OP, I'm actually quite curious about this. So let's say you are short and then instead of being stopped out, you go long. How do you exit out of your long position? Is there a stop for your long position?
or let's just say you're spread because you can't take it anymore, up or down you don't care, but then is there a stop for your spread? Oh no, no need to stop your spread, you can just hedge it (preferably with some very complicated option strategy.) Surely there must be some way to make money when I'm long and it goes down or I'm short and it goes up. Otherwise I'm back where I started hoping I guessed right.
Your decision process is exactly what it would be anyhow. Do you want to reenter the trade? The only difference is that you have bought yourself some time to think. As a result your loss is no greater than the original stop and can be significantly less. It also smoothes out the sharp sudden moves in the price. So often on a particular candle, i'll see a huge high or low that is way above ( or below ) the open and the close. You eliminate being forced out of the trade by these sudden moves. You may not want to exit your trade on Friday. However, over the weekend there can be a sudden change in price. If you hedge your position, you will lock in Friday's closing price. If there has been a sudden change, you can exit the trade without any losses.
90% of what I do is just money management, and that's all you're talking about, but no amount of money management can make you money if you guess wrong. It's easy when you see these idiots studying their charts and indicators only to achieve results about the same as a coin flip to think you can beat the market with some kind of magical spread or hedge or money management program. But the truth is you still need to guess right. So use 90% of your brain on the hedge, but save 10% for reading the market. After you've been turned down, slapped in the face and embarassed by enough women at the bar you begin to hope there is some magic way to get one without having to read them.
Of course. I am not denying this. Even with the hedge, you are still having to make a decision that involves reading the market. Ok, so your stop was hit. Was your trade bad, or did you set your stop incorrectly? I think there is a real benefit to being able to sit there for a little while and watch the market before you make this decision without incurring greater losses. If the market goes back in your favour, you can remove the hedge. Depending on the timing, you can eliminate (reduce) that loss and realize your original expected profit.
... and the "coin flip" idea is interesting. I wonder greatly if the "coin flip" together with good money management is profitable.
no, we've all tried that. But it is usually the way most start to test their money management systems. There are functions called Monte Carlo or Random Entry that you use to test your money management, hedge or spread strategies. But I have never found one that is profitable. You just use them to find the ones that smooth out equity or reduce drawdowns or make big money. All of them over time blow up, if for no other reason than the spread.
but you are on the right track. Sometimes posting ideas here, if you can deal with all the ridicule, will help you pick up an idea from some mathmatician who already ran the numbers, and save you a lot of time and energy.
Yes, it forces me through a process of analysis. I may conclude at some point in the future that those who ridicule may actually be right, but .... Define some hedged entry E:[l,s]. E is constantly moving such that l-s = 0. The ideal setup is where E is moving between some channel with an upper and lower bound C:[L,U]. C can be trending up or down. No matter where you place E within C, your max profit = l - L + U - s = U - L, since l-s = 0. Conclusion: you're just as well off if you short at U or go long at L without the hedge. But .... psychology! Will you actually do it? You force the issue by simply entering the net 0 position, E, at any point within C. We all tend to doubt and hesitate.
Here it is.. I worked it out. You go long at say 10.50 and have short OTM short calls at say 12 and you also short at 10.50 and have OTM short puts at say 9. As the UL goes up you take off your long for a win and leave your short which is now losing, you keep both options as a hedge. Now if the UL comes back lower you take off your shorts while still leaving your options in place, then repeat over and over. If after taking off your longs for a profit the market continues higher you simply keep taking profits as it goes up and continue holding your shorts for a possible retracement. What you don't want to happen is after putting on new longs the UL goes against you and now you have something like long 11.50 and short 10.50. However, if this does happen thats OK as your short calls are making you money as you wait for the UL to head up again in which you can then close out of both your longs and short calls for a profit. Also your shorts that are now down substantially are being helped along by your short puts that are making you money. So as you can see if the UL moves up and down alittle you take lots of litle wins and if it moves both ways a good amount you can still make money. The key here is managing the difference between your longs and shorts so they don't get too far apart and using options to always box yourself in.