Just thinking out loud, would appreciate opinions. What are basic elements of trade risk? Of those that we can control, two major elements are position size and position duration (time in trade). I suppose we can safely assume that for all markets, with few exceptions, the likelihood of X ---> X+2 is greater than that of X ---> X+4. We can also assume that the time required for X ---> X+2 will be shorter than X ---> X+4. Let's also assume here that market liquidity is sufficient enough that doubling our trading size will have negligible impact on slippage. Given the above, would it be feasible/appropriate/beneficial to think of altering the risk profile of one's trading in general in the following manner: double the size taken on a trade, in exchange for halving the target? I'm not so much interested in this idea for the statistical angle (ie, expectancy, which I'd assume this idea would reduce) or for direct numerical comparisons with/without, but more "philosophically" as an adaptation for better exploiting my 'edge' -- maximizing my strengths and minimizing my weaknesses.. The idea behind it is to skew or bring forward my risk on a trade closer in time towards my entries where I am most confident and "away" from my exits where I am least confident -- or more accurately, reducing time risk in exchange for size risk. Does this make sense? (Yes partial exits would achieve a similar objective but like I said just thinking aloud on the justification behind it).
i see what you mean. i guess one thing that comes to mind is the transaction costs. if targets are smaller and size is larger, i guess comms and slip effects increase. maybe vulnerability to shakeouts is a little higher too and not scalar in a linear fashion when actual trades are made. there's an equilibrium point where the profit factor and slip allow you to maximize the opportuntity while still trading comfortably. just some thoughts on the idea
My $0.03: $0.01 = Your risk is function only of your size, entry and stop-loss. Time is not a factor, except if you want to take in consideration the cost of money. $0.01 = Price velocity (slope) is by no approximation constant even on a pretty well defined trend. So you can't double one and halve the other without substantially affecting your profit. $0.01 = Fading in and out the trade changes your risk profile during the trade, but your maximum size should be determined only by your stop loss and your accepted risk (as percentage of your account).
Well, what you propose would increase the percentage of wins, since a lower target is easier to hit. To compensate for the smaller size wins you suggest increasing position size. But as mentioned above, this also would dependon where your stop is and what your actual 'risk' is. If you reduce your upside target but keep the stop the same, then you will actually be increasing your risk significantly by whatever greater position size you are taking on, since if you do get stopped out, your Average Loss Size would be greater. On the other hand, if you were to tighten stops as well as tighten target exit prices, then you would be able to maintain or shrink risk while going for higher hit rates. However, the hit rates go for both sides.. so you run the risk of getting stopped out as well. All in all, like mentioned above, you must know what your target entry and exits are, as well as where your stop is. Only then can you change position size relative to your risk. EDIT: As to address the 'time' aspect of this, I am actually working on something similar... basically the 'opportunity cost' of holding on to a position that isn't going anywhere... IE you could theoretically keep rotating your money into stocks for example that are moving nicely... kind of like scalping; guaranteed .5% or 1% hits, over and over and over. This is all related to velocity of a price movement...(as opposed to volatility). This is a very tricky and difficult task to do because you run more transaction costs and also slippage, but also you risk missing out if the stock moves on you after you exit.
The term 'opportunity cost' has a different relevance for me. I am never close to maxing out on buying power, even on multiple positions, so it is not a case of needing to shift funds out of one trade into another. The "cost" for me is in the next "opportunity", literally speaking -- the longer I hold a position, the more deterioration of objectivity takes place, and the less capable I am in finding the next trade most likely going the opposite way (btw I trade the same 3 or 4 markets day in, day out, so directional bias tends to be a problem for me -- yes, it's something I'm working very hard at fixing). If it clears things up a bit from where I'm coming from, I never conceive of my trades in terms of risk/reward, average profits, win-loss ratios etc; the numbers statistically don't really carry much meaning in my case. For example, my risk/reward ratio is probably a bit higher than the norm: if I were to figure it out, 10-20 to 1 is not an uncomfortable ratio for me to work with, and this applies to time in trade as well (I am usually stopped out within a few minutes if not seconds, while I tend to keep positions from several days to a couple weeks at the most). Whether or not that ratio gets cut in half, or my "hit ratio" doubles, is incidental to me; as I said earlier, I'm more interested in the idea behind being more "aggressive" via initial size as a way of actually decreasing my overall risk.
One further 'pre-emptive' note. Yes, I realize I may be going about things ass-backwards: if I didn't suffer from positional bias, most likely none of this would be an issue at all. But right now I just don't have the solution for it the way that I trade, so this is my way of trying to deal in the meantime. It would be alot easier to "love em and leave em" if I were just trading random stocks that showed up on a daily screener, but that's not the case here.
================== Illiquid; Probably the other side of the coin, but like a well measured, crystal clear direction,[ or time to stay out]; so time is generally on my side. If its a swing /position trade, late entry is fine; but dont like many entrys last half hour intraday trades. Doubling size & halving profit profit sounds, if I understand you rightly???, sounds about twice as risky, over much time./trades. Partial profits fine. In other words surely size is greater risk than time; because even the best hit rate percentages, losses have to be cut. Might work well with bank CD, good idea there Hope this helps.
I use vanilla fixed fractional size... everytime I try variable size, it got me into trouble over time. My concept of time is what I got from Mark Fisher's stuff. If price doesn't move for a long time, the bus people will get in and that price is bounded NOT to be the best price and will get whipsawed two way when the market resume its move. I am more of a knife catcher in ES. IF I can live with quick death, I don't see why it is more dangerous than buying pullback or breakout. Just make sure you don't keep running in front of the same train.
Yeah I could maintain the same objective by leaving size alone and partialing out half way. But one reason I'm going this route of doubling size is that I'm trying to convince myself to trade larger in the first place when all my ducks line up. Pyramiding isn't my strong suit and has always gotten me into more trouble than not, for reasons that I expained above.