Daytraders: Do you use Profit and Loss Limits for the Day?

Discussion in 'Strategy Development' started by aeliodon, Nov 20, 2008.

Do you use Profit and Loss Limits for the Day?

  1. I limit Profits and Losses

    8 vote(s)
  2. I limit Losses, not Profits

    15 vote(s)
  3. I don't use Profit or Loss Limits

    9 vote(s)
  1. First of all this tread is geared towards daytraders and not investors or swing traders.

    Now every trader knows that fear/greed is the enemy.

    Usually when having a losing position if you allow fear to possess you: you hold and hope to get even. You may even average down. Eventually you experience a loss so massive that you must capitulate to it.

    And if you have a winning position - you allow greed to possess you: you hold and hope for a monster win and don't take profits and watch it shrink dramatically or turn into a loss. Or if you average up then the first slight pullback stops you out.

    So this is where limiting losses and profits per day proves its value. Once you end lose X amount you call it a day and once you profit X amount you call it a day. This promotes a much more unemotional way of trading.
  2. When I traded at a prop firm - I never saw anyone leave early regularly so I'm assuming almost all traders 90%+ don't like to stop trading until the market closes.

    To me that's a sign of being addicted to the action, and not having a goal driven focus.
  3. vikana

    vikana Moderator

    Since this is in "Strategy Trading", I'd like to give what I consider the "obvious" answer:

    Any valid strategy must have specific exit rules for taking both profits and losses. You need this for the individual security and at the portfolio level.

    So there is no decision to make. Simply follow your (proven) rules and let the numbers work out over time. I only interfere if I detect some anomaly, such as quotes running slow, CPU overload, frequent broker disconnects, or general software bugs.
  4. vikana

    vikana Moderator

    Wrong answer, imo. Do the casinos in Las Vegas close down for the day after paying out a jackpot ?

    Of course not - the trick is to have a small edge and play it as much as you can.
  5. You can't compare a casino - an institution with a HARD EDGE with an individual trader with a soft edge assuming an "edge" even exists in trading.

    90% of traders lose and 90% can't walk away from the action no matter how much they are up or down for the day. That tells you something.
  6. Yes Risk 1 to make 2 (plus)

    So I have a cutoff at 500 and have hit it a few times this month. My software locks me out from new positions once I hit this mark. It makes me trade cautious when I get close so I can stay in the game.

    When I get up to 1000 I deploy the 20% rule which means I will not go home with less than 800 that day. PERIOD.

    This way I have the opportunity to turn that into 2000 and move the 20% stop up to 1600. Always try to protect your hard work for the day knowing that your downside is limited.

    Some days when stopped out, I miss a move. Some days I save myself from losing another grand. So it all works out in the end.
  7. I don't ever think you should use a Max Profit but using a Max Loss is a good idea. When you are trading well you should trade as large as comfortably possible and go for the kill. Markets change and your system won't work as well in the next market. Don't limit profits unless you consistently give them back and if you do then you have a time of day problem, not a max profit problem.

  8. That's a smart way of trading. If you're down a little you have to take the loss - because if you continue to trade you can very easily continue losing then get really reckless and suffer a catastrophic loss. It takes great faith and confidence in yourself to accept a loss - knowing there are millions of opportunities waiting for you in the future.

    If you're up a decent amount - you accept it without getting greedy. If you go home with a decent profit and finish at the HW mark of the day then you go into the next day with greater confidence and a clearer mind.

    The key to success is setting reasonable goals and taking baby steps to achieve them. Slow and steady always wins.
  9. A max loss is a very good idea for a non seasoned trader.

    Perhaps someone that doesn't quite have all your rules in order will be prone to revenge trading which can be catastrophic.

    It can only help to shut it down for the day for discipline and learning to diffuse emotions.
  10. Exactly. It has taken me many years to get that figured out. I can feel the death spiral coming from revenge trading when I get down to my stop levels. That is why I set it there....the level of emotional recklessness for me is 500 for the day. It may be 2000 for my friends. Its all relative.
    #10     Nov 20, 2008