Superb, this is the exact and only good response to that kind of question! The (all important) exit point is of course a vital component of any profitable trading strategy and must be clearly defined right from the start. If a trader initiates a trade and then later says something like : "Ok, now, where should I liquidate my position, here or here?" then he has NO strategy to begin with.
entry, I guess you could say it is just random, but I figure, I just made a huge profit on the long side, so it's probably time to go short exit, once the pre defined target is hit, the profit gets taken, religiously, no matter how positive I feel about the position. The flipside, I've been so close to the target, sometimes just a few dollars, but if it doesn't get hit, no early taking. It can be a real bitch when you almost had it on Friday, and it pulls back, and you sit all weekend wondering, "Maybe I should have taken it early." stops, they start out tight, but over time just naturally get larger and larger. Due to the fact of how strong the market moves against me. For instance, the first stop is tight on 25% of the position, so that one gets hit so now it is another tight stop on another 25%, but it's now twice as far from the original average price. on and on until I only have a 25% position on, then it trades with no stops, and I have already determined before I ever put it on that I can ride it all the way to zero. and that brings us back to entry. Every position that has been stopped out has a corresponding stop to re enter if it ever starts moving back again my way, and no stop is ever moved, so if it moves hard against you, the stops to enter can be way the hell up there and in normal times will never be hit. and keep in mind, the target is on the whole portfolio, within that portfolio you may have profits that are so large any normal thinking man would have taken them long ago, and also some very large losses. It's tempting to take that large individual profit, but then you screw up the whole deal.
The distribution of wins and losses is random, so if I had two or three (or more) losses in a row, it would be meaningless in the larger scheme of my plan, which has positive expectancy over each series of 10 trades. BTW, the 15 tick is a max stop. I haven't had a max stop hit in a long time.
I am not sure about that, NoDoji. If a trading system has a positive mathematical expectancy then, by definition, after X amount of drawdown (or series of losses), the probability of going through even more drawdown becomes close to zero. In other words, in this situation, the past affects the future.
Perhaps she means the distribution within a population, which would be random. Edit: The expectancy would be expressed in the overall result, not in any particular sequence. Also, if there is a 40% expected win rate and one has 6 losses in a row, it does not mean the next 4 would be wins. One may have a sub-set that is an outlier, and go on to have another 10 straight losses. Expectancy is not certainty.
Absolutely. But here is the thing: let's say the maximum drawdown of a profitable trading system is 15% of equity. Your system has been winning for quite a while but now you are in a 15% drawdown (from the last equity high). What is the probabliity of going through a 30% drawdown? And more importantly, would you believe that the distribution of drawdowns is random (the magnitude of the current drawdown has no effect on the next drawdown)?
Profit targets sound like a great idea but in practice, they only are optimal in range-bound markets. Of course, you can't tell for sure in real time if the market is range-bound or trending, hence the dilemma. I have evolved over the years into a trading style that is aimed much more at taking full advantage of large range trend days. These days occur infrequently, so the last thing I want to do is risk a premature exit.
There is no profitable trading system that has been precisely as profitable, or even invariably profitable, ad infinitum. Any extrapolation from that flawed premise is equally flawed.