ICT Mentorship Core Content - Month 02 - How To Mitigate Losing Trades Effectively

Summary

This mentorship session focuses on effectively mitigating the impact of losing trades in the financial market. The speaker discusses analyzing market setups, framing risks, and leveraging price action to identify entry and exit points. They emphasize the importance of reevaluating trades after a loss, adjusting leverage, and using smaller position sizes to minimize risk while still aiming to recover from initial setbacks. The session also touches on the psychological aspects of trading, advocating for patience and strategic risk management over emotional reactions.

Takeaways

• 📈 The session focuses on strategies for mitigating losses from trading, specifically in the context of the ICT mentorship program.
• 🔍 It emphasizes the importance of analyzing price action and market setups, including framing risk and reward multiples, to make informed trading decisions.
• 🚫 Advises against placing stop losses too close to the market, which can lead to premature exits from potentially profitable trades.
• 🔄 Discusses the concept of reevaluating a trade after a stop-out, suggesting that a trade may still be viable even if the initial entry was unsuccessful.
• 💡 Highlights the strategy of entering a new position with half the leverage and position size after a loss to reduce risk while still capitalizing on market opportunities.
• 📉 Stresses the significance of not letting emotions drive trading decisions, especially the fear of missing out or the rush to recover from a loss.
• 🤔 Encourages traders to consider taking profits or closing a trade to break even when the market provides an opportunity, especially towards the end of the trading week.
• 🔒 Suggests locking in profits or mitigating losses once the initial loss has been recovered, to prevent further drawdowns.
• 📊 Introduces the concept of using multiples of R (reward) to measure the success of a trade and to determine when to take profits or cut losses.
• 🛑 Advocates for patience and caution in trading, emphasizing that it's not necessary to rush into trades to recover from a loss, but rather to wait for the right opportunities.
• 💼 Conveys the importance of equity preservation as the primary rule in trading, and the need to scale back risk after a losing trade to avoid compounding losses.

Q & A

What is the main topic of the teaching session in the transcript?

The main topic is about how to mitigate losing trades effectively in the context of the ICT mentorship.

What is the significance of the 'mean threshold' in the trading strategy discussed?

The mean threshold is a critical level in a bullish order block where traders should not see the middle of a down candle violated. It's used to determine the placement of a stop loss to avoid unnecessary losses.

Why is it not advisable to place a stop loss just below the mean threshold?

Placing a stop loss just below the mean threshold is not advisable because it can lead to being stopped out prematurely if the market moves slightly against the trade, which might be part of normal volatility.

What should a trader do if they get stopped out due to their stop loss being hit?

If a trader gets stopped out, they should reevaluate the trade setup and consider whether it's still viable to enter the trade again, potentially with adjusted parameters such as a different stop loss level or leverage.

How does the speaker suggest adjusting the position size after a losing trade?

The speaker suggests reducing the position size to half of what was used in the initial losing trade to mitigate risk and avoid compounding losses.

What is the concept of 'R1', 'R2', and 'R3' mentioned in the transcript?

R1, R2, and R3 refer to multiples of the initial risk taken in a trade. They represent different profit targets or levels of return on investment that a trader might aim for or consider when managing a trade.

Why is it important to lock in profits or mitigate losses at the R2 level according to the speaker?

Locking in profits or mitigating losses at the R2 level is important because it allows the trader to recover the initial loss and get back to even, which is a psychologically comforting position and reduces the pressure to make up for the loss immediately.

What advice does the speaker give for traders who have taken a loss and are considering re-entering the market?

The speaker advises traders to reduce their leverage and risk, and to be patient, allowing the market to provide opportunities to mitigate losses without increasing risk.

How does the speaker define 'Equity preservation' in the context of trading?

Equity preservation is defined as the primary rule in trading, emphasizing the importance of protecting one's trading capital and avoiding the temptation to chase losses by increasing risk.

What is the potential danger of not reducing risk after a losing trade, as mentioned in the transcript?

The potential danger is that a trader might fall into a pattern of throwing good money after bad, leading to a series of consecutive losses and building toxic thinking, which can result in fear-based trading and emotional stress.

What mindset should a trader develop after mitigating a loss, according to the speaker?

A trader should develop a mindset of being grateful for the opportunity to recover losses and then move to the sidelines to regroup and start fresh, rather than immediately seeking to make another trade.

Outlines

00:00

📉 Mitigating Losses in Trading

This paragraph discusses strategies for effectively mitigating losses in trading. It begins by setting the context of a trading mentorship session focused on risk management. The speaker uses a hypothetical scenario involving a long position on a bullish order block, where the market doesn't behave as expected, leading to a stop-out situation. The key takeaway is the importance of reassessing the trade setup after a stop-out, adjusting the stop loss, and potentially re-entering the market with a revised strategy. The speaker emphasizes the need for patience and not taking excessive risks, suggesting that traders should be prepared to encounter losing trades and have a plan to manage them.

05:00

🔄 Adjusting Position Size After a Loss

The second paragraph delves into the specifics of how to adjust trading strategy after incurring a loss. It suggests reducing the position size by half for the next trade to mitigate further risk. The speaker provides a detailed example of how to use a down candle as a new entry point, using the bottom of the candle as a stop loss. The focus is on leveraging less and allowing for more market movement against the trade. The paragraph also touches on the psychological aspect of trading, advising traders to take profits at the right time to avoid emotional decision-making and to preserve equity.

10:02

🚫 Avoiding Fear-Based Trading

This paragraph emphasizes the importance of not letting fear dictate trading decisions, especially after a loss. It discusses the concept of equity preservation and the potential danger of increasing risk after a losing trade, which can lead to a cycle of further losses. The speaker advises traders to be patient, reduce leverage, and allow the market to provide opportunities to recover from a drawdown. The paragraph also highlights the importance of locking in profits at the right multiples of the initial risk to secure gains and prevent returning to a previous equity low.

15:02

🛑 Reducing Risk to Preserve Equity

The final paragraph reinforces the message that reducing risk is crucial for equity preservation. It explains that traders should not feel compelled to chase losses by increasing their risk but instead should scale back after a loss to avoid a potential string of consecutive losses. The speaker provides a hypothetical scenario to illustrate how even with reduced risk, it's possible to recover from a loss without increasing leverage. The paragraph concludes by stressing the importance of maintaining a disciplined approach to trading and avoiding the pitfalls of fear-based trading.

Keywords

💡Mitigation

Mitigation refers to the process of reducing the severity or impact of a negative event or situation. In the context of the video, it is about effectively managing and reducing the effects of losing trades in trading. The script discusses strategies for mitigating losses, such as reevaluating trades after a stop-out and adjusting position sizes and leverage.

💡Price Action

Price action is a term used by traders to describe the movement of a financial instrument's price over time, reflecting the aggregate perception of value by market participants. The script uses price action analysis to identify patterns and potential trading opportunities, emphasizing the importance of understanding market movements to make informed decisions.

💡Risk Management

Risk management is the process of identifying, assessing, and prioritizing risks to minimize or control potential negative impacts. The video script highlights the importance of risk management in trading, such as setting stop losses and adjusting trade sizes to manage potential losses effectively.

💡Stop Loss

A stop loss is an order placed with a broker to sell a security when it reaches a certain price, aiming to limit an investor's loss on a position. The script discusses the placement of stop losses in relation to market conditions and the importance of not placing them too close to the market to avoid being stopped out prematurely.

💡Leverage

Leverage in trading refers to the use of borrowed capital to increase the potential return of an investment. The video emphasizes the need to adjust leverage after a loss to reduce the risk of further losses, suggesting that traders should be cautious with leverage to preserve equity.

💡Equity Base

Equity base refers to the total value of an investor's holdings or the amount of money available for investment. The script uses the term to discuss the importance of preserving one's equity base by managing risk and adjusting trade sizes after a loss.

💡Order Block

An order block in trading is a price level where there is a concentration of buy or sell orders. The video script mentions order blocks as areas of potential support or resistance, which traders can use to identify entry and exit points for trades.

💡Mean Threshold

The mean threshold is a term used in the script to refer to a specific price level that traders should monitor. It is a hypothetical level that, if violated, indicates a change in market dynamics. The script discusses the importance of not seeing the middle of a down candle on a bullish order block violate this threshold.

💡Risk Multiples

Risk multiples are used in trading to determine the potential reward-to-risk ratio of a trade. The script mentions setting up trades with specific risk multiples, which helps traders to frame their risk and reward expectations and make decisions about entry and exit points.

💡Trade Setup

A trade setup refers to the conditions or criteria that a trader has identified as favorable for entering a trade. The video script discusses analyzing market conditions and identifying trade setups, such as recognizing patterns and price levels that suggest potential buying or selling opportunities.

💡Emotional Trading

Emotional trading refers to making trading decisions based on emotions rather than rational analysis. The script warns against the pitfalls of emotional trading, such as fear and greed, and emphasizes the importance of maintaining a disciplined approach to trading, especially after experiencing a loss.

Highlights

Teaching on how to mitigate losing trades effectively in the ICT mentorship.

Analyzing the same sample size of price action with a different approach.

Standard markup of the market setup and framing the risk and reward multiples.

Identification of a shoulder block and mean threshold for a hypothetical long entry.

Assumption of a down candle supporting the idea of buying or recapitalization.

Discussion on the implications of a stop loss violation on a bullish order block.

Scenario of taking a trade and getting stopped out with a loss.

Importance of not taking huge risks and encountering losing trades as part of trading.

Reevaluating a trade after being stopped out and considering market conditions.

Using a new order block formed by a down candle as a buying opportunity.

Adjusting leverage and position size after an initial loss.

Strategic approach to entering a new position with a smaller risk.

Concept of mitigating losses by using half the initial risk on a subsequent trade.

Emphasizing the importance of equity preservation and not rushing to recover losses.

Advice on taking profits and closing trades to avoid weekend losses.

Using trailing stops to lock in profits and prevent further losses.

Mitigating losses without increasing risk by scaling back leverage.

Highlighting the psychological aspect of trading and avoiding fear-based decisions.

Teaching the principle of not increasing risk after a loss to prevent a losing streak.

Encouraging patience and allowing the market to provide opportunities to mitigate losses.

Final thoughts on the importance of mindset and strategy in trading to avoid emotional decisions.

Transcripts

okay folks welcome back this is

teaching number five in the second month

of the ICT mentorship we're talking

specifically about how to mitigate

losing trades effectively

we're gonna look about look back at the

same sample size of price action and

we're going to go through it a little

bit differently

and we're going to assume that we were

studying this particular asset class or

Market if you will

and we go through our standard markup

of the market setup and framing the risk

and reward multiples

and we noted the little shoulder block

and

we identified where the market should

come back down into it

and we identified the mean threshold and

hypothetical long entry on the secondary

bullish order block

now

assuming for a moment that uh we saw

this down candle here

okay

it's all supporting the idea of we

should see

uh 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 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 middle of the down candle on a

bullish order block be violated

because some of you are all new and

there are

chances that you'll probably take the

trade and want to have a stop loss just

a little bit below this means threshold

and there's nothing wrong with that

normally

but let's just say for instance you did

that and you got stopped out okay what

would you do let's assume you you did

that and you got stopped out

what would you do

obviously I'm going to throw you a plot

twist

you can say yeah you got a stop out here

and you took a full two percent loss or

if you're a hot shot and you think

you're really you

an elite Trader if you will you risk

more than two percent you probably would

have been burned pretty bad and if

you're a gambler and you risk a lot of

money on your trades 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 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 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 stop was below the mean

threshold and it hit our stop

let's assume for a moment that our

maximum leverage and risk on the trade

would be at a full two percent

well that means we'd have to take

another look

at the same trade

and reevaluate whether or not it's

something we can still trade

obviously we had our mindset on this

potential setup 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 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

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 on this candle 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 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 because we still would have a

strong conviction or hypothetically a

strong conviction that the market should

move higher difference is is we're going

to go 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 getting an ultra tight stop

loss this time our stop loss is going to

actually be below the order block that

we're framing our trade around

so the market has created a down candle

we showed and Williams to run away off

support of a previous down candle which

is a bullish order block we saw a

willingness to 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 and we use the

bottom of the candle as our stop loss

what are we going to do differently with

this

well we're going to go long with one

half of the position size we used on the

initial loss so for instance if we took

a initial loss of two percent on the

first trade we have to go down to one

percent if we were trading with one

percent and we took a full loss on the

initial trade we would have to drop down

to one half of one percent of our total

Equity base

now if the initial loss was two percent

of the equity base this trade again

would be one percent of the equity base

in total risk so we're defining the

trade by entering

at the top of this body's uh or this

down candle we get the opening so we'll

be getting long in here okay if we were

to elect to use this down candle as an

entry we could see the return back 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 candle as

our entry

either instance on this movement down or

this movement down in here would have

given the fill

this is our total risk stop below the

order block main thing is is we're using

half of the leverage and and position

size that we used on the initial loss

so we're defining our trade with 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 we're going to frame

out the idea that the same thing would

be seen hopefully if we're right in our

directional premise

with one movement up

that would be a multiple of R1 so if we

have one percent at risk defined by the

entry

in here

and stop below here

once we get to this price point here

we're already at one percent 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 at two percent

mitigated in other words our losing

trade that we just had using half of the

initial risk

is already mitigated now at this point

here

this is one of those instances of your

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 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 Thursday or

Friday now and you get the opportunity

to get that two percent

full stop out and back

take it off

close the week flat do not go into the

weekend with a net 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 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

an opportunity to erase our errors do so

notice that at mitigating two percent of

the initial trades loss

or the initial trades uh um total loss

of two percent of our Equity base we

don't even require the market trading

above the old highs in here where the

buy stocks will be residing so notice

that we're already able to mitigate the

initial loss of a total two percent a

hit on our equity

and it hasn't even really fully moved to

our objectives

obviously with some multiple of 3r

we are now in New Territory so now we've

made a new Net game

if you're going to allow the position

and not listen to it just suggested this

is where you want to Trail the stop loss

up to

where you can no longer lose back Below

open profit of the two percent loss once

it's been mitigated you're going to lock

that in so your trailing stops also be

placed right there and you would not

permit the market to come back against

you and if it stops you out it stops you

out 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 lock it in so it cannot take you

back down below

um your Equity uh

uh reference point before the drawdown

ensued

once we get a multiple of R3 okay in my

opinion that's about where you want to

take your profits and square it off so

either you take it off once you mitigate

your loss entirely

when you get R2 okay because that's

going to basically pay you 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 R2

to get that trade paid back to you

okay and how many times have we talked

about opportunities how there are so

many opportunities of the frame 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 not

requiring you to spend 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 mindset to stay

focused

once the market provides you R2 or the

mitigation of your initial loss

you want to lock that in and then give

the market room if you're going to not

take the the two percent 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 base Equity High rather prior to

the drawdown you and so uh you want to

at least lock that in

initially as your developing Trader you

want to just take it off the table and

just be thankful that you got it back as

you grow into the next stage of the

development you want it to start locking

in your stop 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 okay I fixed my error

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 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 mitigate your two

percent loss after seeing an R2 multiple

with the one percent risk

now you have one percent gain so now you

have a new Equity High all in the same

trade

all this 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 where your stop loss

should be or sometimes you're just a

little early and it's going to run and

go to a level that would make perfect

sense after you see it do it but because

some of us are very emotional very

rushed to get in to make a decision

there's no reason to fear going back in

and taking a look at that trade

um how many times have you uh incurred a

loss and you knew that there was still a

probability or possibly seeing that

trade pan out in the direction you

thought it was going to go initially but

you were too afraid to go back in and

lose money

if you drop down your amount of Leverage

and your total risk cut it in half

okay let's get uh let's play Devil's

Advocate just for a moment say we bought

this one here okay we bought this one

here and then we used the mean threshold

as a stop 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

um you know we did the same 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 squeezed us out or maybe

it 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

if you started with two percent 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 the

impossible but we're gonna say you took

a full stop at two two percent here on

this on the stop

say you took a one percent full hit here

on this being aggressive trying to place

your stop way too short at the mean

threshold okay and you get stopped out

again you would have to go down to one

half one percent right here

right here okay so again with that same

mindset if we were using an entry on

this basis and the stock would have to

go be below this load now

look at the range between this candle's

opening right here

and this low

think about that in terms of the range

that would be your risk okay

Watch What Happens there's

one half of one percent

one percent

one and a half percent

two percent

you still would have made back your two

percent

just on that run here

so your your initial large hit of two

percent

even with one half of one percent would

have been mitigated so then you would

only be down what

one percent and you 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 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 risk you can actually do

it by reducing risk and I I taught this

principal years ago

online and folks that saw it they were

like uh this is stupid why would I want

to cut my risk or my leverage down after

a losing trade uh well

it's because Equity preservation is the

number one rule in this game and we

don't know with any Absolution that our

trade's going to be profitable so why

would any

Trader think like a and not dial

back their leverage if they take a

losing 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 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 thinking but it's not necessary

to get it back on the next trade

but in this example it's very important

we can see that getting to that R3

you can get back your full two percent

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 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 say

for instance that your first hit at two

percent you took a two percent loss how

do you know that's not a beginning of a

10 string losing

in other words what's to 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 two percent 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

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 trading

what that does in the previous uh lesson

and we don't trade with that we want to

avoid that mindset