Haha, your description of the "hedge fund" method cracked me up. The only thing I've found to work for me lately is getting in big at the start of a move and then piecing out of it. If I'm wrong right away and take enough of a beating I just slam out of all of it. If I'm right I might try to add on even more pretty quick, then once I get a decent gain I start getting out during the pull backs AND the sharp run ups. If it pulls back enough times in a row I'll just close out of everything. Similarly, if it runs up big really fast and looks like it's going to be crushed back down I'll get out of everything and look to get back in at a better price. Of course, I miss a lot of moves, and knowing that if I had just held it all the way I could have made a lot more money is frustrating, but with so many false breakouts and fake pullbacks sitting on your full size can be agonizing. For me watching a decent winner turn into a loser is the most frustrating part of trading and can send me into a tailspin of angry trading that almost never ends well. I am very short term trader though, some trades are only a few minutes. Don't see why this wouldn't work for longer term trades, but who knows.
I think a secret of trend following is that using trailing stops is the equivalent of massively increasing betting size on winning trades even with no additional trading. Whereas they may risk only a few % of closed equity they risk a much large, even very large, % of open equity. This characteristic is what allows them to hit home runs from time to time. It is also what makes the systems so difficult for most traders to follow. Large, account changing profits frequently evaporate. A shorter term system could replicate this by increasing betting size with intra-month equity gains or something similar.
When you become more of an experienced trader, sitting on a position becomes easier, and almost second nature. At some point traders stop spending 7 long grueling hours scalping for pocket change and learn to hang on to the bigger trends. Sometimes it can be fun, but more often then not, boring, until you hit the sell button and collect that $$$ .
The issue I have with this approach is that every so often the market is going to go a ridiculous amount against you, even though the underlying premise is sound. What do you do when your analysis says you are right, and yet the market goes 50-100% (or whatever is a "huge" move in the market in question) against you? If you trade small enough to be able to handle gigantic 1-2 year moves in your face, then you won't make much when you are right. If you trade large enough to matter, you won't be able to hold on before being fired, having your fund liquidate, losing your conviction etc. And every so often when you hold on, you actually will be wrong without realising it. Is there a point at which mere market action alone would make you scale back or even exit entirely, despite the fundamental story seeming intact? Or let's say you were pretty confident that the market had gotten ahead of itself and was due or a correction, would you partially or fully exit until it was over, or would you just ride the correction out on full size?
This has its own problems though - if you scale out then you risk having small or zero size on during a large portion of the move. Imagine someone scaling out of stocks in 1995, 1996, 1997, and missing the big part of the rally in the last 2-3 years. Or someone scaling out of housing and financial shorts in early 2007 (when there was a big dip in those sectors), and missing the huge payday later in the year and in 2008. The kind of example I am thinking of is where you have a strong belief that a huge move will occur, but you know you will face numerous decent-sized pullbacks and maybe some major corrections...plus there's always that chance you might be totally wrong.
Yeah, it's irrational to view house money as any different to initial capital. Otherwise two people with identical risk profiles, capital base, and positions, would have to trade the exact same market very differently, which is clearly illogical. Or if your clerk accidentally exited your whole position by mistake, you would not be able to put it back on again at the same price, which is again nonsensical. Trend-following suggests that the expectation on a trend-trade is significantly better once the trend has got underway and made a significant move. Whereas at the initial breakout point, the chance of being wrong is pretty high. Thus it makes sense, purely on trade expectation, to cut losses quickly at the breakout point, but to be much more tenacious in holding through pullbacks once a good profit has been built up. None of this has anything to do with it being open profit vs initial capital, it is solely due to the (presumed) character of major trends (choppy and prone to failure early on, more resilient and able to bounce back from corrections later). However, some trend-followers IMO have not grasped this distinction, and thus use the psychological crutch of house money vs initial capital to rationalize the correct behaviour. A bit like a fighter pilot might check their six for superstitious reasons - their action makes sense but not for the reasons they think it does.
if pattern is not up yet - Theres no reason to take off entries and put on entries for every small retrace a. U can't predict the retraces very well because its countertrending b. Its a lot of work and more work = more fuckups c. Your timing should be good enough where it doesn't effect u d. once the pattern is up - Take off most of it of course, now the money is your money , everything after that is a gamble. I had a big thought on d. but temporarily forgot.
I personally prefer the scale out approach. I am quite risk averse so I like to take profits when I see them and limit my downside as much as possible. Scaling out allows you to take profits, limit risk, and let a portion of the trade run. Yes, it limits the upside potential, but reduces the risk. I think you are looking for a low risk/high reward situation that I am not sure exists.