trading edge, right? Because your edge now is going to come from emotional feedback from the market, which you’ll translate into trading tactics all the while having a really good attitude, you see? So you want to push yourself into areas where you’re slightly uncomfortable just to learn. It’s not really about your p and l at that point.
You’re really trying to get new experiences, and the best way to do that is to be live. So it’s kind of like having an interest squad football game, and then you go out and you scrimmage against another team who has other ideas, other defenses, other offenses, and the game doesn’t necessarily count, but you get to see yourself in action. So that’s kind of what you’re doing here is a scrimmage, and you’re really learning how to calibrate your emotional constitution with your behavior. You don’t want to categorize your winners. It’s the easiest way to make more money is to let your winners run. And I can’t tell you it’s the single most important thing I can share with people who are struggling is that even if you’re just stupid lucky or you find yourself that you’re in the right place at the right time, you can still take advantage of that.
There’s no thing that has less integrity, or let me say it this way, it doesn’t mean that you don’t have any integrity just in the right place at the right time. That’s part of life too, because you’re certainly going to be in the wrong place at the wrong time, in which case you’re going to start to smell smoke and you better believe you got to get out because it could be five alarm fire. It all starts somewhere. So you have to take the thick with the thin, so you might as well celebrate the dumb luck that’s going to fall in your lap because you’re going to have it and there’s nothing wrong with it. You put the trade on. As long as you have the risk, you’re entitled to the rewards. So that’s my 2 cents on it is to learn how to use a trailing stop.
You can trail structure or you can trail by a t r. Trailing structure would be like, what’s a swing low if you’re on the shorter term side of things, if you’re longer term and you do it Allah Commodities Corporation, you’re really looking at support and resistance in many ways. And so this way you’d at least know if you’re getting stopped below support if you’re long. It’s not random at that point, right? If you have a strong you base of support and you get taken out, you’re doing, I guess, best practices. Anyway, thanks very much for being here. Please like and subscribe and go check out the interview that Alex Bustos did with me over at Be The Trader. I look forward to seeing you tomorrow.

Subscribe to the show  

Click here to  get your free copy of The Inner Voice of Trading audiobook.

This is an automated transcript