Reducing Size after Extreme Profitability

Discussion in 'Risk Management' started by oldtime, Oct 3, 2011.

  1. I'm confused... Aren't you talking about after the trade is over? You want to add to the trade when it's working but when you are out and onto the next trade do you reduce size? Wouldn't you just do what you usually do? Sometimes on the rare occasion when I have one of those trades that can make your whole month I'll take a day off and not even look at anything until that feeling of invincibility is gone and I'm scared of risk again.
    #11     Oct 7, 2011
  2. no, I was talking about after an unusually long string of back to back winning trades.

    Actually, I asked the same question about increasing size after many back to back losers on another thread, and I just wanted to see if I would get different answers when talking about winning vs losing.
    #12     Oct 7, 2011
  3. Provided as some others have stated that you're risking not a fixed amount, a fixed % of your equity, which could either be core equity, or total equity. In the core equity the % will be the same as long as you aren't in a drawdown. In the total equity as account increases the amount risked increases as 1% becomes larger with the growth of account using a fixed percentage. While in drawdown it decreases helping to conserve capital, till there is a return to profitability.

    Example $100,000 = $1000, as it increases to $110,000 = $1100.
    The inverse would occur in a drawdown situation. A 10% drawdown has one only risking $900.

    I believe this is a fairly conservative strategy, and upwards of 2-2.5% is acceptable dependent upon the parameters one has defined within the confines of the strategic objectives of the system, or systems. More conservative would be in the .25-.50% range.

    However this works best for those who have defined who, what, how, why they are trading. Applying the rules in a disciplined and consistent fashion will allow one to obtain the long term expectancy of the system, while minimizing the adversity that comes with trading.

    In essence you are increasing, and decreasing as you go. Why one would ever reduce or increase based solely upon a series of wins or losses is purely a psychological bias. As each trade is independent of the trade before it, as will be the one after it.
    #13     Oct 8, 2011
  4. yeah, that's what I said, the coin has no memory and doesn't know it just landed on tails 12 times in a row.

    otherwise, I never reduce size in a drawdown. Kind of hard to dig yourself out of a hole with half the size.

    As far as increasing size when account builds, no problem, I just sweep my account. If I think I'm doing so great then I just make one more deposit and that becomes my new account size and everything gets adjusted and the whole thing starts up all over again.

    When I was young I just let my account build figuring it was better to pay the penalty and trade the IRS's quarterly cut.
    #14     Oct 8, 2011
  5. i view 5% as a puke point or the point at which i throw in the towel if i'm down that much on any given day.

    i increase my puke point's size every time i reach a new high p&l by a puke point. (ie if my account was 20k and i was risking 1k / day, once i grew the account to 21k i'd then risk 1050 the next day)

    i decrease my puke point during drawdowns only after i face a drawdown of 6 puke points and then i resize to 5% of the account. (ie if i was trading at 1k/day on a 20k account and lost 6 puke points down to 14k i'd resize my pukepoint to 700$ at that point)

    this aggressive leveraging up allows me to grow my account as quickly as i can, while at the same time i am not nearly as aggressive in decreasing my size so that the vast majority of drawdowns i'll be digging my way out of the hole i dug with the same size shovel. in the rare case of extreme drawdowns i resize do lower my size to try and conserve capital.

    this has worked quite well for me over my career and although the size pukepoint i use may not be what others feel comfortable with, i'd recommend people play with the numbers and adjust this strategy to match their own. aggressively sizing up and not-quite-so-aggressively decreasing size in the proper way can maximize your potential returns in my opinion.
    #15     Oct 8, 2011
  6. newwurldmn


    Depends on if your strategy is truely independent or has memory. If you are a scalper where theoretically each trade is independent of the previous one, then you shouldn't. But if you trading spreads where they get wider or revert for profit to you you should reduce your risk because then some dynamic has changed in the market place to allow your strategy to work phenominally well and that can easily change back to a more neutral environment.
    #16     Oct 8, 2011
  7. Backtesting shows this to be a very effective method in every market I've ever tested.

    #17     Oct 8, 2011
  8. yes, especially the part about breaking the mathematics. thanks tomdavis, that's really what I was wondering. Has anyone just tested it. Apparently you have and that's good enough for me.
    #18     Oct 8, 2011
  9. right,that's exactly the way I did it when I was daytrading one market. But now I have a portfolio which I hold sometimes a few minutes, but sometimes more than a week, so my strategy doesn't know if I'm having a good or bad day. All positions are usually exactly the same size, so if I start changing one I have to change them all, otherwise I lose my diversity. I like what elecectroniclocal said, you just never know, that long string of winners may just be needed to cover a long string of losses so just stay with the same size. Let it play out over time and don't try to second guess what's going to happen based on what just did happen. That's why we think about these things on Saturday when we are of sound mind and body. Taking a big profit on Thursday afternoon is usually the one that does me in. Then I'm too scared to put anything on on Friday because I wanted to brag I was up for the week.
    #19     Oct 8, 2011
  10. I learned it from a successful options trader back in the late 1990s. After a lot of testing, I started using it for all my trading. In theory there may be more "optimal" methods, but from a practical standpoint I've never found anything better.

    #20     Oct 8, 2011