Do you stop from a loss from the top?

Discussion in 'Risk Management' started by Darkhand, Feb 19, 2009.

  1. In day trading (or perhaps even longer term trading) do you stop if you lose a certain amount from the top?

    Your stop limit for the day is -200$
    You make profits of 400$ and keep trading, you then whittle down your profits to 200$; do you stop trading for that day?
  2. Redneck


    Yes Sir - I stop

    Because if I'm losing near my limit - then something is wrong with me (in my head)

    I’ll step away and re-assess - me

    Take Care
  3. I trade automated reversal startegies. In testing I use position sizing to keep losses to a fixed size of the account and by setting strategy parameters to regulate the rate of loss per time period. If this does not work in live trading I shut it down.
  4. Sounds like an interesting system.

    What's cool about that is you could even change your position sizes based the rate of change in your profit/loss.

    The biggest conflicting issues I see when I delve too deep into position-sizing and money management, I get tied up into "trading your profit/loss." Seems like a lot of conflicting posts about those subjects.

    Any insight on detaching trade management from "trading profit/loss" ? or am I making this more complex than it needs to be?
  5. Hello DarkHand. Yes I believe I have an interesting system. I have been working on it 12 years in Tradestation (before 2000I) with 6 of those years live. It has 9 primary strategies I execute.

    And yes, I do change my position size based on profits and losses. It is not that hard to program. You start at a fixed dollar amount (number starting shares times the first entry price), then add the profit and loss of trades on a continuous basis to form total amount and lastly compute current shares as the total amount divided by the reversal price. It takes just a few lines of code.

    Then there is trade management…. a favorite topic of mine. It is far more complex than most traders imagine.

    Trade management for programmed system strategies is the process of finding what factors during testing induce positive trade cash flow during performance and metric reviews during live trading. With the performance reviews telling the trader how they are making profits or losses and metric reviews compare the tested optimization statistics against the actual result statistics.

    Position sizing and money management are part of the bigger area trade management. As I said trade management is the most complex part of trading other than writing a trading program. The majority of authors spout statistic after useless statistic and cover little of what it takes in trade management to produce a profitable strategy in live trading. Trade management has hardly been touched by any author.

    Here is an example that applies to your original question. I set up my acceptable “deviations” before I trade a strategy. One example of my deviation management is drawdowns. Let us say the strategy allows on average $200 loss per trade. When I review the optimization of the strategy it had a max of 5 consecutive losses. This gives a drawdown of $1000 dollars. Then I review the largest real drawdown that occurred in this case it was $1150. Lastly, I go back to the stats to see what the draw down at 1 standard deviation is at in this case $1075. From these figures I decide what the max drawdown I’m going to allow in live trading. In this case I will allow approximately $1200 as the maximum draw down before I shut down the strategy. The last step is to check out how big the $1200 drawdown is as a percentage of the account balance. If the $1200 is too big I will lower the position size until it fits the account risk specified in my trading plan.

    This is the type of trade management you won’t find in most books. There is hardly anything written about when and how to manage a live trading system or trades. A trader has to learn through experience how all of these pieces interact. This is just one of many preps I do before trading a strategy live.
  6. Mr J

    Mr J

    I don't stop trading. I don't set myself a daily loss limit, as it makes no difference whether I lose $500 today and $500 tomorrow, or just $1000 today. The only reason to set a loss limit is if losing past a certain point will affect your trading. I'd argue that this shouldn't be an issue for a trader, but it usually takes some large losing to get used to it.
  7. Wow very informative. Thanks everyone for your insight.