Hopefully some of the vets here can help me with a theoretical question. My question has to do with swing/position trading. I want to know if anyone here ever decides to liquidate all holdings at a weekly/monthly high water mark. The reason I ask is this. I have realized that a few big trades are often going to make your week/month/year. It has happened a few times in the past two months that I have seen a big jump in equity as a group of trades go in my direction simulataneously due to being on the right side of the overall market . Now, in studying trading, it has been drummed in to my head that I must 'cut my losers and let the winners run'. So when a trade goes my way, I put my stop in and move it up as the trade progresses, trying to let my winners run. However, in studying my returns and doing various extrapolations and 'what ifs', I have realized that had I liquidated everything at those high water marks, I would have been up quite a few points from my equity right now. The trades I would have liquidated? Well, a few of them would have gone further, but not enough to make up for the amount that I gave back as all of them fell back to the stops. Does this just mean I need tighter stops or is their some portfolio management protocol that dictates that it is sometimes all right to liquidate in order to make a number, and then start clean again? The larger question here is how to deal with winners, which I find to be the toughest, most gut wrenching part of trading. Taking losses is easy; you place you trade and put a stop in. However, I have had trouble knowing when to liquidate, especially in those first days when the trade goes up in your direction a bit then starts to retrace. Hope that question makes sense.
"It has happened a few times in the past two months that I have seen a big jump in equity as a group of trades go in my direction simulataneously <b>due to being on the right side of the overall market .</b>" When you're no longer on the right side of the market, get out. Don't set an arbitrary stop.. trail it up if you have to.
This is a great question, and it reflects a lot of insight. You hate to see a drawdown from a new equity high, but the only way you get those new highs is by letting winners run. I think the key is to try to integrate both a market view and a dispassionte analysis of individual holdings. The dicier you rmarket view, the less rope you give individual names. I hate to exit on a tailing stop becuase you are always getting out on weakness, so the alternative is to try to pick a top, which is never easy. Bill O'Neill has a lot of stuff on this in his first book.
Okay, thanks for the reply. So I guess my trades being correlated had something to do with the outsized returns I was seeing. And you're saying that if I am mostly long in an up market, just stay in. However, there is a chance that I could be seeing these high water marks if I was net short in a bull market (we can only hope for the best) or evenly distributed between shorts and longs in any market. I just need a way to reconcile the calculations I did which showed that if I had simply liquidated twice after sudden pops in my equity, I would be up now compared to what I realized by holding everything in order to 'let my winners run'.
Yep, that's exactly what I was seeing. In fact a few of those positions ran right up into clear resistance areas on or about the day of the equity high. I was tempted to cash them in. As I said, enough of them just came off and remained flat to make cashing the whole thing in on the day of the equity high seem better in retrospect, taking into account the ones that rebounded up through that day's high. I'm obviously not running a fund but I wonder what the guys who do would have done. Do they think of their year as being broken up into 12 months and do they do whatever they have to do be positive in each month? I think this gets over my head in terms of risk management theory, but clearly the returns you are aiming for are a clue to what you should do in these cases. I have no compensation tied to making a number each month, so... I'll check out the O'Neill for sure. Thanks for the comments.
I had a really bad fill, when I placed a new stop on a winning trade. So, the next time, I just went ahead and took the whole profit...I later noticed that it went up the next day, but it came down quite abit, almost to take out all the stops, then rode back up again. Perhaps this is madness, but I'm going to listen to my intuition. I recently made a quick buck on two trades, but low and behold, did not cash in, and now I'm sitting on a loss. There is definitely an art to trading. Say what you will about mechanical systems...brokers tend to get in the way!
I think there is an advantage to liquidating everything. It creates a fresh perspective, you can rethink and repurchase your winners as opposed to trying to weed the garden. I would suppose funds may rebalance on a monthly or quarterly basis but that doesn't mean you have to. I also suppose a fund always has to be invested whereas you don't. It is a quandry and one would have to have a personal strategy that works for their style.
"Pit Bull", by Martin Schwartz details his emotional requirement to "ring the cash register" several times during the day and then putting his position back on (again and again and again) as a volatile intra day market would let him. He talks about never being able to "... let his winners run" even though that was the conventional wisdom. http://en.wikipedia.org/wiki/Martin_Schwartz btw, I assume you are trading equities? Because letting your winners run with precious metals or fixed income should not have been that hard over the past year?
Thanks for the link, I'll check that out. Yes, almost all equities, and I just placed my first metals trade a few weeks back (long YG G8 at 809 and stopped out on that dip around 11:00 a.m. Dec 31). In fact that trade is one of the ones that prompted this thread. On Dec 30 I was looking at a nice run from 809 to 846. I knew the market was going to retrace eventually and I was agonizing over where to put my stop. Had I liquidated at or near 842 (I'm obviously not a psychic, couldn't pick the exact top of the move), would I have had the guts to get long again at 832 (a likely looking entry on Dec 31) for the move to 895? Who knows. I put the damn stop at 3 points below the Dec 27th noon hour peak and of course I got stopped out almost exactly at the bottom of the retracement. That is giving back $450 of a $1200 profit that I'm seeing in the position. Christ's sake, am I supposed to put my stops looser than that? 33+% of unrealized profit? I'm supposed to give back more than that? Anyhow, screw all that because I hate guys who whine about getting stopped out at the bottom of a move and then crying 'manipulation'. Still agonizing over this trade. Problem is when I get stopped out it is hard to turn around and get right back in... But that is exactly what you say Schwartz is apparently talking about and exactly what AAAintheBeltway is talking about above. You get stopped out at the exact point where, if you were out of the market and in a different state psychologically, you may be considering getting in! So just selling and buying immediately, huh? Interesting. I might actually have put my stop a bit lower for the new position had I done that, because the chart would have dictated it.
hi, i have faced this problem several times and have tried many things (except liquidating completely) to no avail. things i have tried - nothing - equity drops quite sharply leaving me frustrated. liquidating part of the positions - i dont know how but i end up closing positions that i should have held on and vise versa taking new contrary positions - if i am long platinum, then short some other precious metal. this also has not worked. i tried this again just last week by going long usd to protect my precious metals. both went against me and i had to close out the usd position. there possibly may be a better solution to this, but here is where i am now. i accept that this will happen. my equity chart is similar to a stock/future chart - after a nice run up it WILL pull back and i will have no idea when or by how much. just live with it. would like to hear from other experienced traders as well. sridhar v ramasami