Mjt ---- I might suggest you reread Tharp's excerpt and then test his proposition yourself. I've run several dozen 500-1000 trade simulations on the S&P over many years and in each one Tharp's position is proven correct, often by a big margin. As to whether markets trend more or chop more ----- that's in the eye of the beholder, but I'll put my faith in the bedrock of the long-term probabilities as measured by simulations. Data is virtually infinite, but you don't need to test infinite amounts of data to draw a reasonable mathetmatical conclusion, just enough to account for a very wide margin of standard deviation. And you misinterpret ---- scaling out of positions is not *wrong* (it may be psychologically very right!)----- but I think if you put it to the test you will find that it is simply not mathematically optimal over an extended series of trades.
On everything well I'm "DR" Tharp's son. I also tend to only daytrade and have a very small timeframe (only about 10% of positions are ever held overnight) I tend to risk about 2% on my trades. If there is a lot of momentum. I will add to the position very quickly so I might even have 4-5% when it is working. From that point on for the rest of the day I'm reducing my risk. I have no ticket charges so it makes it easier to sell parts of my position. There aren't many securities that move 10 points daily anymore in this market. In fact 3 points is a lot for the average daily move. What I usually do is sell 70% of if the moves I'm in starts to become parabolic. (I'm seeing it move in a 90degree angle on a one minute chart (I prefer 45 degrees) I will then let the other part ride. This usually allows me to sell 70% near the high (I've noticed I'm more right lately with the market conditions) but if it retraces heavily which markets do when extremes happen I won't lose everything I just made. I am doing this in our current market conditions because no real trend or momentum exists. When a trending market starts to develop I'll be still peeling off positions but a lot less sooner. Robert Tharp aka rtharp
I do wish to emphasize two things things about scaling out of positions. First, ultimately it all depends on whether you have what Tharp calls a positive or negative expectancy. If you have a losing system or method (or, in most cases, no disciplined method at all), then scaling out of winners is definitely a good idea ----- it will reduce your losses. The worse your system, the greater the improvement by taking partial profits on what winners you do have. (Of course, you really shouldn't be trading at all if you have negative expectancy!) But the greater your positive expectancy, the higher your profit ratio while trading with a full position, the greater the degree to which scaling out will degrade your profits. In effect, scaling out represents a reversion to zero ------ limiting both losses and profits. Second, in my own trading, I use an array of sophisticated adaptive moving averages as trailing stops. This is by far the best way I've ever encountered to set precise stops ----there's no guess work involved, or using factors like profit targets or prices which may have nothing to do with what market action is dictating. Part of this whole discussion really revolves around what is precisely the best price at which to take profits (whether on full or partial positions) and I've found (again through extensive testing) that adaptive moving averages do an exceptional job in maximizing gains, which enables me to get all of the benefits of keeping full poitions, while reducing much of the downside by giving me a precise exit point based exclusively on the market's own action from tick to tick.
Armaniman, Could you elaborate a little more on your adaptive moving averages? Sounds like the best idea rather than just using a percentage or number of points for stops. I'm curious to see an example. What software do you use etc. Thanks.