How I am improving my Play to Win Mindset

During my break from trading in August, I have been thinking about the whole play to win mindset verses the playing not to lose, especially when it comes to taking trades and setting correct targets.

PLAY TO WIN

I have two types of trade, scalps which generally have a target of 5-8 ticks, and intraday swings (IDS) which typically have target of 10-16 ticks.

The problem I have, is that it is a lot easier for me to set the targets for a scalp trade and ignore that on certain trades I should be placing IDS targets.

This is due to habit and fear of losing. I am having problems accepting the risk on the IDS trades which tend to take up to an hour to play out compared to my scalp trades which play out in less than 15mins.

I have clean defined rules which decide which trades are designate an IDS, if it does not fit these rules then it is a scalp trade.

For a while now I have implemented a decision making process, to help me approach problems the same way each time.

It is based on a watered down version of John Boyd’s OODA loop called DADA loop, which stands for Data, Analysis, Decision, and then Act. Then gather more data and continue with loop.

I am going to walk through the problem using my DADA process to decide whether I should stick to just scalp targets or on certain trades aim for the larger targets.

The information generated will in turn be placed in my exit rules, so that before entry I re read these and in turn help me focus on playing the trade in my best interests.

Everything is going to be done without taking in account, commissions and costs.

DADA Process

Question

Whether I should set scalp targets or IDS targets.

NB not randomly but when the setup rules specify IDS or scalp targets.

Data

What is the likely outcome?

Scalps Targets

It is a Win. My current win rate on these trades is 68%. With an average win of 6 ticks.

It is a Loss. My current loss rate on these is 24%. With an average loss of 5 ticks.

It is Breakeven trade. My current breakeven rate on these trade is 8%.

My average reward to risk ratio is 1.2 to 1.

Now for some maths.

For me to be profitable taking trades with a 1.2 reward to 1 risk. I need to win 46% of the trades.

This is worked out using the following formula 1/(1+(R multiple)) therefore 1/(1+(1.2)) = 0.4545

Therefore I need to win a minimum 47% of the trades and my current win rate is 68%. So far so good.

My expectancy is typically worked out as follows

(Average win x Average Win rate) – (Average Loss x Average Loss rate)

(6 x 0.68)-(5 x 0.24)=2.88

One of the problems I have found with the expectancy formula, whilst telling whether my edge is profitable or not, it has little bearing to my real life trading decisions.

So I have decide to change this to try and give me a number that I can relate to.

Instead of using ticks, I will use the value of 1 contract and I will multiple the result by 100 trades. This will tell me the value for the next 100 trades for every contract traded.

Therefore

1 contract of the Bund is worth 10 euros per tick.

My expectancy is (((6 x 10) x 0.68)-((5 x 10) x 0.24))x100 = 2,880.0 euro

By scalp setups are worth 2880 euros for every contract traded over the next 100 trades.

IDS Targets

It is a Win. My current win rate on these trades is 57%. With an average win of 12 ticks.

It is a Loss. My current loss rate on these is 33%. With an average loss of 7 ticks.

It is Breakeven trade. My current breakeven rate on these trade is 10%.

My average reward to risk ratio is 1.7 to 1.

Now for some maths.

For me to be profitable taking trades with a 1.7 reward to 1 risk.

Again using the following formula 1/(1+(R multiple)) therefore 1/(1+(1.7)) = 0.3704

Therefore I need to win 38% of the trades and my current win rate is 57%. So far so good.

Therefore my expectancy for the IDS

1 contract of the Bund is worth 10 euros per tick.

(((12 x 10) x 0.657)-((7 x 10) x 0.33))x100 = 5,574.0 euros

Data Analysis

Over 100 trades my scalp expectancy is 2880 and IDS expectancy is 5574.

The difference is 5574-2880 = 2694 euros

Decision

If I do not take a trade when I should, then I am losing a potential minimum of 2880 euros.

If I place scalp targets when I should be placing IDS targets then I am losing 2694 euros.

Act

So I will take every setup that fits my process / rules and I will always place the correct target structure.

I then can collect more data and then repeat the process using my MFE and MAE to see if a change in targets and stops produces better results.

Of course these calculations are not taking in account my cost per contract, so are not a completely true reflection of the profitability. But the purpose of this exercise is to work though the problem in a logical manner using DADA and then turn the result into something that I can relate to.

It is a matter of re framing the risk acceptance.

My journal tells me that my expectancy is 2.87 and my win rate is 68% but during the trading session I cannot relate to that.

I can relate to

That if I take this scalp setup, I have to win 47% of the next 100 trades to be profitable and if I follow my process over these 100 trades then this is worth 2880 euros.

That if I take an IDS setup, I have to win 38% of the next 100 trades to be profitable and if I follow my process over these 100 trades then this is worth 5574 euros.

The next step is to transfer these figures to my exit cheat sheet. The plan is that when I stalking trades using my process, that the reminder of what a missed trade or incorrect targets means will help me accept the risk of losing 5 or 7 ticks on this individual trade when there is a lot more reward for sticking to the plan for the next 100 trades.

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