Long and short signals overlap - What to do?

Discussion in 'Trading' started by SomeYoungGuy, Mar 28, 2010.

  1. I have a strategy that uses a stoploss and profit target. It calls both longs and shorts, and sometimes these overlap. Example:

    Let's say I get a long signal at 100, my plan says price has a 50-50 chance of going to 80 or to 140; I either make 40 or lose 20, I like those odds, so I enter long.

    Price moves to 120, then I get a short signal, again a 50-50 chance, but this time my plan says price will move to 110 or 125; I either make 10 or lose 5.

    The dilemma; do I take this short signal? If I take the short and it wins, then price is at 110. Do I reenter my original long? Then my risk/reward is down to make 30 or lose 30 still on a 50-50, that's not so good. If the short loses, do I reenter? Price would be at 125, I missed 5 winning points of my original bet, and my risk reward went down to make 15 or lose 45, and that's terrible for a 50-50.

    If I get flat each time I have conflicting signal I run the risk of being whipsawed and severely cutting my winners short. Is this made up for be sometimes being right on my reversal signal? Also, every time I reverse, I eat a bid-ask spread and a round trip of commissions.

    I'm considering opening two accounts, one for longs only, one for shorts only. This sounds smart and retarded at the same time.

    This smells like a problem that has a perfect game theory answer, but I can't figure it.
  2. The trend is your friend.
  3. I had two methods that did contradict themselves at one point. I had temporarily developed a strategy to flip from long to short depending on the circumstance. Eventually, I ended up modifying one of the methods and realized it was better than the other so I dropped the other one.

    I've also had various opinions on whether I should follow the trend or not. Overall, over time I ended up choosing to go with the trend.

    I do have two accounts though but partly to trade different time frames or even varying amounts of money.
  4. NoDoji


    This is intriguing. Every trend contains pullbacks. By siding with the long-term trend in one account, and then counter-trend trading the pullbacks short term in another account, it seems you significantly reduce overall risk and profit short term while still allowing a winner to run.