Why Is E-Mini Trading Risky When You Can Get in and Out Quickly?

The outcome of the vast majority of e-mini trades is binary; you either win or lose. There is an occasional break even trade, but they certainly aren’t the norm. With these simple odds it would seem obvious that you should be able to hit at least a 50% rate of success. Yet, according to various sources that are often quoted, more than 90% of e-mini traders are out of the business in less than three months and broke as a result of their efforts. Something doesn’t add up here. What causes this disparity in outcomes?Let’s analyze this phenomenon from a cause and effect standpoint; we’ll look at typical behavior on the winning side of things and look at the losing side of things. As you will see, much of the risk is in considering and managing trades.Behavior on the winning side:It is important to understand, from the onset, that your profit target and stop/loss point need to be at least equal, and your entries and exits need to be at least equal. I usually set my stops based on 2x of the Average True Range (ATR), so the profit target and stop/loss usually fall in the 15-20 tick range. I look at the ATR as a measure of market noise present in my trading session; and I then have a realistic expectation of the trade potential.But here is where the problem starts with the vast majority of the e-mini traders I am mentoring. When I am trading with the trend, my 2x ATR gives me a good idea of where the trade could terminate. Of course, I am leaving out several variables like set-ups and support/resistance, to name a few. Anyway, on most days, even in a strong trend, the market doesn’t move in straight lines, which is to say that there is quite a bit of movement on your trading DOM. New e-mini traders typically get pretty excited when they are up ten ticks and take profit. They take their profit prematurely and don’t let the trade develop. That being said, I have had a slew of traders compelled to take profits at the 6-8 tick range; they simply don’t give their trade a chance to hit its peak price. In short, their emotions drive them to take profit early, typically it is fear.So let’s assume, very generously, that the average new trader takes his profits at +9 ticks. Remember that number.Behavior on the losing sideFor reasons that my one-watt brain cannot fully understand, woefully so, traders are far more comfortable letting their losers run. What gives? I was trained at one of the Wall St. trading houses and it was much like boot camp. Basic trading principles were drilled into my head until they became mantra.One of the most important rules was “don’t get married to a trade.” These lessons served me well; if a trade doesn’t look like it’s going to work out and I can confirm that suspicion with some real time indicators. I get out of the trade and start looking for the next enticing entry. But most new traders trade differently.They feel they have made a good entry and it’s only a matter of time before the trade goes your way. I’ve watched new traders move their stop/loss to accommodate a losing trade in hope that the trade will reverse. The result? They tend to slam into their stop/loss point. Why? People hate being wrong.The equation you would think would look like this: the winning traders letting their trades run and on losing trades cut their losses quickly. But for most, the exact opposite is true. They chop their winning trades too soon and hang on to their losing trades in hope they will recover. We will put the short side loss generously at -15I’ve concluded that holding on to trades is an aversion to “being wrong.” When we look at the net of our average winning trade, +9 ticks, against a typical result of -15 ticks it becomes obvious how traders lose money. I want to note that this is the most common problem I see, and when I see a student’s account slowly falling I can easily pinpoint the problem. While win/loss behavior is the largest group of problems most new e-mini traders experience, I want to acknowledge other problems new e-mini trader face: trading against the trend, overtrading, trading too many contracts, the list is long. But the dilemma I have described in this article represents the most significant problem in my experience.In summary, I have pointed out an inverse relationship of risk/reward on the winning side of a trade and the losing side of the trade. I encourage you to let your winning trades run and have confidence you have taken a high probability set-up and don’t chop your winning trades so early. On the losing side, I encourage you to constantly evaluate whether the technicals of the trade you initiated remain the same about half way down to your stop/loss. If the dynamics of the market have changed and your trade now carries a much lower probability, get out of the trade. I have also stated that new traders tend to let the price hit their stops.