Trading Winning Positions - The optimal approach

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

  1. tomorton


    Love it, this is exactly the point of pyramiding in a trend-following trade.

    I use the length and consistency ("smoothness") of the trend as optional criteria and the points score these contribute to gives me preference towards those charts. Using the straightforward % price change in x days is often a misleading statistic.
    #41     Feb 6, 2018
    Newc2 likes this.
  2. This doesn't sound like you are very confident in your positions.

    Enter, if it goes in my direction keep adding. Picture you adding at 20 with an exit at 19, it goes to 21 and you buy one more. If you move your stop up to 20 your risk is now 2, not 1. Here, an equal move against you will have more loss than you would originally. You have to move the exit to 20.5 in this case.

    The math that you mentioned is wrong.
    #42     Feb 6, 2018
  3. Then if you add another one at 22 you have to move the stop to under 1 away.
    #43     Feb 6, 2018
  4. Cat88


    if i bought at 20 and exit at 20 then there is no loss aside from transaction costs. If I bought one at 21 and exit at 20, then the loss is 1 unit.

    looking at it another way - when the price got up to 21, the stop is moved to 20, so you have a unit at bought at 20 and a unit bought at 21.

    The average price is 20.5, if you exit 2 units at 20 then 0.5 * 2 = 1 unit loss.
    #44     Feb 6, 2018
  5. Cat88


    Also whether you are 'confident' or not in your positions is totally down to your personality and system.

    A mechanical trader (which this approach sounds like it is) would say being confident is irrelevant because they are simply following a procedure which is expected to get stopped out at some point (either profitably or not).

    A discretionary trader would need to be confident because they rely on their superior judgement but you would need to know the person is a discretionary trader to assume that confidence is meaningful to them.

    Also confidence in a 'position' is an interesting choice of words. I would say confidence in your own judgement is more important because confidence in a position suggests you know it will be a winner and that's why you are going to hold on. Whereas confidence in your judgement in your ability would make it easier to say "that was a bad call, I'm going to walk away" because you no longer have confidence in your position (but you do have confidence in your judgement to know that this particular trade is not going the way you envisioned it might).
    #45     Feb 6, 2018
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  6. tomorton


    No. For one thing, no judgement is required with regards a particular trade. If the chart set-up matches the pre-determined parameters for a trend-following buy, then its a buy. I don't trouble over entry patterns as long as not buying at a new high. All trades are of equal stake. All trades have a pyramid order set as soon as opened, no judgement is required on this.

    Secondly, a new trade is only added when the SL on the one before can be moved higher to balance the new risk. So, as Cat88 says -
    buy Trade 1 at 20 with SL at 19: account capital risk = -1
    buy Trade 2 at 21 with SL at 20, move Trade 1 SL to 20: total account capital risk = -1
    buy Trade 3 at 22 with SL at 21, move SL Trade 1 to 21, move SL Trade 2 to 21: total account capital risk = 0

    From this point there is never any account capital risk arising from additional trades but the profit side increases parabolically.
    #46     Feb 7, 2018
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  7. Your math above is wrong.

    Buy 1 at 20, SL 19, loss 1.
    Buy 1 at 21, you are now long 2 at 20.5 and your stop has to be 20.
    Buy 1 at 22, and you are now long 3 at 21. Your stop has to be 20 2/3.
    #47     Feb 9, 2018
    bpr likes this.
  8. tomorton


    This is a great objection, thank you for the thought you've put into this. Most teachers of trading would go along with your view, accepting that a major objective is to use the SL to protect the unrealised gains: but that isn't a primary objective for me.

    The key point of departure is in how you regard the trades. The idea is to treat added positions as NOT being aggregated. So you treat it not as a progressively larger and larger position, which needs an increasingly tighter SL, but always an increasing number of parallel positions of equal size.

    So, the distance in points / pips from last entry to my SL is never changed. This does lead to significant loss of unrealised gains when my new SL is hit, but it also means that the SL distance does not get progressively narrower and therefore increasingly likely to be hit before the trend gets to a really serious correction. As in your example, the SL is already getting considerably narrower after just 3 trades: after 6 or 7 it would be likely to be hit by just mild volatility.
    #48     Feb 10, 2018
    Newc2 and bpr like this.
  9. Exactly why I don't add to winning trades.

    Listen, you're talking to a guy who understands that being long and short at the same time is not the same as having a smaller position open in one direction. I get that even though the math is the same, they're not the same. I get that not combining all your positions into one is different than how I did it, even though they calculate out the same.

    I cannot imagine a system in which you keep adding when it's going in your favor. Buy at 50, it goes to 51 so you buy another, it goes to 52 so you buy another. Really? Do you just treat them separately? Contract is now down to 51, what do you do? You're net even, +1, +0, -1.
    #49     Feb 12, 2018
  10. tomorton


    Yes that's right, you treat all the trades as separate - my platform allows me to display them as separate trades but other platforms might need a bit of record-keeping. But this can be done in advance once you know the distance to the SL from the entry of the first trade - after that, the gap is always the same.

    The objective is to increase the aggregated position size but without increasing account capital risked. However, I know the account capital maximum is at risk for longer and the unrealised gains are at risk of significant top-slicing. But I find and feel - and more importantly calculate - that the parabolic increase in profits is worth these downsides.
    #50     Feb 12, 2018