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Lose a LOT and a little but win a little and make a LOT ...make sense??.....

Primarily, I am a exhaustion trader. For those of you who don't know what an exhaustion trader is, it is a trader who is counter trend to the market or the momentum traders. My biggest fear with momentum trading is when a trader finally gets the signal (or combination of signals) to enter a trade only to watch the move, 5 or 6 bars later, reverse trend causing you to get stopped out. There is a well known saying in trading and if you have followed me for any length of time, you will know that I love these "sayings". The reason is because not only are they true, they are universal, they are principal based and not open to interpretation. Back to the saying. "The trend is your friend". I think -  no actually I HOPE, anyone who is a trader would have heard that one before, but how about the revised version of that one -

 "the trend is your friend until the trend ends"

I like that one much better! All of us as traders NEVER know when the trend , your supposed friend, decides to kick you in the teeth, back stab you and run off with your wife .... uhhh.. oh ... sorry .. I had a moment there -lol!  A trader's angst is, NOT the fear of missing a reversal setup, I mean really I'm not losing anything other than the opportunity cost. My bigger fear as  mentioned above, would be a reversal shortly after entering a trend trade.  Heres a great analogy - it's like showing up to a party at 2 am with a case of beer while everyone is on their way out !

Exhaustion trading attempts to time potential market tops and bottoms after an unsustainable moves. Its been said that that is a losing  game - but is it  really? That all depends whose initiating the trade. More importantly than the accuracy of the signal, is the way in which you  "map out" the trade prior to initiating.


If  exhaustion market timing is so difficult, instead of running from it, how about adjusting your expectations? I mentioned in one of my previous blogs that frustration is a function or by-product of ones expectations. If I normally trade a 10 lot on the SP500 Emini contract and I recognize a potential reversal setup, I know that the probability of being correct relative to its trend trading cousin, is diminished. Following that thought process, I therefore want to minimize the potential damage to my trading account. How do I construct my trade prior to initiating? One option would be to tighten my stop so that if the reversal doesn't materialize, I will quickly get stopped out. This now opens up a whole can of worms. When exhaustion trading, patience is the ultimate virtue. Think of a massive cargo ship coming into port with a full hull. Captains are not only slowing their engines miles out, but at some point throw them into reverse to ease the inertia of such a massive object. After unsustainable moves, regardless of the time frame you trade are like those cargo ships - they take some time (usually) to turn around so letting the trade play out would be your best course of action - NOT setting your stops tighter. By leaving your original stop in tact but reducing the number of contracts that I trade is the solution.

 Remember this - just because you can afford to trade more contracts or shares does not mean you can afford the losses.

 To lose a LOT and a little refers to losing on more trades than I win but by adjusting not my stop but rather my position size Ican lose a little in dollar terms. Winning a little refers to  being correct a lot less that being wrong but when I am right and the trade reverses I know that I am in the trade at the beginning of the move allowing me to make a LOT !

The m3 money management modeler allows for this `what if`type of  mapping out or modelling and not just on a single win or loss trade but over a sample size of 500 trades. Lets quickly take a look at the equity curves both scenarios.

Equity Curve Scenarios - m3 - Money Management Modeler
Equity Curve Scenarios - m3 - Money Management Modeler (Click to enlarge)

Using a tool like the m3 - Money Management Modeler can really help a trader model out the `What-ifs`before committing real dollars to a trade. Take the guess work out of trading and treat it like a business. Welcome to Fulcrum Shift Trading