Trading Winning Positions - The optimal approach

Discussion in 'Strategy Development' started by mschey, Feb 16, 2006.

  1. Hello:

    I think a couple of things should be said

    I notice that most retail traders direct their attention to setups and entries.

    Commentary about stops, position sizing, position management and exits is almost never the primary subject of a thread here.

    Ironically, these issues are significant and interestingly, people seem to have little to say. You comment that people here are "tight lipped". I think not. I believe that most ET members are unable to offer anything of substance on the subject.

    As I move on in time, I have tended to go believe that widers stops are more effective for daytrading. I found long ago, that knowing what the best stop size is, and trading it are two different things.

    As regards adding to a profitable position. I was taught the same strategy as Acrary. In addition, I try to incorporate a couple of ideas as follows;

    1. Add when price moves past a significant resistance (pivot, or resistance).
    2. When you have a profitable entry, add on the first pullback

    Finally, I add based on an analysis of my market. What I mean is for the Russell contract, I know from experience what the average length of line is for each intraday swing. I will only add early on, so that I can take as much profit as possible when it works out. If I have a significant profit, and I am close to the point where normally I might close out, I will not risk it. Instead I will exit all but a small piece just in case it continues to run.

    My overall philosophy is to make sure that my average winner is much bigger than my average loser.

    I hope that helps.

    Steve
     
    #11     Feb 18, 2006
  2. acrary

    acrary

    My post on adding to a winner is only valid if you adjust your stop as the trade goes in your favor. But what if the system you develop uses a fixed stop that doesn't change during the trade? In other words I'm putting on this trade with my stop. I'm holding until I'm either stopped out or I get a exit signal from my system.

    If that's the case you can do tests with adding to a position to see how good your entry is. To evaluate improvement I'm going to look at the profit factor of the system. (I made a case for judging a system by profit factor and trading frequency in my system devel. thread.) I know if I increase the PF while keeping all else equal, I'll make more money and more consistent performance.

    I'll work through a example system to show what I mean about using add-on trades as a tool.

    Here's my old discard system dsc389 used on the NQ market from 2002-2005 to use as a baseline. Notice it's using 10 contracts per trade.
     
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    #12     Feb 20, 2006
    Newc2 likes this.
  3. acrary

    acrary

    Before I get going I wanted to address a pm I got on why not just add to a position when it's underwater if the overall method is profitable. The old dollar cost averaging approach to trading.

    Here's a add to the base system when the position is underwater. From it, you can see it does nothing good for the system. The profits, profit factor, drawdown, and % winners are all going the wrong way. This is why you don't add to a position when it's underwater.
     
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    #13     Feb 20, 2006
  4. acrary

    acrary

    Here I'm adding a small amount of 2 contracts to the position when it's winning by a certain amount. You can see it improves the profit factor a little bit. Since I know the stop is fixed this tells me the second entry was better than the initial entry.
     
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    #14     Feb 20, 2006
  5. acrary

    acrary

    To show that the second entry is better than the first I'll add the same number of contracts as I did in the initial entry. This shows the improvement in profit factor more clearly.
     
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    #15     Feb 20, 2006
  6. acrary

    acrary

    With the knowledge that the second entry is better than the initial entry I could just enter one contract initially and then the other 11 with the second add. By doing so you get to see the full effect of using the second entry instead of the first.
     
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    #16     Feb 20, 2006
  7. acrary

    acrary

    In real trading I could just leave the system as is and use the first entry as a signal that the second is coming up. It'd be easy to frontrun the second signal and boost the overall trading to a PF above 2 using a little discretionary trading.

    Anyway, I just wanted to add that you can try using the addition to a winner process to see if you can improve your initial entry. In this case you could see a pretty good improvement.
     
    #17     Feb 20, 2006
  8. I also find it very important to know where in the lifes trend you are.

    I prefer tighter stops later in the trend and looser stops in the beginning.
     
    #18     Feb 20, 2006
  9. achilles28

    achilles28

    Thanks for sharing, acrary. Can we assume your posted example exhibits dependency between trades?
     
    #19     Feb 20, 2006
  10. I am getting different results that suggest building into a position as a trade goes against you is better. Perhaps this rule is system dependent?

    Using a contrarian strategy for range bound markets (sell on local maximums, buy on local minimums) I get the following results:

    Buy/Sell 3 contracts at trade initiation:

    Net Profit: $587,100
    Max Draw Down: $68,070
    Net Profit / Max Draw Down: 8.62
    Profit Factor: 4.74
    Number of Trades: 66
    Periods Profitable: 61%


    Buy/Sell 1 Contact at trade initiation and as trades enters a draw down. Max 3 contracts held:

    Net Profit: $545,990
    Max Draw Down: $59,160
    Net Profit / Max Draw Down: 9.23
    Profit Factor: 5.60
    Number of Trades: 172
    Periods Profitable: 68%

    My profit factor, number of trades and number of profitable periods increases when I build into positions during draw downs.

    I will also perform this test on a trending strategy.

    Granville
     
    #20     Feb 20, 2006