Seems like semantics, but Ok. I never endorsed the idea of "playing with the market's money." The risk point on a pyramid is placed at a logical threshold relative to price action on the trade. Typically this risk point will preserve some profit even if stopped out, though not always -- part of the reason for a "breakeven" stop is because, starting from the logically determined risk point, the trader can then work backwards to determine how much he can pyramid if he chooses to risk all open profit on the trade. He could risk more than open profit or he could risk less, of course. I prefer not to let winning trades turn into losing trades as a rule of thumb. Call it a quirk, I don't care. For a discretionary trader, there is "NEVER EVER" a situation when another trader is following the "exact same system" as him. Discretionary trading patterns are, by their very nature, unique to the trader. It is possible for two discretionary traders to use the same rule sets in regards to open position management, risk protocols, entry and exit paramaters, and so forth, and yet the discretionary element means their actual trading paths may well be very different.
I haven't player poker for some time, but I did play it before I started taking trading seriously (in fact it made some of my initial stake). Anyway, whether I play now doesn't affect whether my argument is true or false. Let me explain my reasoning for why I claim the poker analogy is still flawed. I stated that in trading there is zero cost to 'seeing the later streets'. I said that, unless the hand is checked around, in poker you have to pay to play - that means either blinds/antes, or any bets that you have to call. A cheap price is still a price you must pay, and it is still meaningfully higher than zero. You see what I mean now? Ante/blind >0. A bet on any street (something the vast majority of meaningful pots see) must be called to progress to the next street. A bet >0. Therefore your claim 'You do not have to "play and pay" on earlier streets to "earn the right" to see the later streets as you say." is false, thus your conclusion 'The analogy as I expressed it is exactly correct.' is also false. Now I'll explain again why this means the analogy is false: Because there is no additional cost (other than commission - which he would have to pay anyway whenever he entered) for a trader to exit when the fat pitch comes, whereas for the poker player he must ante/blind and then usually make one or more calls (no matter how cheap) to see the fat pitch, the two are not comparable. The poker player's ante/blind and initial calls are not just recommended, they are COMPULSORY for him to be able to see that fat pitch and then bet on it. For the trader they are not required at all - he can bet the ranch on the fat pitch despite having had no position at all beforehand. Summary: Poker: must pay an ante to even see the odds. Must call the full bet to see the flop. Must call the full bet on each street to see the next street. Must (in hold'em) pay the full blind, plus call on pre-flop, flop, and turn, to even get to see the river. Total marginal cost to even see the fat pitch = ante/blind + the sum of all calls (and any raises you might also make to knock out other players). Trading: no need for any ante to see setups. No need to commit capital to more marginal trades early on in order to be able to bet heavily on a fat pitch later. Total marginal cost to see the fat pitch = zero. See? Totally different. I hope that's clear now.
Rapidly losing interest here. I explained to you how I trade, and offered sources of evidence (Ken Grant, Drobny Invisible Hands) that confirm many top traders use this same approach. My approach, in turn, being modeled after careful study of PTJ and Soros, honed through an intertwining of theory and practice for more than 15 years. If you choose to dismiss the logic of my argument as "mental accounting" and a "total noob error," so be it. I simply spoke from experience, in a grounding of theory and practice. I have no interest in correcting the errors of the great unwashed masses or handing down stone tablets. It was an interesting conversation, that's all. Now it is becoming tedious. No, but when the best traders in the world as a group have a tendency to do something, the habit likely has merit. You further insinuate the aping of others' practices on my part just because of their reputations. This is insulting. I have logical reasons for everything I do and fully understand the theory behind everything I do. I was not attempting to 'argue from authority' in referencing top trader habits, but responding to inaccuracies stated by you (along with incorrect insinuations by you as to what top traders do or do not do). The argument from authority is also an invalid criticism because I know why the methodological aspects work, and I explained as much in my replies. I did not stop with "PTJ does it so it must be right." I explained why it makes sense. What the hell are you talking about? The fact that a stop is "20 handles away" has no bearing on planned risk, unless the trader's account in question is too small for adequate granularity of the contract -- in which case he should not be trading that contract in the first place. If I saw fit to to take, say, an S&P e-mini futures trade with a 20-handle stop, that would have no bearing on whether my planned risk on the trade was 30 basis points, 300 basis points or 3,000 basis points, because planned risk is a function of trade size (number of shares / conjunction) in conjunction with risk point distance. Smith would thus have NO WAY OF KNOWING that Jones planned to risk 30% unless Jones first told him. There is no way one trader could know what another trader's % of capital planned risk on a trade is without knowing three things: *The size of the account *The distance from entry to risk point *The size of the trade Your theoretical conversation thus doesn't make any goddamn sense. There is no way Smith would automatically know Jones is risking 30% on the 20-handle trade unless Smith also knew how many contracts Jones intended to use. Furthermore, if we are talking e-mini S&Ps -- and why wouldn't we be, as you did not specify -- Smith would not scream and yell about a 20-handle stop at all, because it is quite feasible to have 3% risk on a 20-handle e-mini trade with a 91K account. [It would be roughly 3 contracts: 20 handles * $50 per handle * 3 contracts = $3,000 planned risk, whereas 3% of 91K is a close-enough $2,730.] Did you neglect to mention that Jones is either drunk or retarded? I have never advocated being fast and loose with "the market's money," let alone a suggestion that open profit risk is "zero." Keep beating up that straw man -- you're really giving him quite a pounding. I still have no idea where the fuck that 30% came from. And I have even less idea why you are shouting about ZERO RISK, when such was never even close to insinuated by me. The idea behind pyramiding is an implied odds expectation bet. You pyramid when you feel your expectation on doing so is positive. There is no illusion as to whether it is "the house's money" --- "the house's money" does not enter into it. The only thing you might be justified in latching onto here, is the decision not to take pyramid risk beyond breakeven on a substantially profitable trade. But there are logical reasons for picking breakeven as a threshold, in the absence of compelling reasons to pick some other threshold larger or smaller. And even so, such has NOTHING to do with the illusion of "zero risk" or "the house's money" or any of this other stuff you seem so aggressively on about. Well, you are right about the nonsense part. I never said a damn thing about "the house's money" or "zero risk" in respect to pyramiding profits -- you completely and wholly assumed a straw-man meaning out of whole cloth. If a trader chooses to pyramid the accumulated profits of a trade, he does so as a steward of capital pursuing a worthy opportunity, not as Homer Simpson running around Duff Brewery. There are logical reasons for limiting the size of the pyramid to accumulated profits within the trade, though frequently the pyramid will be smaller (still leaving profits if new risk point is hit), and on exceptional occasions it can be larger. The pyramiding I gave was a generalized example, not an edict from Moses. Your whole Smith / Jones example left me quite surprised. The egregious errors you made -- in respect to non-existent assumptions (did Jones somehow communicate via telepathy that he planned to risk 30%?) and the absolutely silly "zero risk" idea -- makes me wonder. I mean seriously, on what fucking planet would a competent trader embrace the assumptions your straw man did? Wait, hold on, don't answer that... let's just drop this whole thing.
That's your experience. My experience is different - I don't find any benefit to having on test positions, in fact possibly the opposite. So, how do we decide between these opposing views? Same as anything else - pick out the underlying assumptions and see if they have any flaws, then analyse the logical reasoning based on those assumptions, and see if there are any errors in it. If the assumptions and the reasoning have no errors, then the conclusion must be true. If there are errors in either, the conclusion is likely to be unjustified. A further point before we go on - citing what one person says is ok, but you must explain *why* they are right. You can't just rely on their view alone, you must be able to justify the logic behind it. Otherwise you could say the equivalent of "Ken Grant/PTJ wrote that 2+2 = 5, so it must be true". So, let's cut the trading quotes/received wisdom as though it's some kind of definitive proof - explain why Ken Grant is right rather than just stating his views. People who are good at something are not immune to mistakes and fallacies. Let's look at the specifics: "There is a psychological aspect and an intuitive aspect to making "probe bets" where you have a small level of conviction in regards to a market, and want to develop a feel for how it is acting before dialing your conviction higher." For you this may be true, but for me it isn't. One should not claim something as objective and universal, just because you feel it. Everything you can get from having a position on, I can get from simply watching the same chart, the same price quotes, the same news feed etc. In fact, personally I find it slightly easier to get an unbiased opinion by not having on any position - it avoids confirmation bias. Now, what if having on a position during the more marginal phase of a setup increases risk, and increases confirmation bias? Could this not result in inferior performance? The increased risk, and increased capital needs from margin requirements, are irrefutable fact, and universal to all traders who employ 'probes'. Maybe for you, the increased feel more than offsets the risk and margin requirement. But someone who can observe and analyse the market whilst flat, and get the same feel (and equal or greater objectivity) from just doing that, will be better off - they'll not have risk, they will have more capital free etc. So, there is no reason to think it's objectively superior to use test traders. And there is plenty of demonstrable and proven evidence saying the opposite: confirmation bias has been scientifically demonstrated in peer-reviewed academic journals (test trades haven't) for example; and reduced capital (due to your probe tying up margin) and increased risk are undeniable facts. The truth is that you feel (not know) that it's better for you, and that you have no evidence that it is superior even for yourself, let alone other traders. It might be, but I don't see much concrete evidence of that, and I know from my own experience that I don't need it, and that it has drawbacks too. Many times, back when I also subscribed to the unthinking received wisdom on 'probes', I would suffer a few whipsaws due to being in the market before the fat pitch came along, then find this had depleted my capital, made me overly sensitive to short-term moves, sometimes made me trigger-shy - and thus reduced my focus on being in on big side when the fat pitch came and the market tipped its hand. I found my performance improved measurably when I stayed out until the big setups came along. I am not alone in this thinking - quite a few of the best traders have said that over-trading is a problem, I have NEVER heard ANY top trader say that they were guilty of under trading. Plenty of top marie performers have said you should concentrate most of your efforts on waiting for the very best setups e.g. Buffett talked about making only 20 investments in a lifetime, for example. Anyway, I think we've pretty much covered this subject as much as possible now, anyone reading has enough information to make up their minds. To summarise my views on the posts of the last few pages: 1. Starting with small initial risk in no way reduces your risk later on when you have large open profits. Open capital is at risk just as much as 'closed' capital, it's identical dollar for dollar. A simple glance at a brokerage statement is enough to confirm this - if you lost 100k yesterday, it doesn't somehow become a smaller loss just because it was open profit. And if someone tells you that a 99% drawdown is ok because it's 'open profit' and that somehow they 'broke even' on the trade, they are wrong. If you don't believe me, try suffering a 99% drawdown on open profit, then get back to us and tell us how serene you felt while watching almost your entire net worth go up in smoke. 2. "Pyramiding" or "adding to winners" is a somewhat fallacious and misleading description. The only rational way to adjust size is based on shifting trade odds - have on big size when odds are very favourable and risk is low; have on small or zero size when odds are marginal and risk is high. The right size is the right size - regardless of whether your prior trade/position was a winner or a loser. 3. Prior trade decisions, profits, or executed trades have no bearing themselves on the trade odds, and thus no bearing on what the optimal position is right now. So they should be totally ignored when making any trade decision. You should analyse the market either as if you had bought at the very low of the move (or shorted the high of a down move), or as if you had on no position at all. If your trade analysis is at all influenced by your current position, such that your trade decision is different to what it would be if you had been flat instead, then you are 'married to your position' (a well-known known trading error). 4. Some people may require test trades to get a proper feel for the market. But this comes at the cost of increased risk and tying up capital in margin requirements, and may create confirmation bias. Other traders do not require test trades, and are capable of getting signals just by observing the exact same market data as 'test traders'. Confirmation bias, becoming trigger-shy after whipsaws, and losing focus are real risks to 'probing'. Other things being equal, it is preferable to be able to analyse a market by observing all the data objectively, rather than needing to see P&L fluctuations to be able to analyse properly. 5. Just because a good trader said something does not make it true (good traders disagree, after all), and certainly one should not accept it without analysing the statement. Argument from authority is a known logical fallacy. 6. Poker (or sports, gambling etc) and trading are not the same thing. The only perfect analogy to trading is trading. 7. Arguments by analogy are dangerous when the attempted analogy is meaningfully different in important ways to the original topic. They promote flawed conclusions and fuzzy thinking, and are no substitute for proper logical analysis based on facts specific to the situation at hand.
Ok if I misunderstood the open profit thing, I apologise and take back that part. Fair summary of my views is: choose your current position size/vehicle based on the present profit opportunity relative to risk. I don't believe that anything other than the data from the market are what determine that - past trades, current/past position, current/past P&L have no effect on it IMO. Trader psychological state can have an effect, but my solution to that would always be to fix your psychology, rather than compromise optimal trade strategy & positioning (in the short-term a crutch may be useful, but it's best to try and iron them out of your game). Anyway, I agree we're starting to go round in circles, so let's move on.
Jesus man, seriously? Now you are arguing just for the sake of winning an argument. "A cheap price is still a price you must pay." Yes, which is splitting hairs and utter semantics, because the whole point of my poker analogy in the first place was explaining how starting small in a trade, then ramping up exposure in favorable conditions, is analogous to coming in for a tiny percentage of one's stack, with very large implied odds, in deep stack poker. I am coming very close to writing you off as obtuse now. You seem deliberately committed to ignoring or overlooking the actual ideas I convey, in favor of "winning" the debate. Blinds and antes? Really??? But wait, maybe we can compare the cost of the blinds and antes to the trader's monthly nut for his research services and Bloomberg terminal. That's total sarcasm of course. You are deep, deep in the land of ridiculous semantics now, and missing the point entirely. You further miss the whole point of starting small. If Paul Tudor Jones or Louis Bacon or whomever can just "bet the ranch on the fat pitch despite having no position at all beforehand," then WHY DO THEY BOTHER WITH SMALL SIZE IN THE FIRST PLACE? The whole value-add to varying size massively is so that you can begin in a state of relative uncertainty, at low risk, and then dial up as certainty develops. If this did not make sense, there would be no need to bet small, ever. You would just wait and wait and then bet huge. But this "huge from the start" does not work in global macro trading because the variables are too complex. A supercomputer can't even figure out the turbulence in a glass of water, let alone how geopolitical, sociological and even meteorological factors are going to intertwine six months from now. The reason the great global macro traders are great is because they have developed a methodology that lets them powerfully exploit uncertainty, maximizing gains while minimizing risk. The illusion is the idea that a trader can just wait and "bet big" without ever betting small. Warren Buffett can do this, but he doesn't use leverage and his holding period is forever. A guy like John Paulson can do this -- once -- but the dirty secret of Paulson is that he had the soul of a riverboat gambler and if he was off in his timing by just 12 months -- not that long in the macro scheme of things -- he would have busted. And thus, uncertainty goes back to the very heart of the deep stack poker analogy, because the WHOLE POINT of such was that, in deep stack poker, you can come in with an uncertain (speculative) hand for a very small percentage of capital, with the possibility of getting your opponent's entire stack via big connection with the flop. A point that has sweet fuck-all to do with "blinds and antes." What's "clear" is that you like to argue for the sake of arguing, that you are willing to resort to torturous semantics to avoid addressing key points, and that we're not going to get much further here.
I would agree with most of that, but disagree with the second half as impractical / idealistic. In actual practice, there is such a thing as mental capital. If you are trading OPM, there is also such a thing as client risk. If you are looking to build AUM, there are also track record preservation and enhancement considerations. One could consider track record considerations artificial, but if your goal is to make the most money in absolute dollar terms, and that means ramping up to X hundred million in OPM, then the shaping of the track record is no longer an extraneous factor. It becomes "part of the game." And on top of that, even if one were to say "I am going to pursue optimal strategy regardless of all outside factors," whatever that might mean, certain real world considerations regarding P&L / equity curve would come into account at outlier extremes. There's just no way to take the real world out of trading. Since you apologized, I will apologize also for getting cranky. It was a good discussion even if it ended ugly, and I have appreciated many of your comments.
Well, I basically agree a lot of with your conclusions here, so obviously we are just misunderstanding on some level. My view: you have average setups, and some good setups, a few great setups. Size small, medium, or big accordingly. Then as the trade develops, fundamentals shift, price action unfolds, the odds shift - and thus shift your size (and stops etc) in response. That's the part I agree with on 'pyramiding' (I prefer the term 'adjusting position size'). If that's what you meant by putting on a test trade, then we don't really disagree. But I got the impression that a test trade for you meant that you actually need the position to get that data (about shifting news, price action etc), which I disagree with. Thus I put on small early trades purely as P&L generators, not as probes/tests. If the early move is tricky, I'd rather stay flat and wait for the market action, news or whatever to shift decisively in favour, and only then go big. But if the early setup is decent, I'll take it on the appropriate size, and then go big (or small or flat) later if the market/news indicates to do so. Here is where I disagree: " The great traders start small, wait for premium situations to develop, and then "vary their size massively" as a favorable scenario unfolds and the market tips its hand." Not necessarily - that assumes that moves are always uncertain or have marginal odds at the start, and then become more favourable later on. In fact it can be the other way - the best R/R and win-rate can happen at the start, and then degrade as the move takes place. A good example is buying a market crash once its in the exhaustion or early rebound phase (i.e. extreme mean reversion trade), or making a deep value investment during a period of dire news, high uncertainty and bearish sentiment. The further things went in your favour, the more good news and price action, then the more obvious the trade is, so the higher the price, the lower your remaining profit potential, the less value remaining in your trade. You may be following your approach due to your specialisation in macro trades, where they are normally involving trends with confirming data increasing conviction and trade odds in your favour. But not all trades are like that. Hence my focus on identifying the odds and win rate and risk for each situation based on its specifics, rather than just accepting the received wisdom. What a bunch of macro traders say for positive gamma trend/macro trades is not necessarily applicable, and may in fact be disastrously wrong, for negative gamma mean reversion trades, or for spread trades, or options plays etc. Anyway, I'm sorry for making the tone a bit bitter here for a few posts. I think there are some good points being made on both side in our discussion, despite a few disagreements.
The logic is clear enough, but I would point out that on every trade (or at least, every one of my trades) there comes a time when the distance from the current price to my target is many times greater than the distance from the current price to my stop. You enter ABC at 10 with a stop at 9 and target at 50, it goes to 49 and in the meantime you've raised the stop to 35. What do you do - use a fixed mechanical trailing stop at your maximum initial risk? I would suggest that in most cases this would lead to strategy failure, or at least lower profits than would otherwise be realized. Is the implication that, with no position on and given an identical setup, one should always, as a standalone strategy, buy at 49 looking to sell at 50 with a stop at 35? Strict logic would suggest doing so but experience tells me to pass. I should note that in practice it's common for me to close prior to my initial targets for exactly these reasons, but there is nevertheless a grey area. Perhaps the way to think of it is to consider market action as a flow of noise interspersed with occasional actionable signals. It is simply not possible to re-assess the entirety of evidence for and against the trade, expectancy, precisely adjust position sizes and risk etc. with every tick, only at certain points. In between these points a breakeven stop or similar tactics to 'lock in profits' may be a perfectly acceptable means of preserving capital, in the absence of a detailed fine-tuning of risk or full reassessment of the trade.