Riding Winners

Discussion in 'Risk Management' started by wyndtrader, Dec 17, 2009.

  1. Much has been written of the importance of cutting losses and riding winners.

    I have been working on a short-term trading strategy (mostly day-trades, some held for a few days), and have thus far been pleased with my conditions for entering trades and my conditions for placing stop-losses. However, I have not yet been able to decide upon the best means for exiting profitable trades.

    I would be interested in hearing how people have successfully solved this problem in their own short-term trading, especially in terms of how much you allow the market to drop before exiting (do you make allowances for volatility), do you raise your stop-losses as your position becomes profitable, and do you exit a position all at once, or cut back as you perceive the position to become more risky.

    Thanks in advance,

  2. I'm a strong believer that the exit strategy should have some commonality with the entry strategy. The same is true with the trade management of stops after entry...they too should have commonality with the entry strategy.

    Therefore, take a closer look at those components of your entry signal to redesign your exit strategy and your stop loss management. Also, I think the main problem that we as traders have with trying to let winners run is that most traders tend to use fixed profit targets.

    The flaw with that is that it's usually a number based upon some info prior to entry instead of being based upon some info after entry. Further, fixed targets makes the assumption that the price action will not receive any new market inputs (breaking news, economic report releases, global economic events, FED actions et cetera). That's a false assumption to keep us married to the initial profit target.

    Simply, we tend to fail at adapting or changing the plans when the conditions are still in our favor when profit targets are reached or when conditions improve via new market inputs as mention above. Therefore, the question is how do we know that the price action is still in our favor or has changed for the better in direction of our trade when profit targets are reached ???

    Answer for many (not all) is market experience and understanding the fundamentals behind the reasons why you enter the trade in the first place (I'm not talking about TA stuff). Thus, it's something you got to learn on your own and it should take many years because you better than any one else understand your entry signal.

    Last of all, just being able to let a few trades run beyond the initial profit target will give a big boost to you profit curve even if your win:loss remains the same. Thus, you aren't going to be able to maximize every trade...you just want a few more in comparison to what you use to do.

  3. Let see some exact formula to attempt to quantify this concept.
  4. Depending upon your stock selection criteria that is not difficult to do.

    If you read the longer post above (NihabaAshi), you see where ommissions in selection criteria can necessitate compensatory measures.

    The general formula that handles the rational thinking process is well known and findamental (compound interest formula). If criteria is tied to the formula, then the priorities for improving trading effectiveness and efficiency come to the fore (optimizing riding winners).

    Another alternative is to eliminate the downside risks by ranking them according to the damage they are doing.

    So it comes down to incorporating a strategy that will take the makret's offer that is available. The following ranked considerations solve your and the OP's stated problems.

    1. Always make or have cash available to take opportunities.

    2. Maximize the cycles per year in trading profit segments of instruments.

    3. Minimize risk by entering late.

    Subtending these are facilitating considerations:

    4. During RTH's monitor properly.

    5. Exit when a hold is marginally less effective than a timely opportunity.

    6. Do weekly planning in order to have the trades for the week in view.

    7. Always have some potential back up stocks available to substitute in the plan of 5.

    8. Always have your Universe in the picture and available (sorts) by current individual leading indicator performance criteria.

    The nitty gritty is in the depth of the above.

    Selecting the Universe is a qualty control issue and all instruments in the Universe behave the same way. The criteria for making money is found on the Universe master list in every way to take care of the above items.

    An optimum trader is doing as many turns as possible and each profit segment is tuned to the optimum money velocity available. This eliminates having to have a stop loss strategy. Every trade makes the maximum money possible because it is in competition with all other opportuniies available.

    By looking at the decription of a trader's activity while doing the above, a picture of how the items got positioned where they did. Write out how the year unfolded for the last 12 months. The following have to be happening:

    1. The number of cycles is increasing because shorter duration trades are occurring.

    2. The profit per cycle is also improving.

    3. Idle cash has been minimized.

    Substantively, this looks like about 100 cycles per year and a profit of over 10% a cycle. Capital streams are being added by dividing streams that get too combersome by having to do too many partials fills to not disturb the market capacity and flow. In the past, prints have been posted of this performance using an ATS. The data was an average hold of 6.6 days and an average profit segment of 11.1% per segment.

    The Universe is documented by having all the work done that describes the character of each instrument in terms of the ranked items above. No instrument gets into the Universe without being "qualified". the Universe member all perform roughly the same and they are culled from over 15,000 inital listings.

    This means that the profit segment of each member is roughly uniform during the integration of three variable internal cycles that make up the observable cycle. For me it is the "natural cycle". The profit segment has a known money velocity and duration. The profit cycle repeats at a known frequency. This is on the Excel Universe and is capable of being sorted for various purposes. One column is always devoted to the next beginning date of the neaxt profit cycle.

    To make it onto the list, a repeatability test has to be passed.

    Regarding three variables cause, the complete cycle to be divided into 8 parts. Therefore a half cycle contains 4 parts and these cause three price moves within the profit segment.

    Optimizing taking the maximum money velocity means choosing the portion of the cycle that eliminates the least effective money making. fortunately, these places are exidentiary in nature; that is they can be seen.

    Position trading a 100 cycles a year is best seen by looking into a daily chart and using the next faster observable fractal where the parts of the cycle are displayed in terms of the three variables.

    The variables contribute intracycles in a ratio of 2:1 as adjacent frequencies are considered; simplicity personified. Over all in terms ot the price cycle the ratios are 1:2:4 for P, V and A/D respectively. The optimum trade is ADA, respectively. Sitting out the other 5 parts DADAD, is the down cycle and the inefficient portion (unless you do short trading and there you use just the ADA portion. This is called front running and traders who do it are easily recognized by govenment agencies who monitor multiple account "bunch" trading.

    If the government can do it, then there IS a specific, prima facia, formula for qualifying making money but not holding winners. Holding winner to extract all their momentum is inefficient after a certain point. The point is observable when A turns to D and the instrument coasts to its extreme as momentum wanes.

    As people learn to trade, they change their ways as seen by the nature of the posts in ET.

    Drilling down to observe the three prices moves in position trading is best done on the 30 minute chart. For carving the crossover of a held stock ending and going into a new stock that has gone from D to A in the beginning of ADA. Cross over can be done by looking at the second derivative of each. As they go through 0, they are proceeding with opposite signs and that is handled easily with ATS deductive type logic.

    So in optimum trading exits are NOT determined by looking at one instrument but are, instead, determined by looking at the instruments competing for the scarce capital already making money.

    For those who have moved to the understanding of long versus short money velocities, the above can be adjusted to move up to the next level of money velocity.

    So the specific equation comes down to a binary logic equation and it is based on statistically derived derivatives with respect to time, all of which are binary vectors.

    For those familiar with using the "pattern", simply use a 15 or 30 minute chart and trade fom the R2R 2B 2R ending FTT to the FTT ending the B2B 2R 2B pattern. Or for more time efficiency, hold off the entry until the BO of the RTL of the short at which time the A of the ADA begins.

    The object is to trade short term prifit segments and the have the tie breaker for equal duration potential holds be the rank (money velocity of the instrument).

    Doing two turns a week gives the riding winners new meaning. This is an exponent of 100 in the compound interest formula where getting half the price move comes down to an average of over 10% in the half week hold period.

    By dividing 8 into the 100 you get the number of capital doublings per year using the two specific formulae. This means that the earnest trader can start with any amount of money and he can learn to trade in a few weeks or a month or two. Elsewhere there is a myth of needing 10,000 hours to learn and be expert.

    To the government, this type of trading resembles, mathematically, "insider trading". The riding winners is better ended by usi8ng the A to D detector rather than the end of momentum detector. Maybe some momentum traders can kick in their momentum equations for those who do not do opotimum trading.

  5. Different traders have different opinions on when the optimal points to take profit occur in a trade. For me, I've realized that scaling out at multiple price levels helps my psychology a thousand percent, which in turn boosts my consistency over time.

    For instance, if Im riding out a profitable long position, and have not taken any off yet, my brain will overthink things and make me uneasy, because at any point the market could take my paper profits back. However, if i scale out of even a small portion, locking in some gains, all of a sudden im 100% more confident to let the large portion ride out. It's more of a mental trick than a probability based edge.

    Also, it makes the most sense to me to unload portions at prices that could be potential reversal inflection points (ie Sup/Res). I don't know in advance if a reversal will occur for sure, but i can tell at what levels atleast a temporary reversal is probable, such as whole and half dollars, pivots (for ETFs more than stocks), major daily support lvls, and daily 20sma, 50sma, and 200sma. Scaling out right in front of these levels makes me feel like Im out smarting the market. Again, all psychological.
  6. I use technical stops like S&R, patterns, Fibo levels, as well as a cumulative 10% stop from the peak equity value based on the close.
  7. dirkd


    one thing that has helped me hold my winners a bit longer is just watching the candlestick bars. if im short at a resistance level i will ride the market down(as long as im profitable) using the current bars high + 1 tick as my stop. I let it go where it wants and just follor the bars. i always have a profit objective and will get out when it hits my level. dont be greedy but try and hold your winners a bit longer and also know where you will get out if you are wrong.
  8. The real question I see often asked is how to determine the price action is still in your favor when profit target has been reached.

    Thus, some traders have problems staying (riding a winner) in a trade before it reach a profit target. In contrast, other traders have problems staying (riding a winner) in a trade beyond the profit target.

    The answer is market experience and screen time...it's something that can't be taught.

  9. No.Heat


    Use a size that is divisible by 2 or that you can split into half.

    Now set two targets, one should be an easy to achieve target that does not require market extraordinary events to be hit. Once this is hit, adjust your stop and leave half of your size for the breakout trade.

    That's how I do it, there are probably better ways, but I cannot speak of what I don't know.

    No Heat
  10. Redneck


    And here’s another way – no better or worse – just different

    You have setup(s) to enter a trade/ position (I assume)

    Why can’t you use the same setup(s) to exit a trade (while also simultaneously identifying a new trade/ position)

    A bit counterintuitive no doubt - and it requires you remain absolutely objective

    Your ("riding winners", aka taking profit) should always match your trading style – with the option of remaining in longer should you get a sudden windfall – I believe (otherwise you're getting greedy and that'll kill a trader quicker than you can blink)

    BTW – The divide by 2 also works well - as long as you can stand the initial risk and are willing to lose it


    #10     Dec 23, 2009