The Daily Market Forecast... trend or reversal?
Monday’s Results: The suggested short level stopped for a loss of 4.75 (per contract). Team members saw a smooth breakout south at the open run for 25+ points (see chart).
Today’s Trading Tip: Find your style.
There are many winning strategies. You need to trade only those that resonate with your personality. Otherwise, your confidence and performance will wane.
Here’s an example comparing two very popular styles of trading. Trend Following versus Reversal Trading. Regardless of the tools/indicators you use to enter and exit your trades…
- Trend Following will generally result in many small losing trades and fewer larger winning trades. The net result might look like this: 30% winning trades of $500 and 70% losing trades of $100 = $80 per trade profit.
- Reversal Trading will likely result in more winning trades that are somewhat larger than the losing trades. The net result might look like this: 60% winning trades of $200 and 40% losing trades of $100 = $80 per trade profit.
Noting that both strategies performed the same in net profit your first thought might be that choosing one over the other doesn’t matter. But it does psychologically. Here’s why: A smaller win percentage will generate more losing streaks and while the amount of money in the end is the same, you may FEEL differently about your performance during those losing streaks.
The Theory of Runs is a simple math formula we can use that shows the probability of the number of losers in a row. In a 100 trade sample using Trend Following with a 30% Win Rate, you could experience 13 losers in a row. For Reversal Trading with a 60% Win Rate, you could experience 5 losers in a row.
Which feels better to you? Bigger wins with more small losses or smaller wins with less losses? Financially neither is superior but personally you may have a preference.
Disclosure: Your actual trading rules may have different results. This is just a “ball park” for illustration purposes.
Today’s Best S&P Futures Turning Points:
Short Level: Sell 4661.00 stop 4666.25 (5.25 risk).
Long Level: Buy 4577.25 stop 4573.25 (4.00 risk).
Trade Well,
Mike Siewruk
P.S. Join us every Saturday morning @ 10:00 ET for our weekly LookBack (5) trade review session. Every trade for the week is analyzed. Now open to the public. Meet the team. Ask questions. Register here for the December 4th session.