Risk Rule 3: Do Not Add To Losers
Youtube Playlist about Risk for Futures Traders
TRANSRIPT: okay Traders it's time for another episode of Risk rules to get a complete list of the Risk rules go to my website microstrader.com click the hamburger menu at the top click Risk rules and it will take you to the web page that lists out most of the Risk rules risk is the only thing you control as I create these videos I will continue to build out that page so let's talk about the Risk rules we've already discussed the first one was know when not to trade the next is knowing your max trade loss how much are you willing to lose per trade and what's the max loss for the day before you say I'm done and today we're going to discuss the super important topic that blows up more accounts than anything else is never add to a loser okay let's get to it before we're done this whole screen is going to be full of information it is quite involved it's taken me several days to put this together so I hope you find it valuable so for today's exercise we're going to pretend that you took a short right here for whatever reason for our group it would be because it's a bounce level this is six points from your hard exit then I have a backup level right here four points that I have a different backup level here within two points to help fill out our examples because although the risk rule is do not add to a losing trade there is a section that we we can add to our trade and that is under the hard exit Okay and we're going to talk about that where do you not want to add I don't want you to add above the hard exit this is adding to a loser and we're going to discuss all of this so let's talk about the profitable Trader so the profitable Trader manages losses within this region they manage their entries within this region and we're going to discuss that and then of course below your entry on a short you're now managing your profits down here and that's what you do this is your job mainly this and then hopefully that if you have a high probability system hopefully you're managing profits more than you're managing your losses but both are absolutely vital and what's even more vital is the fact you do not add to your position up here making your losses worse further away from your entry so what resides up there Doom that's what's up resides up there is Doom this is where Traders go to Die the charts are littered with Traders bodies who decide to stay in their trade past their hard exit who decide to add to their trade beyond beyond their hard exit it's littered with their bones and their debt accounts one thing to note a failed trade does not equal a failed Trader if you have a high probability system and you need it you can take this acceptable loss that just makes you go oh well no big deal it happens the size of this loss needs to be where you go oh well whatever no big deal there's another high probability trade around the corner if this loss size causes you to freak out in any way it's too big you don't need to be taking that trade with that amount of Leverage with the stop that far away so what you need to know is that up here is the graveyard of Traders these are unacceptable losses you should be fired from being a Trader you must submit and surrender and plan for this happening and not allowing anything up here to happen this is a no trade region for you you're out you're waiting for your next high probability trade if you knew that you had a system where 92 percent of your trades were profitable don't you think you'd have the confidence to just get out of this trade just get out wait for the next entry it's no big deal it is absolutely no big deal just get out okay so this is where we want to live we're going to manage our entries here we're going to manage our profits down here and when it gets to our line we're simply out this is the red line in your car you don't want to blow your engine you don't want to blow your account this is like putting a limiter on your audio saying I don't want frequencies above or below this because it is unpleasant to the ears well I'm going to tell you right now trading up here is unpleasant to your mental and physical and account Health this is not good for you just stop it get out we do not add to a losing trade a week or two ago I made a YouTube video where I just repeated over and over I will not add to a losing trade I will not add to a losing trade I will not add to a losing trade I encourage you to repeat that remember it I certainly repeat it inside of my mind I sure do okay so let's get rid of these two let's get more into the Nitty Gritty here so we're going to talk about this first we want to use a risk first approach this goes back to reviewing our first Risk rules we've talked about risk rule number one is should I be Trading when should you not be Trading and then the converse of that is should I be Trading you've got to be able to answer that question next one is what are the high time frames telling you where are you are we laddering up are we laddering down are we in chop are we headed to a high time frame inefficiency on the chart where are we headed the main thing though is you need to know where are you next thing is have you decided your max loss but this was risk rule number two your max loss per trade and your max loss per day we need all of this information to even be Trading we need this information to even be trading okay must have that next thing in our core strategy Academy in our boot camp I encourage my Traders to hand draw three to five perfect setups I want that diagram drawn if we were at Chili's and I handed you a piece of paper and I said draw for me your ideal entry I want you to be able to draw it because if you can draw it you can own it and then does the picture that I drew or the picture that I screenshotted does that picture match the candlesticks on my chart if they match I probably have an entry if they don't match why am I entering so I want you to have three to five setups that you can reference does the chart match the diagram you drew okay next decision we need all four P we all need we need all all of this information right here what is our Trend are we with the trend wtt with the trend are we counter or are we chop and the reason why I want to know that information is because I will allow a different Max loss based off Trend okay so I have my daily loss and how am I going to divide that up well if I'm with the trend I'm willing to use up more of that daily loss because I want to trade bigger because I have statistics that show that when I determine we are with the trend I have a super high win rate so therefore let's leverage that a little better next thing you have got to be able to discern you've got to discern where is my ideal stop loss where is that and our core strategy we know exactly where that is and you need to know where that is calculate the distance and know how far that is because all of that information is going to go into our leverage Matrix if you haven't watched my leverage metrics video or downloaded the Google sheet go to my website microstrader.com in the upper right is a little hamburger menu so scroll down to you see leverage Matrix the video in the Google sheet is there on that page my gift to you from Trader to Trader so we need this information because this will tell me how many contracts I can trade given Trend and given the stop loss and given the max amount I'm willing to lose based off that trend beautiful we're getting somewhere next thing is what type of Entry do we want to do ah this is important do we do it as a single entry do we do a test entry do we spread out our orders across the range is there multiple bounce levels I demand for our core strategy there to be at least one bounce level between my entry and my exit I want to give the trade an opportunity let's say price went past my first my entry level but if I got a backup level is that where it's going to bounce is it going to bounce off this level it's going to bounce off this level I want to have at least one backup level between my entry and my exit preferably too preferably some high time frame bounce levels on top of it so now let's discuss the entry possibilities so five entry decisions in my opinion are you just going to do a full all of your entries at your first bounce level so let's say the leveraging metric said I could do four entries am I going to put all four right here that's one option if you do all four right here price just rips through sorry I should have used an arrow rips through and hits your stop loss well that's four contracts at six points at five dollars a point we're using mes here that's a hundred and twenty dollar full stop loss that's the amount you've decided Max I can take that no big deal oh well let me get back in the game let me reanalyze the chart where's my next trade 120 bucks Max loss no big deal you might be a big dog where you're doing ESS and 1200 bucks is no big deal okay it doesn't matter just know your numbers that's one way to enter is putting all four contracts here at your entry or you could decide hey I'm going to use the four contracts but I'm going to dial down my entries in other words I'm going to put one at the six points one at the Four Points one at the two points and one at the one point now if price rips all the way through the levels and hits this I sustained half loss because one was at six one was at four one was at two and one was at one okay that's pretty nice I could take half a loss well what if I just traded the wings what if I only traded the wings where I did I entry here with one and I did three up here okay entering on the edges of your range entering on the edges of your range that's why it's called the wings if I did that well one contract experienced a six point loss and three of them experienced the one point loss that's a quarter loss but then I still got in all my entries pretty cool I prefer spreading out my orders or using the wings I don't like entering all my Leverage right on my initial bounce level that's just me I tend to play Risk first and that's how I roll now the other way to do that is let's say price comes to your level gets you into your one contract and bounces awesome now my goal is to add contracts further down to get to my four very cool not a problem you could also do a test entry here it comes up you do your butterfly you bought you you you enter at the edges you enter at the wings your break even is going to be really low here and as soon as it crosses I'm going to manage at that um break even and that's going to be my new quote-unquote entry level okay so there's a number of ways here to manage your four contract entry all four here or we do one one one one or we do the wings like this or if we come here it touches and bounces we add to our winners I much prefer adding to my winners than I do adding to my losers okay which is one reason I favor the wings I do a test entry here I'm expecting a touch and bounce but if it comes up I'm willing to add at the edge of the range those contracts have the least risk I like that I like that a lot okay next thing we got to decide first of all it's good for me to tell you I manage for touch and goes okay so everything I'm about to discuss here I manage because I want price to touch my level and go I don't want it to go through my level so we're going to talk about full loss heart stop don't make things worse so if price just rips through you need to have your stop up here and you just get out and go oh well I miscalculated something some news event may be happening anything like that who knows the next thing is is could I possibly get out at a half loss what would that look like well let's say price came up it did bounce off this level it didn't make it back down to give me the gift of a break entry and started going back up I'm gonna get out why we're now laddering the wrong direction so I am not afraid to take a half loss no problem what about a paper cut loss well price comes up it comes back it does this stuff I'm just out I'll take a paper cut loss no problem no problem at all what if price just rips through this comes back to break even and gives me the gift of a break even trade I'll take that too no problem I don't mind taking a break even I have a high probability trade right around the corner and when do you just get out whenever you're tired of watching the trade whenever it's just not doing what you paid it to do whenever you start hoping that price comes back you just get out who cares there's another high probability trade right around the corner price either bounced or it didn't okay now the extra juice here is adding to your winners okay that's really important because I typically like to enter with the wings a lot of times price will hit my level and bounce and go that direction and now I'm trying to be in the business of adding to my winners and adding to your winners will really juice your returns adding to losers will not um it works sometimes and then when it doesn't work it hurts so bad which is one reason just to bring this chart back up I like these different entries I'm typically not entering my full contracts will I yes it's got to be the most perfect setup and I go I gotta do all my contracts here okay that happens very rarely where all the stars on our alignment I prefer either spreading out my orders or trading the wings or just doing a one contract and if it bounces my direction I plan on adding to my position once I receive confirmation that it actually bounced and we are moving and laddering in the direction that makes me profit so at the end of the day when it's all said and done the disciplined Trader is going to live down here this is where Traders go to die don't do it manage your risk manage your entries know your max loss that you can stomach have a high probability system so you have the confidence to get out oh well that didn't work there's another trade around the corner please make sure you go watch my risk rule one when not to trade I published a video yesterday about high time frame analysis I did risk rule two the trade what's your maximum loss per trade and your maximum loss per day and this is risk rule three do not add to a losing trade but you should do the converse of that which is add to winning trades think about this for a second if if you look at your trading career and you never add it to a loser and you always add it to your winners would you be in a much better position today I'm going to say yes you would probably be in a much better position today if you never add it to a loser and you only added to your winners but you know what the trader within us the Gambler that lives within you wants to add when you're down because now price only has to come back half the distance and I can get out well that works until it doesn't and it destroys you that is dynamite we don't play with that Don't redline your car just get out of the trade all right I hope that you found this information useful if you like this type of information and you believe this could help your trading please check us out at microstrader.com have a great day
TRANSRIPT: okay Traders it's time for another episode of Risk rules to get a complete list of the Risk rules go to my website microstrader.com click the hamburger menu at the top click Risk rules and it will take you to the web page that lists out most of the Risk rules risk is the only thing you control as I create these videos I will continue to build out that page so let's talk about the Risk rules we've already discussed the first one was know when not to trade the next is knowing your max trade loss how much are you willing to lose per trade and what's the max loss for the day before you say I'm done and today we're going to discuss the super important topic that blows up more accounts than anything else is never add to a loser okay let's get to it before we're done this whole screen is going to be full of information it is quite involved it's taken me several days to put this together so I hope you find it valuable so for today's exercise we're going to pretend that you took a short right here for whatever reason for our group it would be because it's a bounce level this is six points from your hard exit then I have a backup level right here four points that I have a different backup level here within two points to help fill out our examples because although the risk rule is do not add to a losing trade there is a section that we we can add to our trade and that is under the hard exit Okay and we're going to talk about that where do you not want to add I don't want you to add above the hard exit this is adding to a loser and we're going to discuss all of this so let's talk about the profitable Trader so the profitable Trader manages losses within this region they manage their entries within this region and we're going to discuss that and then of course below your entry on a short you're now managing your profits down here and that's what you do this is your job mainly this and then hopefully that if you have a high probability system hopefully you're managing profits more than you're managing your losses but both are absolutely vital and what's even more vital is the fact you do not add to your position up here making your losses worse further away from your entry so what resides up there Doom that's what's up resides up there is Doom this is where Traders go to Die the charts are littered with Traders bodies who decide to stay in their trade past their hard exit who decide to add to their trade beyond beyond their hard exit it's littered with their bones and their debt accounts one thing to note a failed trade does not equal a failed Trader if you have a high probability system and you need it you can take this acceptable loss that just makes you go oh well no big deal it happens the size of this loss needs to be where you go oh well whatever no big deal there's another high probability trade around the corner if this loss size causes you to freak out in any way it's too big you don't need to be taking that trade with that amount of Leverage with the stop that far away so what you need to know is that up here is the graveyard of Traders these are unacceptable losses you should be fired from being a Trader you must submit and surrender and plan for this happening and not allowing anything up here to happen this is a no trade region for you you're out you're waiting for your next high probability trade if you knew that you had a system where 92 percent of your trades were profitable don't you think you'd have the confidence to just get out of this trade just get out wait for the next entry it's no big deal it is absolutely no big deal just get out okay so this is where we want to live we're going to manage our entries here we're going to manage our profits down here and when it gets to our line we're simply out this is the red line in your car you don't want to blow your engine you don't want to blow your account this is like putting a limiter on your audio saying I don't want frequencies above or below this because it is unpleasant to the ears well I'm going to tell you right now trading up here is unpleasant to your mental and physical and account Health this is not good for you just stop it get out we do not add to a losing trade a week or two ago I made a YouTube video where I just repeated over and over I will not add to a losing trade I will not add to a losing trade I will not add to a losing trade I encourage you to repeat that remember it I certainly repeat it inside of my mind I sure do okay so let's get rid of these two let's get more into the Nitty Gritty here so we're going to talk about this first we want to use a risk first approach this goes back to reviewing our first Risk rules we've talked about risk rule number one is should I be Trading when should you not be Trading and then the converse of that is should I be Trading you've got to be able to answer that question next one is what are the high time frames telling you where are you are we laddering up are we laddering down are we in chop are we headed to a high time frame inefficiency on the chart where are we headed the main thing though is you need to know where are you next thing is have you decided your max loss but this was risk rule number two your max loss per trade and your max loss per day we need all of this information to even be Trading we need this information to even be trading okay must have that next thing in our core strategy Academy in our boot camp I encourage my Traders to hand draw three to five perfect setups I want that diagram drawn if we were at Chili's and I handed you a piece of paper and I said draw for me your ideal entry I want you to be able to draw it because if you can draw it you can own it and then does the picture that I drew or the picture that I screenshotted does that picture match the candlesticks on my chart if they match I probably have an entry if they don't match why am I entering so I want you to have three to five setups that you can reference does the chart match the diagram you drew okay next decision we need all four P we all need we need all all of this information right here what is our Trend are we with the trend wtt with the trend are we counter or are we chop and the reason why I want to know that information is because I will allow a different Max loss based off Trend okay so I have my daily loss and how am I going to divide that up well if I'm with the trend I'm willing to use up more of that daily loss because I want to trade bigger because I have statistics that show that when I determine we are with the trend I have a super high win rate so therefore let's leverage that a little better next thing you have got to be able to discern you've got to discern where is my ideal stop loss where is that and our core strategy we know exactly where that is and you need to know where that is calculate the distance and know how far that is because all of that information is going to go into our leverage Matrix if you haven't watched my leverage metrics video or downloaded the Google sheet go to my website microstrader.com in the upper right is a little hamburger menu so scroll down to you see leverage Matrix the video in the Google sheet is there on that page my gift to you from Trader to Trader so we need this information because this will tell me how many contracts I can trade given Trend and given the stop loss and given the max amount I'm willing to lose based off that trend beautiful we're getting somewhere next thing is what type of Entry do we want to do ah this is important do we do it as a single entry do we do a test entry do we spread out our orders across the range is there multiple bounce levels I demand for our core strategy there to be at least one bounce level between my entry and my exit I want to give the trade an opportunity let's say price went past my first my entry level but if I got a backup level is that where it's going to bounce is it going to bounce off this level it's going to bounce off this level I want to have at least one backup level between my entry and my exit preferably too preferably some high time frame bounce levels on top of it so now let's discuss the entry possibilities so five entry decisions in my opinion are you just going to do a full all of your entries at your first bounce level so let's say the leveraging metric said I could do four entries am I going to put all four right here that's one option if you do all four right here price just rips through sorry I should have used an arrow rips through and hits your stop loss well that's four contracts at six points at five dollars a point we're using mes here that's a hundred and twenty dollar full stop loss that's the amount you've decided Max I can take that no big deal oh well let me get back in the game let me reanalyze the chart where's my next trade 120 bucks Max loss no big deal you might be a big dog where you're doing ESS and 1200 bucks is no big deal okay it doesn't matter just know your numbers that's one way to enter is putting all four contracts here at your entry or you could decide hey I'm going to use the four contracts but I'm going to dial down my entries in other words I'm going to put one at the six points one at the Four Points one at the two points and one at the one point now if price rips all the way through the levels and hits this I sustained half loss because one was at six one was at four one was at two and one was at one okay that's pretty nice I could take half a loss well what if I just traded the wings what if I only traded the wings where I did I entry here with one and I did three up here okay entering on the edges of your range entering on the edges of your range that's why it's called the wings if I did that well one contract experienced a six point loss and three of them experienced the one point loss that's a quarter loss but then I still got in all my entries pretty cool I prefer spreading out my orders or using the wings I don't like entering all my Leverage right on my initial bounce level that's just me I tend to play Risk first and that's how I roll now the other way to do that is let's say price comes to your level gets you into your one contract and bounces awesome now my goal is to add contracts further down to get to my four very cool not a problem you could also do a test entry here it comes up you do your butterfly you bought you you you enter at the edges you enter at the wings your break even is going to be really low here and as soon as it crosses I'm going to manage at that um break even and that's going to be my new quote-unquote entry level okay so there's a number of ways here to manage your four contract entry all four here or we do one one one one or we do the wings like this or if we come here it touches and bounces we add to our winners I much prefer adding to my winners than I do adding to my losers okay which is one reason I favor the wings I do a test entry here I'm expecting a touch and bounce but if it comes up I'm willing to add at the edge of the range those contracts have the least risk I like that I like that a lot okay next thing we got to decide first of all it's good for me to tell you I manage for touch and goes okay so everything I'm about to discuss here I manage because I want price to touch my level and go I don't want it to go through my level so we're going to talk about full loss heart stop don't make things worse so if price just rips through you need to have your stop up here and you just get out and go oh well I miscalculated something some news event may be happening anything like that who knows the next thing is is could I possibly get out at a half loss what would that look like well let's say price came up it did bounce off this level it didn't make it back down to give me the gift of a break entry and started going back up I'm gonna get out why we're now laddering the wrong direction so I am not afraid to take a half loss no problem what about a paper cut loss well price comes up it comes back it does this stuff I'm just out I'll take a paper cut loss no problem no problem at all what if price just rips through this comes back to break even and gives me the gift of a break even trade I'll take that too no problem I don't mind taking a break even I have a high probability trade right around the corner and when do you just get out whenever you're tired of watching the trade whenever it's just not doing what you paid it to do whenever you start hoping that price comes back you just get out who cares there's another high probability trade right around the corner price either bounced or it didn't okay now the extra juice here is adding to your winners okay that's really important because I typically like to enter with the wings a lot of times price will hit my level and bounce and go that direction and now I'm trying to be in the business of adding to my winners and adding to your winners will really juice your returns adding to losers will not um it works sometimes and then when it doesn't work it hurts so bad which is one reason just to bring this chart back up I like these different entries I'm typically not entering my full contracts will I yes it's got to be the most perfect setup and I go I gotta do all my contracts here okay that happens very rarely where all the stars on our alignment I prefer either spreading out my orders or trading the wings or just doing a one contract and if it bounces my direction I plan on adding to my position once I receive confirmation that it actually bounced and we are moving and laddering in the direction that makes me profit so at the end of the day when it's all said and done the disciplined Trader is going to live down here this is where Traders go to die don't do it manage your risk manage your entries know your max loss that you can stomach have a high probability system so you have the confidence to get out oh well that didn't work there's another trade around the corner please make sure you go watch my risk rule one when not to trade I published a video yesterday about high time frame analysis I did risk rule two the trade what's your maximum loss per trade and your maximum loss per day and this is risk rule three do not add to a losing trade but you should do the converse of that which is add to winning trades think about this for a second if if you look at your trading career and you never add it to a loser and you always add it to your winners would you be in a much better position today I'm going to say yes you would probably be in a much better position today if you never add it to a loser and you only added to your winners but you know what the trader within us the Gambler that lives within you wants to add when you're down because now price only has to come back half the distance and I can get out well that works until it doesn't and it destroys you that is dynamite we don't play with that Don't redline your car just get out of the trade all right I hope that you found this information useful if you like this type of information and you believe this could help your trading please check us out at microstrader.com have a great day
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