Day Trading Futures
Control the risk - everything else follows
Risk
There are a lot of ways to approach risk - some approaches are more conservative than others but the idea is simple enough - the only thing you know (and you control) - from before the trade begins to the time it ends - is the risk. Before the trade you cannot know if it will be a winner, or a loser and you cannot know if price will move in the direction you think it is going to move - and you cannot know how far it will go in that direction.
There are NO TOOLS that can ever answer how far a market will go... but there are plenty of ways to determine how far it "could go" and even how far it "should go." I say this because I have met newer traders who believe that it's their lack of knowledge that holds them back from knowing how far a market will go. That is just not true - no one ever knows how far price will go... the best we can do is anticipate how far it “could” and how far it “should” go.
Why are we talking about this...? Because of the risks we take. How do I know how much risk to accept - if I do not know how much reward I could take? The trading books often suggest that we should be aiming for nothing less than "risk one to make two" - and ... they also suggest that getting a better risk reward is the goal. Sounds great on paper right? It sounds great to think of "risking one to make five"!
Unfortunately - a lot of those books do not tell you the downside. (huh...? There is a downside...?)... the downside of aiming for a greater risk reward is the reduced win rate. There is a math expectancy which suggests the win rate drops as the RR increases. It "suffers" - and the best traders in the world are the ones who manage to maintain a great win rate while also maintaining a great risk reward.
But even those "greatest traders" still have a struggle to maintain that uncommon state (mostly it's accomplished by very selective - very picky trades that meet exact criteria). For the average trader - even a consistently profitable trader - the win rate WILL suffer with a high average risk reward. So - what do we do?
Consistent Data
One thing about trading - is that the variables change and one trade does not define us. We want to use averages to develop an idea of our 'typical" or normal trading results and we want to monitor that average for changes over time. These changes can warn us of risky activity and these changes can inform us of our progress in growing as a trader.
To gather this data - we want to record the trades we take. (Thankfully - brokers record it for us and we just need to access that data). We need the details of the trade so that we can calcualte some results. Let's just list the things we need first and then discuss what to do with it. All of this is historic data - and our goal is to calculate the hRR (the historic risk to reward). I am going to put in some numbers just for demonstration below.
We Need
Avg Profit: 27.00$
Avg Loss: 1.70
Avg Win Rate: 43%
Avg Loss Rate: 57%
(Maybe you can add "Avg Scratch" but personally I place those in the "loss" section)
Once we have all this data - we want to calculate the risk to reward, and we want to determine if the avg win rate with our avg risk reward is high enough to survive in a live account or if we should stay in paper until the numbers improve.
Let's consider the example above... in the context of 100 trades. If we had 100 trades and we won 43 of them - then we lost 57 of them.
Take the avg loss and multiply by 57 (1.70 x 57 = 96.90$)
Take the avg win and multiply by 43 (27.00 x 43 = $1,160)
Now take the win & subtract the loss (1,160 - 96.90 = $1163.10)
This shows that we are safe to try trading this strategy - because the loss rate is low enough and the profit on the wins are high enough to grow.
Tradovate Performance Center
Trade Review
Learn from your trading...
On Tradovate - the account has a performance center - which shows you the data you need to calculate the hRR and you already know what your sRR is because you made it. Notice that the picture above has the commissions included into the data? This is vital!
A lot of new traders use TOS or TradingView to trade on paper without considering the commissions - they are only focused on winning. (Pro Tip: Winning is not the goal to successful trading). If you trade on a broker that does not have something like the Tradovate picture above - consider how you can get that data.
TOS has a export function - so that you can export the trade history and then you can upload it to a on-line trade journal or (if you are good at excel) you can load it into an Excel journal to analyze the trade history.
Either way - you need your trade history for review - but that is only part of the review process! You also need the chart where you were trading. Reviewing the trade you took gives you a chance to look over the trade setup and consider:
Was it a good trade?
What was the entry sign?
What was your exit sign?
Did you miss any signals while you were in the trade - that you see now looking back after the trade is closed?
When we review the charts after the trade we can learn what signals we missed and teach our eyes to look out for these signals in the future. We can also look back and ask "was that a good trade?" What could I have done better...?
A journal entry - using photo's to evaluate the trade taken
Journal
This is a topic for another day - but it’s a great one to dig deeper into. I use pictures to journal my trades and that picture above is from my Journal. What does your journal look like?
