Meet Ron, a futures day trader at a prop firm, who was struggling with his execution. Over the course of five months, from January to May, I had the privilege of coaching Ron and watching his growth.
Ron's main challenge was cutting his winners too early, missing out on substantial profits. His trades clearly had potential for bigger risk to rewards but, his fear of missing out often hindered him from holding onto winning positions. He would often times convince himself that he could re-enter the trade but, in reality, this thought just served as an excuse to satisfy his fear.
Additionally, Ron grappled with his approach to risk management. Although he could oversize when necessary, maintaining that risk level throughout the trade posed difficulties, leading to premature exits on winning trades. This became a recurring cycle.
Furthermore, despite trading for a prop firm, Ron wasn't utilizing even half of the maximum daily risk allowance. In simpler terms, he was trading with smaller positions than he had the capacity for.
Ron's frustration stemmed from knowing he had untapped potential but struggling to fully realize it due to his challenges with early exits and risk management.
Ron's coaching goals were clear and focused:
1. Enhance the risk-to-reward ratio of his winning trades.
2. Prolong the duration of trades by holding onto winners for more extended periods.
3. Implement a more effective position-sizing method and leverage higher risk when appropriate.
After five months of personalized guidance, Ron made remarkable strides. He successfully improved his risk-to-reward ratio, grew more comfortable holding trades for extended durations, and overcame the impulse to take profits prematurely. Additionally, he learned to utilize higher risk in his trades.
Even amidst the slow market conditions that characterized the early months of 2023, Ron achieved top rankings within his prop firm for February and March. Navigating through a period demanding adaptation of his strategy and performance, Ron successfully demonstrated his resilience.
This article will breakdown the two specific techniques employed during Ron's coaching that empowered him to capture more market movements and maximize gains from his winning trades.
Ron’s Journey
Exit Method
Ron was exiting his trades using one single profit-taking. This placed a lot of pressure on him to get the right exit. His trade management wasn’t flexible. Left with only one chance to take profits, he would get nervous and end up acting on his fear, leading him to close full position too early.
This exit approach wasn’t helping Ron. There were ways to make his exit method more flexible and put him on a higher probability side.
So we introduced a new approach to take profits by using partials.
The first step of Ron’s new exit approach was to scale out of his trades in two moments. When he would feel that the urge to fully close the trade was getting too big and difficult to handle, the idea was to satisfy that urge by taking one part of the position out. This 1st profit was based on emotions rather than technical indicators. This might sound weird but it was just the first step that would take us to where we wanted. It required Ron to be highly self-aware during his trading.
The second partial exit was meant to be taken after the first one, and we started by leaving at least 10-20% of the position. Since Ron was a discretionary trader, he could use his expertise to decide when to take the second partial. If only he could reduce his fear with the first partial, then the emotions would be easier to run the second one. His fear wouldn’t dictate his actions, allowing him to focus rationally on his fundamental variables to read the market properly.
There were possible challenges that Ron could face with this approach. We anticipated them and developed plans of action:
Challenge One: The urge to take the full position out at the first partial profit. To overcome this challenge, we began with a significant percentage (70-80%) for the first partial. This ensured most of his profits were secured, allowing him to freely run the remaining partial risk-free, most of the time. Over time, we could adjust the percentages and set goals for taking a smaller percentage for the first partial and a larger one for the runner.
Challenge Two: The urge to take the second partial immediately after the first one, resulting in two partial exits very close together. To address this, we established a rule that the second partial couldn't be taken less than 1R away from the first one, on A+ setups. This rule ensured Ron gave all the discipline and focus to run the second partial.
I explained to Ron that in the beginning, this exit method wouldn’t improve his profits by much. The initial goal was to practice to catch more of the move. Then, with the adjustment in percentages for the 1st and 2nd partials and with practice, it would mean a big difference in the equity curve in the long term. In my coaching approach, I believe in taking small steps towards the ultimate goal. Many traders make the mistake of wanting to solve their problems right away, from 0 to 100, leading to frustration. By focusing on small and manageable milestones, the trader has space to achieve small victories that feed the motivation to pass on to the next step.
This was a work in progress and in the first week, the only goal was for Ron to be able to take the two partials on his winners, which he accomplished successfully.
Risk Management
As I mentioned earlier, Ron was using a significantly low amount of risk in his trades. To address this, we agreed to increase the risk in all of his trades, focusing particularly on his A+ setups, where he had the highest confidence to maximize profits. The interesting thing is that, by increasing the size of his trades, the 70-80% of the first partial profit would result in equal or even more profits compared to taking full size with his previous approach. This was a win-win. We began with small increments in increasing the risk, gradually moving close to the maximum daily risk allowance. We also used a method to simplify the position sizing and save calculations. With it, every time Ron would take a trade, he was confident about the size which would give him space to focus solely on the execution.
Ron gradually became comfortable taking two partial profits, which over time, he transformed into 3, 4, or more. This exit method took into consideration that every trade is different, and the market is uncertain. By using a more flexible exit method, we can adjust it to the different market conditions and actually improve the read of the market.
That’s what’s happened with Ron: he saw a significant improvement in his ability to read the red and green flags for the validity of his trades and with that, his confidence in riding them increased a lot.
Previously, a single red flag would press Ron to exit his trades fully. But we realized that many times, one red flag wasn’t decisive for the validity of the trade. Now, he had the confidence to keep a runner and take advantage of the market's potential. Because Ron had more control over his exits with this strategy, he could better practice his trade management skills meaning there was more potential for progress.
With this exit method, the market randomness was always taken into account because Ron was leaving runners in case of price would keep on going. This is how traders have home runs, by never closing themselves to what can happen in one trade.
What happened is that Ron experienced very good trades and some home runs which made him rank at the top in his prop firm for the months of February and March.
Final Words
After 5 months of coaching, Ron achieved great improvements in his trading performance. Through our work together, he was able to:
Build a solid routine to collect and analyze data - the foundation;
Reduce the fear of missing out and trade more comfortably;
Increase his risk to reward and trade holding period;
Use larger sizes on his trades without extra pressure because he knew he could scale out;
Let go of the pressure to achieve a perfect exit and instead focus on long-term results.
We not only improved his performance but we did it during a rough period: the markets were slow and not showing really a clear direction. Ron’s trades wouldn’t work as before and there was a clear need to adapt to the market. Ron did that fast and very well.
Nothing of this would’ve been possible without the fearless commitment, rigorous discipline, openness, responsibility, and humbleness of Ron. He was willing to put in the effort and make the necessary changes.
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