There are certainly too many of my losing trades that went down 2K and still came back up. I meet that a lot in my contrarian plays. To me it still boils down to reward/risk over the expected time-frame. I have a hard 10% (of account) limit on my stock trades. I know that is way more than most people could handle. If my exposure is right in the first place (and consistent) I do not usually fear the size of the loss. It is when I add on to losing positions most of the terrible things happen. I understand that if you are trading with leverage (say 10:1, 20:1) as in futures, it is inevitable you must have a hard stop loss, so as to be able to play another day. It is hard to set stop rules on options, given the rate they decline. Moreover I do not like placing market orders on options, because of the slippage. In my opinion, my exposure (percentage of account used) effectively constitutes my maximum stop loss. If I use 10% of account on an option I intend to hold for multiple days, I should be prepared to lose that much. In effect, if I intend to hold overnight, I make sure my exposure is small.
My trades are normally based on the premise that over a given time-frame (normally till end of day) the reward/risk justifies the trade. I only put a hard stop for stock when my account is threatened (10% rule). Otherwise I judge the situation and take action when I think my initial expectation was wrong. Having said this, some of my strategies do not have the "edge" I thought they did - the results show it. Add to that negative impact due to slippage, excess leverage, adding to losers, commissions, taking profits too soon while allowing losers full time, and some rule violations, and the impact on my account is obvious.
When I said earlier had I stuck to my two top strategies (out of more than a dozen) my account would have been up more than 100%, I said so using actual trade results. As of the end of last week, my top strategy made $54,795 (53.4%) while the next made $26,737 (26%). My computation of greater than 100% is based on the effect of compounding the individual gains (in the absence of the other strategies). It hasn't been a good year so far, but I am determined to get a decent return (1.2million is probably out of the question) for the remainder of the year.
Regarding taking profits too soon, do you simply pick a point in time that you're pleased with the existing profit and exit the trade at the going rate? Or do you choose a target in advance? In the past I've often changed my protective hard stop to a tight trailing stop once my trade is reasonably profitable, because I want to exit at least close to the current profit level, but also want to ride it as far as possible. This has worked well for me on high volume options. I don't get out at the top, but I often get more than I initially bargained for. I'm currently trading AAPL and it's very liquid, tight spreads, and moves in solid trajectories up and down, so I feel good about setting a pretty tight trailing stop. But I've certainly lost spare profits to serious slippage on less liquid options.
Weekly Update for week 27 ended 07/19/2008 The bleeding continues, down 9.6K (8%). The biggest one was from BIDU (BIDU CALL) on Monday that sent me down 7K. That was pre-mature. Other than that, it was program bugs on Tuesday that sent me down another 3K (Kept buying and selling a certain option at market, incurring commission and slippage, until I stopped it). I hope the worst is over, and I can plan towards a recovery. Code: Opening Balance: 119,020 Net loss for the week -9,606 ------------------------------------------------ Net Balance: 109,414 Number of Trades 39 Number of Profitable Trades 19 Since Inception of Thread 01/13/2008 - 07/19/2008 Opening Balance: 102,615 Net gain (Less Margin Interest) 11,799 ------------------------------------------------ Balance Before Withdrawal: 114,414 (Up 11.5%) Cash Withdrawal -5,000 ------------------------------------------------ Net Balance 109,414 Number of Trades 632 Number of Profitable Trades 352 Expected Balance at this time to be on track for Year-End Target : 387,264 Status: Behind Target (Based on adjusted balance before withdrawals)