Do You Need Limiters?
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My last 3 years have been spent full time on learning to trade with order flow. After nearly 20 years of “chasing the dream” with all the other stuff that’s out there, I needed to really start over from scratch, forget everything I thought I knew, and keep myself out of trouble. The most obvious way of doing that, is by setting arbitrary limits.

I’m sure we’ve all used them in one form or another. Arbitrary stop losses, targets, times of day, price levels, indicator crosses, etc. There’s an infinite number of potential arbitrary things you could use to restrict what you do, and when or how you do it. And these absolutely have their place! When starting out, it’s vital that the inexperienced trader keep some simple rules in place so they don’t blow up their account and lose the ability to trade (of course these days we have really good sims and evaluator companies but still, limiters are important when starting out!)

Here’s the issue with them however. At some point, the trader develops their skill to a level where they get held back by these arbitrary limits. When they need to start learning when it’s time to press their advantage in the market, when it’s time to back off and manage risk, or when it’s time to sit out and do nothing.

I ran up against this a few weeks back, and have been thinking about writing this article ever since. In my quest to finally withdraw money from a funded “prop” account, I’ve been gradually keeping these accounts alive a little longer each time (most traders don’t survive the first week), and I’m at the point now where I’ve gone several months before killing it. But I was doing this with my arbitrary rules still in place. 1 MES contract, $25/day profit target, $100/day max loss, a few specific structural time-of-day setups only. And while these were excellent rules to have in place while I was getting my bearings on this style of trading, I realized that now, they were essentially guaranteeing I wouldn’t ultimately succeed.

Every time I had a good day, where the market was behaving well and my reads were solid, I’d hit or exceed my goal quickly and shut down with my $30 or $50 profit. But on a bad day, I’d blow through my max daily loss and maybe end up with a $120 or $130 loss. Some simple math should make it pretty obvious, that this isn’t a winning formula unless you almost never lose.

It became clear to me what was happening. Any day’s results in the markets can be thought of as falling somewhere on a bell curve. The bulk of days will fall in the roughly 70% of the curve in the middle. But there will always be outliers, both to the positive side, and the negative. By limiting my upside, I’ve been guaranteeing that I can’t have positive outlier days! And over time, those are absolutely essential for the overall equity curve, to go up.

I’ve said for many years (don’t recall where I first heard this, probably a book at some point) that there are really only 4 possible outcomes in trading:

  1. A small loss
  2. A small win
  3. A big loss
  4. A big win

If over time we expect that the small wins and losses will roughly cancel each other out, then that leaves only the big wins & losses. Now if we never, ever, allow a big loss, then the only thing left is the big win. And if you stay “alive” in the markets long enough, you WILL get those on occasion. And played correctly, they’re where the bulk of your equity can be built from. But you have to allow them to happen first!

So a couple weeks ago I started to remove my arbitrary limiters. I began allowing myself to use a second micro so I could scalp around the structural setup when opportunity presented. Then I dropped the arbitrary profit & loss goals, instead trading until I felt the opportunities had dried up for my setups & preferred times of day. And this week I began allowing myself to scalp a mini for ticks when a clear opportunity presented, while holding up to 3 micros for the larger swings.

The result has been that in my current funded account, I have finally pushed into profitability for the first time. Not by any astronomical amount, that’s not really important to me. What’s important to me is that this is directly the result of observing and critiquing my trading performance, and applying discretion, skill, and discipline to my trading. It’s everything I’ve been working so hard on these last few years, and I’m starting to see it bear fruit.

But I couldn’t have made this shift if I hadn’t let go of these arbitrary “training wheels” that I had clung to absolutely all this time. And they were good and useful, until they weren’t anymore.

Any trader who works hard to develop their skill, is going to come to this point and need to make some changes. What limits do you have in place, that may no longer be serving you?

Until next time, good trading!

Jonathan van Clute
Community Manager, Trading Research Group

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