There’s a plague that has infected the trading community.
What is it? It’s the desire to catch tops and bottoms with full size.
I personally believe that this is the hardest way to trade. It programs your mind in all the wrong ways.
It causes you to become biased, and it causes you to put on full size too early before the market has a true shift in flows.
Two great ways to combat this problem
In my opinion the best ways to combat this is to use one of the following:
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Use larger sizing on A+ setups, medium sizing on solid setups, and then use very small sizing on the low quality setups such as trying to catch a top or bottom (or just don’t try to catch tops/bottoms at all).
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Dynamically scale your position up or down based on the order flow and/or price action (I mainly use order flow for this).
I use both of these strategies depending on the situation. It really depends on the context and market dynamics.
There are many ways to manage trades which work, but I believe that the first strategy of using more sizing for A+ setups is a strategy that everyone should consider using.
However, I must say that dynamically scaling positions up/down based on the order flow/price action is not a beginner strategy. It’s more advanced and requires practice.
If you are interested then I recommend practicing this in SIM mode until you are consistently profitable with this strategy. That being said, it is a powerful strategy once someone is good at reading order flow and managing trades.
Here’s a couple example trades that I took in Crude Oil earlier today
I caught a rotation to the downside and then as the reversal came in after bouncing I was dynamically sizing my position down as it broke back up against me. Then I cut and reverse to catch the upside move as well.
Whenever a trade is failing I scale out based on the counter-flows and when it’s working I either hold or add. I’m adjusting the sizing based on the incoming flows. Not based on some random idea or prediction I have about what is or isn’t possible. This is an important distinction!
A lot of traders probably would have kept holding in this spot and would have given back most or all of their gains but since I was managing the trade dynamically and not thinking about hitting a home run I was able to adjust to what the market was doing.
I didn’t expect it to reverse so quickly but I followed my strategy and quickly scaled the position down as strong buying flows started hitting the market. I ended up doing a cut and reverse as the flows coming in looked like they were going to have some strong follow through.
The reversal happened at a key area that I was watching, but I expected it to consolidate for a bit more time before popping higher. It caught me off guard.
Dynamic positioning works better when the market is imbalanced in the short term
If the market is trading in a choppy manner then it’s going to be more difficult to build positions and get ahead of the move.
There are situations where the flows start unwinding while it’s still in a range/balance area, and you can build the position before it breaks out.
The flows tell you when it’s happening. You’ll see the speed of the market starting to pick up.
A big benefit of dynamic positioning
Dynamic positioning has some big benefits that I never see anyone mention. One of those benefits is that it keeps you from being biased and getting stuck on the wrong side of the market with full size.
It’s difficult to get caught offsides when you are scaling down your size during counter-rotations. It allows you to only be offsides with small size or no size.
You never want to be offsides with full size, and you never want to be adding in order to improve your average price while the market moves against you. That’s what leads to massive losing trades.
This is one of the biggest mistakes that struggling traders make. They want to buy/sell when something looks overextended as if there’s some sort of correlation between where price is and what it must do. Anything is possible in the markets, and we must be prepared for anything!
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