Trading Probabilities & Red Day Management
Some of the very hard work day traders Kendra and Becky have gone through and grown through is accepting red P/L days and the game of probabilities that trading is! In this episode/blog, we’re going to jump right into this topic and discuss how it has challenged us. Because for a younger/middle trader, red P/L outcome days can be SO HARD.
Let’s start by considering how a day might go for a trader once said trader gets into a trade and then the price action starts to go in opposition to the plan. In the moment when the market goes against my trade plan, my stomach falls. My heart rate increases, my palms sweat and my mind starts to blur in a hyperdrive fight or flight mode that’s trying to rapidly figure out how I can somehow prevent the stop out that I see price approaching. I see this as my trader immaturity, but it’s hard to contain in this moment. This is me still not wanting to be wrong and accept a loss. It means I was counting the win in the moment and not completely accepting the risk when I put on the trade.
Both Market Mamas are slowly improving at remaining calmer and accepting the risk more fully, but this has been an area for us that we have really had to acknowledge and actively work to change. As the consistently profitable traders that we are growing into, we want to experience the uncomfortable but ideally peaceful outcome of a small red day that can be hard to accept at the moment but is sustainable for our trading accounts. Vs not accepting an initial small loss and engaging in a fix it battle with the market and the toxicity of that. The latter can lead to trading trauma and serious account and progress damage.
Just this last week Becky had a struggle day. Her first trade was a loss but she did not walk away right away and accept it. No, instead she took about 4 more trades in a 45 minute period... At one point she reports that she had nearly gotten her accounts back to a net zero on the day and indeed “fixed it,” but her profit target was missed by a hair and then price rapidly pulled back with her still in it. Insta worsened frustration and two more impulsive trades after that moment that sent her accounts just over her trade system’s daily loss limit. And then she finally snapped out of the trance. Becky then messaged Kendra and forced her system to close on the day. This type of trading session is easier than we wish it was to sink into. Becky was not proud of the fix it attempts in such tight succession that day, but she did stop *near her daily loss limit and walked away from her office for that morning and those are big wins and improvements on a *potential full tilt day. It was like a medium tilt? A contained tilt? Hahaha This day was another lesson day and Becky definitely spoke to her core people in her locker room in the aftermath and acknowledged the day and how she handled it. And you know what, she has been steady and green since that day. This is the literal example of a red day not having to have a big impact on your overall journey if you can keep the day from fully imploding. We’ve all heard the timeless but so appropriate Jim Rohn Quote: “We must all suffer one of two pains: the pain of discipline or the pain of regret. The difference is discipline weighs ounces while regret weighs tons.” This is synonymous with 2 different types of red days 100%.
A red day gives us valuable feedback and performance data to examine. The idea of sustainability with keeping our losses small, it reminds us of one of the principles we've discussed about the better you manage your loss, the quicker you can get back to winning. The less we engage after taking a tough loss or repeated losses, the more easier it can be to restore that sense of clarity and build back that confidence. We’ve called it out as an acute irritation or annoyance in the moment recently, and that can really eat at us if we let it. We’re so happy that we are both making great strides to overcome those temporary feelings and not letting the toxic behaviors surface. There is nothing more draining and disheartening than engaging in a full out bloody war with Miss Market. There’s enough to learn and grow through even when you're executing from a sound and solid stance! And so we will continue to keep fighting the battle in our minds in order to NOT have that battle on the charts!
“When you set more goals, try more things, engage in more activities, and explore more opportunities, your probabilities of success increase dramatically.”
~ Brian Tracy
All of our trading mentors have discussed the influence of probabilities with our trading experience. How this is an important part of the game for us to understand and learn to appreciate. Some days we simply will not have it with our analysis or executions. And on those days, if we can pull our bodies and our minds away from the charts and let reasonable losses sit, then we live to trade another day. Miss Market really is abundant and each day presents fresh opportunities for us to choose from, per our lens with our trading strategy. As we understand it, there are a couple of ways to utilize our understanding of probabilities with trading, depending on your style.
Some traders are true scalpers at heart. And with that style, some of the most successful traders we have seen want to take a hit early, often, and small. They want to be the first ones to know the trade isn’t holding so they can wait for a better setup that honors their risk tolerance. By learning to take hits when they are small, they can afford to enter with a larger, higher-leveraged position and still be accepting of the hit and keep their head in the game. This style may lend to more frequent stop outs, but also a steady equity curve because they never take a large hit if risk management is maintained. Essentially taking paper cuts in pursuit of solid trades and then once the great trade is taken, the paper cuts are surpassed. It’s definitely a style that honors probabilities in that it recognizes that not every trade will win, but keeping losses small is totally sustainable. This strategy may have a 50-60% win rate or worse even! Now that doesn’t sound amazing, but you have to see it for what it is. This trader could take 4 stop outs that total in 2k of losses in one session and then nail one trade for a 8k win. Statistically, that is a 20% win rate on the day but results in 6K in profits!
Another type of trader might approach probabilities slightly differently. This is more like larger time frame traders or swing traders. With this style of trading, your stop losses are not tight and frequent, but instead purposeful and highly calculated. This trader might be trading off the 4 hour chart and have a stop loss based on that level and data. Now with an established, studied, tried and reliable edge in this time frame, the trader can still choose to enter with a large position. If the stop was then hit with this large position, it would be more substantial by far than a scalper’s tight stop on one trade. It can work though because the larger time frame’s tend to be more reliable with movement and give you time to adjust and set up just right with the market, and will have farther and much more substantial profit targets. These traders can find awesome profitability with much less daily management time requirements because their profit targets may take 2-8 days to achieve and be significant in size. A higher win rate is generally associated with established swing traders as well, more like 80%. Two different methods of utilizing probabilities mixed with your trading style to yield nice profits in trading!
Another important aspect of understanding trading probabilities relates to the unique method of each person’s system. Becky and Kendra both day trade US futures markets. But, the exact method of how we create our trade plans and read our data in real time is very unique to our own style. For example, Kendra leans heavily into Market Profile to define her levels of interest for entry and targets she want to trade to. Also, she uses foot print order flow as one of her data tools to understand the imbalance of volume between buyers and sellers. Then there’s things that we both use like VWAP, volume profile, and divergences from momentum indicators such as stochastic. Granted, we no longer trade the same futures instruments now but when we did both trade ES (the S&P 500 index), we would usually have very similar levels of interest and targets. It’s such a cool technical factor about trading, there's really not one right or wrong way, but only your way that you can understand and repeat to start to build the probabilities of success for each trade within your trading edge.
Let’s break that down for a minute. In this way, we can see probabilities as a representation of confluences. The more confluences, or reasons you can recognize in real-time that support your trade bias and favor your setup, can and usually does result in the higher probability of your trade being successful. So that’s like the BIG BOX that ideally is checked before entering any position. This understanding is another part of trading that only comes with time and experience, while staying dedicated to improvement from studying and collecting data from your executions. The goal for us is to be as selective as we can to build that muscle of recognizing our pitch and acting when we need to. If we’ve done that, then we’ve done our job. Respecting the game of probabilities is so important. It makes us think of the part of the One Good Trade book where author Bella says, “You can do everything right and still end red.” Trading is nicely nuanced and can send you chasing your tail if you let it. Respecting that as just a hard cold truth about trading is critical. We show up and do our best, honor our systems, and trade our edge, all while learning along the way.
We just love when our best setups show their faces and call us to join the move! There are times when we can see the market setting up for a move that we really tend to see well. It’s at a level that can often hold as a support, such as a LVA, this level is also in confluence with a previous 4 hour support level, your momentum indicator is along the lowest levels, we’re along the -2 standard deviation band and you’re seeing a bullish candle pattern forming... These trades don’t speak to you, they scream at you. They beg you to join them and reveal their cards to those paying attention that they are one of your high probability trades! In this situation, you can enter with less hesitation, less fear, more peace, excitement and potentially more size. So, more confluences = higher probability of success = better grade of a trade. Such a great situation to experience.
When you couple the concept of trading probabilities with ideal red day management, it can feel obvious how we need to behave day to day. A 100% success rate as a trader is extremely rare and certainly not common in your first several years of learning to trade. But, that doesn’t mean that you can’t start to build a positive and steady(ish) equity curve once you really start to fine tune and calibrate your edge. There can be pullbacks on an equity curve and it still be bullish! This is our goal at our current stage in our trading careers. Our intention is to now shorten and decrease the depth of those pullbacks. This is done in large part by respecting the game we are in - the probabilities of this career and the system we have created to cut trades when our trade plan is proven wrong. To manage our emotions and prevent tilt or trauma days by increasing our awareness of all of it in real time. That is putting it all together.
A healthy perspective of how to manage red days and probabilities is always a work in progress. We’ve had so much support in this area throughout our years trading, and even now we’re frequently having new revelations or reminders of the type of trader we are working to be. It’s always easier said than done, and of course hindsight is 20/20, but this is the work that is required to break through. For us, the harder we try to improve, the more errors we see and that’s uncomfortable but it’s our season. We’re here for all of it.
As traders, Becky and Kendra have been taught and learned through our own experiences to respect and appreciate the influence of probabilities in our trading businesses. And always try to inject logic into our trading system so that we can honor this exact relationship every day at our charts. These correlations and lessons have helped us level up as we grow as traders, so we hope it can help at least one or two other traders out there similarly striving. Thank you to everyone who is subscribing to our podcast, reading our blogs, and providing us feedback! We are here to talk openly about everything that may help us all level up within our lives, be it day trading or otherwise. We wish you all the very best for your lives!