Here's some info about position structures and strategy goals in day trading strategies. Day trading strategies are based on perceived statistical edges. Not "Being right/wrong" on any given trade.
Losing trades are not "Taboo" in these day trading strategies. They are factored into the strategies. Please find info on this below. Day trading analysis/trades will be tagged with the applicable strategy type to make sure people are aware of the goals of the strategy, short and longer term expectancy of it and the money management we think is best suited for each.
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Laddered entries and stop losses (LE)
Laddered entries are intended to give the potential to profit in reversals with a reasonable probability of recovering losses over a set of 3 - 5 trades. The aim is to give a possibility of making good profit while maintaining a probability of breaking even or containing losses so as to be very small overall.
Laddered entries will define an overall inflection point in the market as a general zone and then look to pick out specific points in that zone to enter and places to stop out and allow for entering the same position at a better price. Each time an order is stopped out and entered at a better price the overall risk:reward of the trade improves to the full target or the amount the market has to move to breakeven reduces.
A simplistic example would be if we wanted to buy something between 70 and 100 and target 150. We could buy 100 and stop out 95. Buy 90 and stop out 85. Buy 80 and stop out 75. Buy 75 and hit the target of 150. Here 15 is lost in stop outs and 75 gained in the winning trade, a net gain of 60. For the trade to turn profitable it’s only required to bounce 75 to 101.
The main characteristics of this type of strategy is there will be low win rates, losses will come in steaks, entries will be taken aggressively into countermoves and the motto of the strategy is “One goods trade pays for them all”. Failure in implementing this strategy is being stopped out and entering worse prices. It is not getting stopped out and the market moving fast against the previous position - being able to get out and in at better prices is the strategy’s objective.
Money management (Position sizing/risk per trade) for these types of trades is best to factor in the risk in blocks of at least three and more conservatively five. If 1% risk is used in a trade it’s better viewed as 5% since the strategy will attempt the same trade off a few different levels if the market continues against the position, hitting all stops in a failed reversal.
Perceived edge bets (PE)
The classic example of a perceived edge bet is a coin flip in which you can win $2 and lose $1. You have a strong reason to think it is most probable you will come out ahead if you play for long enough. Over a large sample size you’d be expected to win 50% of them and you’re making double your losses in winning flips.
If playing this game there are various things that’s not make sense. One would be to play the game over one flip. You have no advantage other than you can win more, but an equal chance of losing. You’d not bet bigger when in a winning streak or start to skip out flips if you were in a losing streak. All you’d be wanting to do is get through as many flips as you could.
Many times we’ll get situations like this in the market where our immediate profit/loss outcome on any one instance of the things should be viewed as a probability of random. But over many instances it can start to smooth out to an edge that gives you a positive expectation. A car insurance company does not know who will crash, they just know it’s very unlikely too many will.
Perceived edge bets will be taken very dispassionately. If the last three times we tried it there was a losing out, that will not affect the next three times we try it. Success or failure in these types of strategy on a trade to trade basis is determined upon how accurately the signal generated was followed. Strategy execution. Not trade to trade outcomes.
Aggressive stop losses (AS)
Some strategies are optimised towards high risk:reward trades. Since the market only makes big one direction moves on infrequent occasions, the main way RR is improved is by using tighter stop losses. These have the possibility to make large profits if there’s a string of winning trades and a good probability of covering losses even if there’s a low win rate.
Using a 1:10 risk:reward and entering into a market entirely randomly is not likely to make profit in a lot of market conditions but is quite likely to get close to breakeven or contain small losses in anything other than a very persistent small range (Where a 1:10 move is never made). Random entries in line with a strong trend can sometimes vastly beat buy/hold on some occasions.
This is not advocating for random entries and exits into the market (Most of these just don’t lose ‘Too badly’ over a long time) rather pointing out that in a lot of market conditions you’re not going to lose over 95% of trades. Losing 90% is running breakeven (Less fees). If there are things you can do to improve these odds even the tiniest little bit and consistently apply this over a large sample size there’s a strong expectancy of a bet profit to be made.
The main characteristic of these types of trades is they have very low win rates. The stop losses are really close. Often they can just hit and the market turns around (Which is annoying but it’s part of attempting to increase RR). This is compensated for by the targets being really large. It’s possible to risk 0.1%, 0.2% or 0.3% in these types of trades and make a couple %.
When using these types of strategies it is best to think of losses in blocks of ten. What this type of strategy is looking to do is to identify precise levels where price is most likely to reverse from. The philosophy when it comes to wins/losses is similar to the ladder entries but this type of strategy is not (Necessarily) looking to enter at better prices every time.
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