Luck Management – Using What You’ve Got

In trading, like any other endeavor, it is easy to become mired down with the mindset that we need something we don’t have to accomplish our goals.  When this happens, we tend to ignore the tools we already possess, and fail to recognize how they can be utilized to achieve those goals.

Spinning your wheels is never good.  Constant forward motion is of much greater importance than the speed at which you are travelling. The goal is to monetize the ability and knowledge you possess now, without having to acquire more of either in order to start moving your account balance in the right direction consistently.  To do this requires some self analysis to pinpoint what we are actually doing well without realizing it.  Once we define it, we focus on it and fine-tune it’s efficiency.

For example: Most, if not all of the trades that drive you crazy while you’re waiting on the target, spend a lot of that time in profit.  Think about the point in time when you started wishing the trade would just hurry up and get to that target. What if you just closed it at this point?  Where would it be?  This will give you an idea of what it is about the trade that makes you feel uncomfortable.  It could be the amount of time the trade has been open, it could be the fact that it’s only gone a small amount towards the target, or maybe what appears on the chart evokes some second-guessing.  Whatever it is, now it’s known and acknowledged that it is an obstacle.  Don’t bother trying to overcome the obstacle though, this wastes time and energy that can instead be focused on fine-tuning what the trade did before it started to drive you crazy. Focus on that part of the trade, leverage the part that was enjoyable and “easy”, and make it pay. Think of ways that you can maximize this part of the trade.  Would a different pair pay a little more money, or require less margin for the same result?  Have a tighter spread?

Now look inside this little part of a big trade, on smaller time-frames.  The entry for a trade on H1 can be executed with much greater precision on a 5 minute chart. Allowing us to further limit entry risk.  We can tighten stops, decide we’re wrong earlier.  The same patterns and behavior that appear on the longer term charts also occur on the shorter time-frames.

I begin my trading week by considering these things.  How can I maximize the productivity of each dollar in my account?  I consider them my employees.  I don’t want any of them sitting around doing nothing, and I don’t want 10 of them working on a task that 8 can do. Smaller accounts must focus on pairs that pay the most per pip, and require the least margin.

I start with the monthly and weekly charts. It’s important to know where the long-term support and resistance levels are.  Then I move down to the daily chart.  This shows me where I’ll be working for the week, and what type of entries I will be looking for.  Breakouts, range-reversals, trend-following, etc. I know whether intraday support or resistance is more likely to hold or fail.

Now, when it’s time to sit down and trade, I watch daily, 4H, 1H, 15, 5 and 1min – all at the same time.  When trade setups that I recognize form on the 4H and 1H charts, I look down to the minute charts to get into the trade. I am looking for that move on H1 to be in-progress, so that the trade is going in the right direction as I enter.  I am looking for my trade to go into profit immediately.  Once it does, it’s not allowed to go negative, at all. I’ll shut it off with just 1 or 2 pips if I must, just enough to cover transaction costs. Every trade that I take that doesn’t cost me anything, is one trade closer to the one that just runs away and pays out big-time. Since I’m not going to let it draw down at all, I can put some size on it. With more size, the trade doesn’t have to do as much before getting to the point at which I’d be happy if the day ended here. If I’ve got a $5k account, and I’ve got 2 lots on a trade that’s gone 10 pips in a couple of minutes, but now looks like it’s stalling, well that’s somewhere around $200 in profit, I’ll close it immediately. That’s a 4% gain in the account, which is an awesome day, and I’m done. No sweat, no stress, no fighting for it, and I couldn’t care less if it goes 100 more pips after I get out. I’m not going to give any of that 4% back. Time for Netflix.

I do the above each day.  Sometimes I end the day with 3 or 4 failed entries that did nothing but break even. I don’t care, because I ether lost nothing, or a very small amount.  I know there’s more trades tomorrow.  Sometimes though, because the trades are planned on longer-term charts, they will start to run away.  In-the-money stops are awesome, period.  I love being able to walk away, knowing I’ve got profit locked in, because every now and then, that in-the-money stop does not get hit, and it’s possible come back to find yourself 80-100 pips in profit.  A 4% day is awesome, but now we’re looking at a single trade that is dishing out 10 times that.  What does the year end up looking like, even if something like this happened only a few times? I call this Luck Management. I’d rather be lucky than good, any day.

The hard part about trading, is not giving it back.  To trade this way, you MUST embrace break even as a sort of “win”, and accept multitudes of go-nowhere trades.  If you go looking for huge profits, if you’re searching for 40% trades, you end up taking huge risks to find them. These risks start the count-down to account-obliteration.  But they can appear out of nowhere when you’re not looking for them. This is why the long term charts are so important to me, even though I’m actively trading on the 5 or 1 minute charts. I stack the odds of getting lucky in my favor, then I get out of my own way and allow it to happen.  That one big lucky trade gives me considerably more power tomorrow, because I’m still not going to let anything go negative at all, but can put even more capital to work.
Small accounts NEED these massive infusions of profit to really grow into accounts that can produce measurable income without getting “lucky”. The equity curve should be smooth and rise slowly with huge leaps here and there.

For now, do what’s comfortable.  Make THAT pay you, and ignore everything that makes you crazy.  Avoid altogether the conditions that negatively impact how you feel.  The better you feel, the better you perform, which makes you feel even better… a positive feedback loop that leads to easily accomplishing things that once felt impossible.  As the account grows, so will your ability to step out of the comfort zone and take a little more risk – leading to even greater rewards.
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20 thoughts on “Luck Management – Using What You’ve Got

  1. spacepip

    Hi Matt,

    Nice to hear from you.
    It makes sense to build on the positive things and grow them.

    So pretty much the self-analysis has to do with personal psychology/emotions, comfort and the analysis of what pays the most for the least effort (both physical and emotional effort).

    From what I have seen, pairs that pay the most per pip are also the ones that have the biggest margins.If that is so, then it is either one or the other. I wonder whether you have found anything different.

    Reply
    1. mlacoco54 Post author

      I find the opposite in many cases. A current example is NZDUSD, which is paying a full $10/pip on a lot, using $1,800 in margin to get in. Meanwhile, GBPNZD pays just over $7.50/pip on the same size, and needs $3,400 to open, and has a wider spread.

      Then again, depending on which side you’re on and how long you’re going to hold, positive swap can make up a bit too, so it’s not all black and white. There’s a Kaizen process involved in maximizing the efficiency of a trade.

      Reply
      1. spacepip

        Wow that is cool. Thank you for the reply Matt. I didn’t notice that. I cant check now for sure but I was thinking of something like USDJPY and GBPCHF/GBPUSD myself. Lol I have always wondered what is so special about the word ‘Kaizen’ and whats up with everybody abroad using it lol. I haven’t heard Japanese mentioning ‘ The Kaizen process ‘ etc yet outside of it being a normal word:D

        Recently I stopped trading and am planning to do lots of backtesting and some math/statistics and I might consider doing the comparison on the topics you brought up as well. Great ideas.

      2. mlacoco54 Post author

        None of the GBP pairs are very efficient, and the CHF is even worse after the SNB debacle. These will all have much greater margin requirements to trade the same size. USDJPY used to be better, it’s paying less and costing more than it used to.

  2. Alexander

    I love this. Breaking even is hard to do at the moment because it feels like wasted effort. I guess re-framing iit could really work. Thanks for the detail on your process.

    Reply
  3. fxoutlier

    I liked everything about this post Matt. Brilliant, I’m looking forwards to seeing that seminar you did with Shonn and Rob, when Rob releases it. Maybe another visit with Shonn to the Cigar shop can be arranged and recorded . Thanks,

    Reply
  4. isaacecheverria

    Matt

    It is awesome !

    I am trying to grow an small trading account also. And it is exactly as your example above.

    I am using 1 microlot for every 25$ so In an account of 100$ I will be looking for trades of 4 microlots with a 10 pips stop loss. For a 20 pip SL trade I use 2 microlots in this account. I am using only 6-8 pairs with spread 2-3 pips. So I do not trade in short term the CHF, NZD and some GBP

    Reply
  5. oggalan

    Excellent post. It made me realize that the thing that drives me crazy is when a trade was positive and I let it becomes negative to have more profit and it does not return to the positive field. When you consider a trade positive, Is it at 1 or 2 pips as you stated in the article?

    Thanks in advace for your reply,

    oggalan

    Reply
    1. mlacoco54 Post author

      Yes, as long as transaction cost is covered, it’s positive. The spread and/or commission has to be considered, or they will nickel and dime you to death!

      Reply
  6. Pingback: Episode 337: Meet Luke, Our Forty Percent Club Mentee

  7. Michael

    Reblogged this on daytradefx and commented:
    I thought that is interesting and I like the fact that you should not let your profits disappear, and let your runners run when you have a chance. This is an excellent way to grow a small account. I am also finding out as a trend trader myself, letting your profits go makes up for all the small stops that you use. You don’t always need a large stop to be positive. If you entered at the correct time you should be positive right away more times than not.

    Reply
  8. fxoutlier

    Having just read your sunday 29 march email about pre payrolls on usdjpy, I was wondering how fast, foolishly fast actually is. I’ve been attempting this myself and everything Is getting stopped at break even, sometimes to the pip then turning in the correct direction for a load of pips. What size initial stop do you have and are your entries so precise that you don’t often go negative before the market turns in your direction? I like what your wrote about how the wicks like on thursday tend to get filled quickly and I’ll be looking out for that. Liked the post very much, it is very straight forwards and to the point but contains a wealth of insight.. This one for some reason went into my spam folder so I’ll be watching out for that in the future more carefully. Cheers.

    Reply
    1. mlacoco54 Post author

      Fast in this case means as soon as I see enough profit to cover transaction costs (spread and commission). The very foundation of how I trade is that it’s very likely that a huge number of my trades will close at break even or with slight, tiny profit. I’m fine with this. I consider any trade I don’t lose money on a success. Sooner or later statistics catch up and one will run away in the right direction, more than making up for all the break-evens.

      Rarely do I place an initial stop loss when I open the trade. This greatly increases the selectiveness with which trade. I take trades when I see strength or weakness on the short term charts, at levels that have been established on much higher timeframes. This greatly increases the probability that the short term behavior will continue long enough to get an in-the-money stop in place. Once that’s done I just go do something else. Sometimes the stop is hit, sometimes it doesn’t. I don’t really care which, because I’m not losing any money. It’s just a numbers game, and I don’t pressure myself to achieve a certain amount of profit on a given day or week. This takes care of itself as long as I’m not making donations to the market.

      Context is the golden key to taking trades that move into profit quickly. This is why I often say that long term charts are a short term traders best friend. I don’t take a trade on 5m because of anything I saw on that chart, I take that 5m trade because I’m seeing something happening on the hourly or 4 hour chart.

      Hope that helps, all the best!

      Reply
  9. Nathan A.

    Inspiring post Matt! I love the idea of not letting a trade move against you, and the concept of keeping a positive feedback loop. I have tried strategies that allow for a trade to drawdown, but I realized I’d rather just get someone to kick me in the balls, than get stopped out on one of those. On the other hand, I don’t mind a quick chop and putting a stop in the money IS money. And hey, if you can catch a runner now and again – maybe even add to that position – “luck management” rules..

    Reply
  10. Robert Roberson

    Knowing when to pull out of the trade is very important. I am using two pieces of software to help me. Exeria and Arena, one help me to manage strategies and the other lets me build my own strategies.

    Reply
  11. Valis Odin

    Great read again thanks… the fine tuning of your edge once you’ve found it is the key for sure.

    The money management side is really interesting I entered one of those Myfxbook comps for fun last year I decided to use very aggressive leverage consistently each trade and only trade one pair at a time and to try to do well relatively to others. I used around 40 pip stops each time, the problem was my leverage was too aggressive and I kept getting margined and exited out of the trades by the trading platform well before my planned stop sometimes at 4 or 5 pip stops sometimes more but they hardly ever hit my original stop of 40 pips. My profits I let run until the market turned, the best trade was 116 pips.

    Anyway long story short by trading using this ‘default’ money management system of effectively being so highly leveraged each trade that the market would exit me on any draw down very fast I turned the bank from $50,000 to $301,000 in a month more importantly the real key stats: There was 46 trades 20 winners with an average win of 40 pips and an average loss of only 13 pips, profit factor of 2.18 and z score of -2.46 and I finished 14th… small sample size I agree.

    Now some of those quickly ‘default’ stopped out trades ended up winners and others would have been fully stopped out at 40 pips if i didn’t get automatically stopped out. I traded my usual system but the ‘default’ money management side showed just how powerful a role money management plays even just on a demo account in a play comp and the power it has to reduce your average pip loss and grow a bank at speed and that is the ultimate goal for any trader at the end of the day.

    Reply

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