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13-ICT Mentorship Core Content - Month 2 - How To Mitigate Losing Trades Effectively

Last modified by Drunk Monkey on 2022-09-02 11:06
1 00:00:23,910 --> 00:00:34,680 ICT: Okay, folks, welcome back. This is teaching number five in the second month of the ICT mentorship room talking specifically about how to mitigate losing
2 00:00:34,680 --> 00:00:43,140 trades effectively, we're gonna talk about looked back at the same sample size of price action, and we're gonna go through it a little bit differently. And
3 00:00:43,140 --> 00:00:54,150 we're gonna assume that we were studying this particular asset class or market, if you will. And we go through our standard markup of market setup and framing
4 00:00:54,150 --> 00:01:06,930 the risk and reward multiples. And we noted the bullish order block, and we identified where the market should come back down into it. And we identified the
5 00:01:06,930 --> 00:01:19,110 mean threshold and hypothetical long entry on the secondary bullish order block. Now, assuming for a moment that we saw this down candle here, okay, it's all
6 00:01:19,140 --> 00:01:28,860 supporting idea of we should see some buying or or recapitalization of this down candle. We see that happening here. Now, we don't know for sure that's going to
7 00:01:28,860 --> 00:01:37,200 happen. But let's assume for a moment that we went in and we took along on this position, okay, and understanding the mean threshold, we don't like to see the
8 00:01:37,200 --> 00:01:49,620 middle of the down candle on a bullish order block be highlighted. Because some of you are all new. And there are chances that you'll probably take the trade
9 00:01:49,620 --> 00:01:58,290 and want to have a stoploss. Just a little bit below this mean threshold. And there's nothing wrong with that normally. But let's just say for instance, you
10 00:01:58,290 --> 00:02:10,080 did that and you got stopped out. Okay. What would you do? Let's assume you did that and you got stopped out? Well, what would you do? Obviously, I'm going to
11 00:02:10,080 --> 00:02:22,890 tell you a plot twist, you can say, you got a stop out here, and you took a full 2% loss. Or if you're a hotshot and you think you're really an elite trader, if
12 00:02:22,890 --> 00:02:31,170 you will, you risk to the more than 2%, you probably would have been burned pretty bad. And if you're a gambler, and you risk a lot of money on your trades
13 00:02:31,170 --> 00:02:41,400 like that, and you don't feel any pain. That's a problem. But we don't need to take huge risks. We don't need to take a lot of trades, but we will encounter
14 00:02:41,970 --> 00:02:51,990 losing trades. So I'm going to give you a scenario. And assume for a moment, we saw this panning out, we saw the idea that there should be some upside, but we
15 00:02:51,990 --> 00:03:03,150 put our stop loss a little too close to the market and say we took a full stop. Now assuming that we took that long position, and our stock was below the mean
16 00:03:03,150 --> 00:03:18,210 threshold, and hit our stop, let's assume for a moment that our maximum leverage and risk on the trade would be at a full 2%. Well, that means we'd have to take
17 00:03:18,210 --> 00:03:32,970 another look at the same trade and reevaluate whether or not it's something you can still trade. Obviously, we had our mindset on this potential setup
18 00:03:33,000 --> 00:03:45,120 initially. But if the trade hasn't completely unraveled, just because it swept us out below the mean threshold on our initial try going long, it doesn't mean
19 00:03:45,120 --> 00:03:55,740 the trades completely no longer viable. It just means that we probably were just inaccurate in terms of where our stop loss was placed. And we had to take
20 00:03:55,740 --> 00:04:08,250 another basically stab at it. So now we can take a look at that new order block that forms with this down candle price trades away through it when this candle
21 00:04:08,250 --> 00:04:19,530 right here. It trades above that down candle. So when it does that, that authorizes any new return to this down candle as a buying opportunity. Mark
22 00:04:19,530 --> 00:04:31,560 comes down into it here. Okay, we can take a long position here. Okay, and now this time, we're going to allow a little bit more movement against us. Okay,
23 00:04:31,560 --> 00:04:40,620 because we still would have a strong conviction, or hypothetically, a strong conviction that the market should move higher differences is we're gonna go
24 00:04:40,620 --> 00:04:46,920 about our leverage a little bit differently and we're going to allow ourselves a little bit more movement against us. We're not going to be so high strung about
25 00:04:47,220 --> 00:04:55,860 getting an ultra tight stop loss this time. our stop loss is going to actually be below the order block that we're framing or trade around. So the market has
26 00:04:55,980 --> 00:05:03,960 created a down candle. We showed him Williams the runaway office support of a previous downtrend, which is a bullish order block, we saw a willingness to
27 00:05:03,960 --> 00:05:14,310 capitalize buying with the movement away from this here, came back down, we want to be a buyer, right in here at the top of that candle. Okay, so if we did that,
28 00:05:14,520 --> 00:05:19,440 and we use the bottom of the candle as our stop loss, what are we gonna do differently with this?
29 00:05:20,819 --> 00:05:30,599 Well, we're going to go along with one half of the position size we used on the initial loss. So for instance, if we took a initial loss of 2%, on the first
30 00:05:30,599 --> 00:05:40,859 trade, we have to go down to 1%. But if we were trading with 1%, and we took a full loss on the initial trade, we would have to drop down to one half of 1% of
31 00:05:40,859 --> 00:05:53,009 our total equity base. Now, if the initial loss was 2%, of the equity base, this trade again would be 1% of the equity base in total risk. So we're defining the
32 00:05:53,009 --> 00:05:54,029 trade by entering
33 00:05:55,199 --> 00:05:59,009 at the top of this bodies are this
34 00:05:59,039 --> 00:06:09,719 down candle right at the opening, so we'll be getting along in here. Okay. If we were to elect to use this down candle as an entry, we could see the return back
35 00:06:09,719 --> 00:06:18,839 down into this down candle as well. Using that either way, we're going to use this range defined by the opening of this down candle, or the top of this down
36 00:06:18,839 --> 00:06:32,249 candle as our entry. Either instance, on this movement down, or this movement down in here would have given the film. This is our total risk, stop below the
37 00:06:32,249 --> 00:06:43,919 order block. Main thing is, is we're using half of the leverage and, and position size that we use on the initial loss. So we're defining our trade with
38 00:06:44,009 --> 00:06:56,159 this in terms of the risk. Now, all we're going to do is refer back to the original idea of that trade, where we first took a loss, hypothetically, and
39 00:06:56,159 --> 00:07:08,099 we're going to frame out the idea that the same thing would be seen, hopefully, if we're writing in our directional premise. With one movement up, that will be
40 00:07:08,129 --> 00:07:21,659 a multiple of our one. So if we have one person at risk, defined by the entry in here, and stop below here. Once we get to this price point here, we're already
41 00:07:21,659 --> 00:07:37,169 at 1% return. So we got half of our initial loss back in open profit. Once we get one more standard deviation from what our risk is defined by, we're already
42 00:07:37,409 --> 00:07:49,619 at 2% mitigated, in other words, our losing trades we just had, using half of the initial risk is already mitigated. Now at this point here, this is one of
43 00:07:49,619 --> 00:08:00,929 those instances if you're new trader, this is where you want to consider taking the trade off. And I can't stress this enough. Sometimes, it's just good to get
44 00:08:00,929 --> 00:08:11,879 back to even and relax and then regroup. Especially if you're late in the week. For instance, say you've been trading all week, and you took a loss. And it's a
45 00:08:11,879 --> 00:08:23,639 Thursday or Friday now and you get the opportunity to get that 2% full stop out back, take it off, close the week, flat, do not go into the weekend. Within that
46 00:08:23,639 --> 00:08:31,709 loss. If the market presents the opportunity to give you that loss back, and you're late in the week, or you're late in the trading session, take it off the
47 00:08:31,709 --> 00:08:39,299 table, move to the sidelines and be glad that you did. There's nothing saying this is going to continue going higher. So that's why once the market gives us
48 00:08:39,299 --> 00:08:54,779 an opportunity to erase our errors, do so. Notice that mitigating 2% of the initial trades loss or the initial trades, total loss of 2% of our equity base,
49 00:08:55,229 --> 00:09:04,889 we don't even require the market trading above the old highs in here where the BizStats will be residing. So notice that we're already able to mitigate the
50 00:09:04,889 --> 00:09:20,189 initial loss of total 2% A hit on our equity, and it hasn't even really fully moved to our objectives. Obviously what's a multiple of three are We are now in
51 00:09:20,219 --> 00:09:33,269 new territory. So now we've made a new net gain. If you're going to allow the position and not listen to that just suggested this is where you want to trail
52 00:09:33,269 --> 00:09:44,909 the stop loss up to where it you can no longer lose back below open profit of the 2% loss. Once it's been mitigated. You're going to lock that in so your
53 00:09:44,909 --> 00:09:52,559 trailing stop loss will be placed place right there and you would not permit the market to come back against you. And if it stops you out. It stops you out.
54 00:09:53,039 --> 00:10:01,829 Bottom line is is you're not willing to go back down below if it gives an opportunity to recoup the drawdown. Take it or to lock in, so it cannot take you
55 00:10:01,829 --> 00:10:18,899 back down below your equity reference point before the drawdown ensued once we get a multiple of our three, okay, in my opinion, that's about where you want to
56 00:10:18,899 --> 00:10:28,319 take your profits and squared off. So either you take it off once you mitigate your loss entirely when you are to, okay because it's going to basically pay you
57 00:10:28,319 --> 00:10:37,919 back whatever your, your loss was percentage wise, even if you cut that trade leverage in half, regardless of what it is, you only need a multiple of our to,
58 00:10:39,390 --> 00:10:48,240 to get that trade paid back to you. Okay, and how many times that we talked about opportunities, how they're, there's so many opportunities of the frame
59 00:10:48,240 --> 00:10:55,950 three to one or five to one or even more throughout the week, you don't need very much to get that losing trade back. And that's why it's something that's
60 00:10:55,980 --> 00:11:04,260 not requiring you to have sent spent a lot of time fearful of, or obsessing about when you take a loss, they're easy to get back, you just got to allow your
61 00:11:04,260 --> 00:11:17,220 mindset to stay focused. Once the market provides you are two or the mitigation of your initial loss. You want to lock that in and then give the market room if
62 00:11:17,220 --> 00:11:25,740 you're going to not take the 2% Back off or whatever that initial loss was if you don't take it off and repay your drawdown and bring you back to the equity
63 00:11:25,740 --> 00:11:36,120 base equity high rather, prior to the drawdown. You ensuite. You want to at least lock that in. Initially, as you're developing trader, you want to just
64 00:11:36,120 --> 00:11:43,260 take it off the table and just be thankful that you got it back. As you grow into the next stage of development, you want it to start locking in your stop
65 00:11:43,260 --> 00:11:53,040 loss after you get your loss mitigated, and then see if it has any more room to go. But initially, you want to not do that. You want to train yourself to say
66 00:11:53,040 --> 00:12:02,220 okay, I fixed my air, I've corrected the drawdown, I'm going to move to the sidelines and start fresh. Okay, the next stage would be would be to lock that
67 00:12:02,220 --> 00:12:12,600 in. And don't allow your your drawdown to return and see if the market has room to run. Again, in this case, if you allow the market to run, and you mitigated
68 00:12:12,600 --> 00:12:27,150 your 2% loss after seeing our two multiple with a 1% risk. Now you have 1% gains, you know you have a new equity high, all in the same trade. All of this
69 00:12:27,150 --> 00:12:36,090 has been done in the scope of just looking at one setup, that you may have messed it up, you may have got in and you got too aggressive about what your
70 00:12:36,090 --> 00:12:44,940 stop loss should be. Or sometimes you're just a little early. And it's going to run in go to a level that would make perfect sense after you see it do it. But
71 00:12:45,000 --> 00:12:53,280 because some of us are very emotional, very rushed to get in and make a decision. There's no reason to fear going back in and taking a look at that
72 00:12:53,280 --> 00:13:03,360 trade. How many times have you incurred a loss, and you knew that there was still probability or possibly seeing that trade pan out in direction you thought
73 00:13:03,360 --> 00:13:14,100 it was gonna go initially. But you're too afraid to go back and lose money. If you drop down your amount of leverage and your total risk, cut it in half. Okay,
74 00:13:14,610 --> 00:13:24,030 let's, let's play devil's advocate just for a moment. Say we bought this one here, okay, bought this one here. And then we use the mean threshold as a stop
75 00:13:24,030 --> 00:13:35,550 and it stopped us out here. And then we used this down candle when price ran back down into it. Okay, we went long. And say for instance, we did the same
76 00:13:35,550 --> 00:13:42,810 thing, we were using this middle of this candle here. And we want to have ultra short term stop loss. And it came down against us and squeezes out or maybe it
77 00:13:42,810 --> 00:13:51,180 scared us, okay, and the market runs again, when it comes back down into this order block here. That would be another opportunity. So if you started with what
78 00:13:51,660 --> 00:14:00,930 if you started with 2% here on this trade here, and you got knocked out and you had a full stop the likelihood of you having that probably next to impossible,
79 00:14:00,930 --> 00:14:11,130 but we're gonna say you took a full stop to 2% here on this diploma stop, say took a 1% full hit here on this being aggressive, trying to place your stop way
80 00:14:11,130 --> 00:14:22,080 too short at the mean threshold. Okay, and you get stopped out again, you would have to go down to one half 1% Right here, right here. Okay. So again, with that
81 00:14:22,080 --> 00:14:32,730 same mindset if we were using an entry on this basis, and the stock would have to go be below this low now. Look at the range between this candle opening right
82 00:14:32,730 --> 00:14:49,770 here in this low. Think about that in terms of the range, that would be your risk. Okay. Watch what happens. There's one half of 1% 1% One and a half percent
83 00:14:52,050 --> 00:14:54,030 you still would have made back your 2%
84 00:14:55,890 --> 00:15:09,600 just on that run here. So your your initial Large hit of 2%, even with one half of 1% would have been mitigated. So then you would only be down what 1%. And you
85 00:15:09,600 --> 00:15:18,300 can actually let the market run or take another setup, it doesn't have to come back from it doesn't have to come back in all, one trade. In other words, one
86 00:15:18,300 --> 00:15:29,760 trade doesn't have to erase all of your your losses. But don't think that you can't make the money back or mitigate the losses. Okay, without increasing more
87 00:15:29,760 --> 00:15:40,920 risk, you can actually do it by reducing risk. And I taught this principle years ago, online, and folks that saw it, they were like, this is stupid, why would I
88 00:15:40,920 --> 00:15:53,730 want to cut my risk or my leverage down after a losing trade? Well, it's because equity preservation is the number one rule in this game. And we don't know with
89 00:15:53,730 --> 00:16:03,990 any absolution, that our trades going to be profitable. So why would any trader think like a moron and not dial back their leverage, if they take a losing
90 00:16:03,990 --> 00:16:13,350 trade, that means you're doing something wrong, the likelihood of you going in and making a winning trade on the next trade as a new trader, highly unlikely,
91 00:16:13,470 --> 00:16:20,220 because you're going to be rushed to get back to square one, you want to get that loss back right away emotionally, psychologically, that's what you're
92 00:16:20,220 --> 00:16:31,620 thinking. But it's not necessary to get it back on the next trade. But in this example, it's very important that we can see that getting to that are three, you
93 00:16:31,620 --> 00:16:42,000 can get back your full 2%. If that was the case, you don't need to have increased leverage. You don't have to increase your risk. But you do have to
94 00:16:42,000 --> 00:16:52,350 have patience to allow that loss to be mitigated. And you don't need to do it by scaling up your risk. You actually do it by scaling back your risk. Because if
95 00:16:52,350 --> 00:17:02,100 say, for instance, that your first hit at 2%, you took a 2% loss. How do you know that's not the beginning of a 10, string losing? In other words, what's to
96 00:17:02,100 --> 00:17:10,920 say you don't get nine more losing trades in a row. It can happen to you. It can happen to me, it can happen to anyone. So if you do that, and you keep going at
97 00:17:10,920 --> 00:17:20,190 2% Or worse, you increase your risk. You're throwing good money after bad you're, you're building toxic thinking, you're allowing yourself to be beaten
98 00:17:20,190 --> 00:17:26,760 down emotionally, you're going to spend a lot of mental capital, and you're going to grow into fear based trading. And we already spoke about fear based
99 00:17:26,760 --> 00:17:32,250 trading what that does in the previous lesson, and we don't trade with that. We want to avoid that mindset.