I tend to pick stop losses that I know based on back testing that are <10% chance of being hit. If they are hit then it proves I am wrong in >90% of cases. If my trade direction was right then my entry signal would show up again and I can renter trade. But that happens rarely. I only risk 0.75%-1% per trade, usually only 0.75% though. I choose my stop loss based on my rule and then determine shares to buy. If a $100k account I would risk $750 then if my stop is $0.40 from my entry price then $750/0.40= shares to buy (1875 shares). The further away your stop is from entry the fewer shares you buy. This helps keep risk ($750) equal across volatile stock or instruments. Once a trade breaks a recent high I have a method for switching to trailing stop loss that never lowers. This way if the trade reverses back then I lose less and less. When those trailing stops are hit I may end up losing 0.3% as opposed to the full 0.75%. If the trade remains profitable the trailing stops follow price and gets me out before too much of a reversal has taken place. This is my method of letting winner ride and cutting losers quick to maximize profit and minimize capital loss. As far as adding to a position I allow myself one addition when I have a second entry signal BEFORE the trade takes off. I have found that <3% of the time will I lose if this occurs but this only occurs maybe 10% of the time I get an entry signal anyway so it's relatively rare that I add on. If I add I only add about half of my initial risk so no more than 0.5%. AFTER a trade has taken off in the intended direction and I get another entry signal before my trailing stop has been hit on the profitable portion I treat this like a completely separate trade with same stop loss rules as described above but starting from this new price. The exits will obviously be the same for both portions of the trade but they are treated as 2 separate trades at entry. Obviously the 2nd trade will usually not make as much money as the 1st unless I get a signal with a really tight stop loss associated with it (since a tighter stop means more shares bought). It's rare that I lose on a 2nd trade add on to original but it does happen.
FreakofNature -- how refreshing that you make following and posting to a trading forum such as Elite perhaps worthwhile. I rarely read or post to Elite or the numerous other trading related message boards. In my opinion, it is a GWOT (Gross Waste Of Time). Forums of this type can actually be "Detrimental to Your Wealth". With that said -- what possible value can one obtain from spending hours on here? Yesterday, a colleague of mine suggested that I read your post on -- so here I am (hoping that it is not a GWOT. Probability of any trade being profitable when entered into is simply 50%. It is referred to as a "Roulette Trade" -- the directional outcome is a 50/50 chance of being successful. Coin flipping is a good example. Of course, FoN, you know that as no doubt anyone reading here does as well. Therefore, I have spent untold hours proving to myself that where the entry takes place (at what price) is really quite unimportant. Now, most will argue (which is really the reason most participate in these "forums") that success depends on predicting direction for the pre-determined time frame (fractal) that the trader intends to be in the trade before he/she surrenders and bails with a loss. Hence the use of pre-determined Risk to Reward and stops and targets which are "appropriate". Regardless then every new entry reflects a directional bias and a time in the trade assumption. This assumption is then "managed" with stops. Really! (It doesn't work!) Really! What determines the traders choice of stops and targets? Isn't it just an opinion which is then reflected in the stops? Is a 2 point stop sufficient to "consistently" earn profits? How was that stop chosen as appropriate (correct). Most chose a stop based on how much they will be willing to lose (fear of loss). They then set a target based on how much they need to win to offset losses. Most posters here might not choose to say: "That Makes No Sense"; I say it is Stupid! (Stupid is as Stupid does) In order to change this type of trading, one must first recognize that they will be unable to consistently predict direction and profit utilizing stops. Sure, so-called Scalpers will angerly post that they can Scalp the ES as an example and make consistent money. Years ago, I offered to pay $10,000 to anyone that could trade live everyday with the ES and just end up making 1 point a day. Think about it -- just make one point a day -- never a losing day and then just start doing it with multiple contracts. Before long you are buying your second new Ferrari. OK, with that said then what is it that makes sense as a trading strategy? Are moving average crossovers, breakouts of trend, using numerous indicators for momentum, trading triangles -- ad-nauseam --the answer. I have accumulated a list of 211 offers by course and system sellers which will have you believe that by buying their stuff you will soon be rich from trading. Obvious question: Then why are they selling the "stuff" when just utilizing it themselves they would soon own New York. As traders we all take Risk. That is what we are paid to do. Years ago, my mentor told me this; "Don't ask, how much can you make, ask how much you can lose." So as Warren Buffett states: "First Rule of Trading -- Never lose, 2nd Rule: Never Lose, 3rd rule: Adopt the 1sr Rule." That IS the basis of profitable trading. After years of study, years of losing as a trader -- the trader either gives up, gets a divorce, starts robbing 7-11 stores to get another account open or finds the "Holy Grail" which we are told Does Not Exist. The answer: Don't trade Directionally. Consequently, no Stops are necessary. Forgive me for first digressing but it may help to understand my putting on line in this forum a great opportunity for what most like to do -- that is to criticize or obfuscate when posting here (see FreakofNature"s comments on gurus). Here goes the digression: Trading is a Scam. Your broker knows and perpetuates the Scam. Brokers know that the average new account has a life of about 6 months and then will blow out. Their job is a sales job -- to constantly replace the failed traders with new and excited ones that will product commission and fee tickets. The institutions and large professional traders know that the retail trader is a Mushroom. (Grown in the Dark and fed manure.) The trainers at brokerage houses are there to create Hope of Success to make the mushrooms find more money to trade and buy "picks" and attend webinars that will stimulate more ticket charges. OK, end of that rant. So what is the alternative? Always trade Hedged. Hedged? How? Profits are your net returns on Margin. Starting with this in mind, I look to lower my margin requirements. How? either by strategy or a Portfolio Margin account. OK most don't start with a portfolio account. But there are ways to reduce margin requirements through proper choice of markets and risk management. (This is a huge subject -- so perhaps another post -- if I don't get booted from posting or decide it is just a GWOT. Remember every new trade for most traders is at best a 50/50 Bet. (either a head or tail coin flip) So Don;t make those Bets. Get better odds. BTW -- of all my friends who have sought me out to teach then day-trading the ones that end up as the Best Traders were Poker Players. I am not a poker player -- barely know which hand wins over another. I have experienced working with some of the world's best players when asked to explain the similarities and even why Trading has "Better Pot Odds". (No table limits, ability to predict probable outcomes without first seeing the cards) . Most traders are unaware of the understanding of probable outcomes and the accompanying Risk to Reward determinations. Here is the crux of trading -- it is Easy to get into a trade -- the profits are made in the Management of the Trade. (Stops perclude vialble management) I believe, at this point that the length of this post is beyond the rules of posting. So I must end. But maybe we can sometime make clear what it is that makes for successful trade management. Till then thanks to FreakofNature for catching the eye of my colleague who suggested I offer this post.
MACD...always trading hedged doesn't sound particularly easy either, unless someone shows you how...like you did with your friends. Are you going to show any newbies a good place to start with so called hedge trading? BTW, are you talking about option or futures spreads? Anyways, does your $10,000. offer apply to directional trading of treasury futures as well? And when you say...not even one loss, do you mean the entire year? I know directional trading works, but only for the minority. With that said, I agree that a unique alternative would be wise to investigate. I very much agree with staying away from anyone "selling stuff"!
Let see if I can be of some help, Mr. Bonecrusher: Googling some keywords may be of some value. "Delta Neutral Trading", "Gamma Scalping", "Statistical Arbitrage"; perhaps may produce a lot of some useful info to you -- but beware, as with everything (including posts (maybe even mine) could be a very tedious pursuit with little gained as the writers are presenting information from their own perspective and hence it may not apply to the so-called undercapitalized retail trader. It will be interesting and give a basis of what the heck trading hedged is all about. I did that years ago -- not recently -- and it resulted in confusion for me at the time. Here is an analogy of what I see as trading non-directionally. Horse Racing. Say you are witnessing a race of only 2 horses. Only one horse will win and to decide which one it will be (if evenly matched) will be difficult. (Interesting our current upcoming election for President is in Fact "A 2 Horse Race") Either Mrs. Clinton or Mr. Trump will be our next president -- having one the 2 horse race. OK so we are wagering on a two horse race in the markets for this example we have Horse One in the race and Horse 2 -- we do our homework; we check the racing form for information as to the recent workout times, how each horse faired in there last races, which jockey will be up for this race. We look at what track conditions the horses favor. We check how much rest the horses have had. We may look at how much money each horse has won in the past -- etc. etc. So a very experienced handicapper may calculate by numerically weighting each of the criteria above. Horse 1 may end up with a rating of 12 while Horse 2 may be an 11 numerically rated with points having been assigned to all the available criteria, Even making it more difficult perhaps the 1 Horse is carrying extra weight in the saddle. However what if we could find a way to bet on both horses to win. We get paid for the win and we lose on the horse that came in second. If the payoff on the winning horse is enough to cover the loss on the losing horse we net a profit. Now we have to find a way to get some favorable odds so that our payoff on the win covers our costs and leaves us with a small profit. This is not an easy problem. I will get back to that problem later on. Consider what one might do it this situation. Could we possibly find bookmakers who had different odds on each of the horses -- if so would that help? OK BoneCrusher, you got the picture. You asked. are we talking about "options or futures spreads." There are so many different ways to hedge that yes you could go long a future and the go short calls. By doing so you have "both horses in the race -- one side (the future) goes your way -- Long or Up in price so you win on that. Your other horse (Calls you sold) lose value maybe at the same amount as you made on the option. So maybe that means you have a breakeven -- one trade offsets the other. But what if you had a way to weight the outcome in such a way that you will end up with a profit? Mysterious or perhaps e I am talking in circles now. I am presenting this as if the reader has little or no knowledge of the methods used to hedge and believe me it can get complicated -- not in the actual trade by how to select the correct hedge and when to hedge. No worries we shall look eventually at some real trades. Now some traders trade pairs. Like Long Gold, Short Silver or Long Pfizer and Short Merck -- that could be labeled as a non-directional play. To do it consistently successfully one need to know the hedge ratio as to how many shares short and how many long. Another trader may trade Crude Oil (CL) and go long a futures contract against short calls and then further hedge when necessary with the mini crude contract (QM) . Sounds very complex, yet with a little knowledge of nominal values of the underlying instruments. it becomes just another 2 horse race. I will try and explain with some exhibits but first. for a so-called "newbies" I want to get some basic understanding of what I am doing. When one decides to get serious about how to trade non-directionally, then you may find that you are really "buying some insurance" to offset possible losses. (More complexity ?) You are in effect betting both horses in a 2 horse race. (Large political lobbyists may back both Clinton and Trump in the race for the Whitehouse with donations to both) . I might point out that I have nothing to gain by spending so much time and effort writing this out and therefore I will try to cut to the chase and figure out the best way to suggest a way to become profitable as a non-directional trader. For now. it is getting late at night and I must rest before doing battle early tomorrow morning. (Most of what I trade trades night sessions as well as day) --Let's see if we are able to make some progress and determine how those on this thread have some experience at trading other than strictly directionally. Once that is known then we can tailor this discussion to include both the traders who are well versed in using hedges and those who consider themselves newbies. I doubt that many who may read this know a lot about hedging or they would not be on this forum but would rather spend their time with either managing money for themselves or their firm. For those who want to pursue this further, I will attempt to offer a bit of guidance on how to get from Point A to Point B and then even C and D. (Maybe a quick look at Sheldon Natenberg's book which is required reading for most brokerage firms and banks -- as in Goldman Sachs -- for any new hires. "Option Volatility and Pricing Advanced Trading Strategies and Techniques" -- 2nd edition. Don't go out and buy it -- but once you get the gist of the hedge aspects you probably will have a better understanding. I want to leave now with one last thought which I made in earlier post: That is for sure you will be a "Mushroom" unless you can work hard to understand that which all profitable traders eventually realize and that is how to correctly sit comfortably in your Ferrari having mastered the shifts and drifts... Now, as in the past some here will start feeling the need to start throwing stones. Thas's O.K too. Also, please note that I just do this from the top of my old head and do not proof read before posting.
You may find this thread applicable to this discussion as well: ES day trading journal - my final attempt Discussion in 'Journals' started by hurricane_sh, Today at 8:26 PM.
Today, Friday, I have entered new positions and have managed existing trades. So I will briefly explain the use of the continuing analogy of trading as if in a "2horse race". When one places trades without stops (because these are unnecessary and actually Harmful to making money) then the trader is riding 2 horses at the same time. In other words -- since you have one Long Position (Long futures ES contract for example) and you also are Short the ES as a result of either hedging by selling Calls at the same strike (think covered call) then you are directionally neutral – you cannot lose on both the short and long positions. The obvious question then is how do you make any money? At this point, I question whether or not, my effort here is of any benefit to those who may be reading this, as most would at this point be thinking this is "way to complex for a new trader". My purpose here is to provide some value to familiarize those who have not seen a benefit in trading non-directionally. This method of trading can be learned and adopted by any trader – even those who are not familiar with options, pairs, correlations, and trading hedged. Thank God for complexity. No valuable skill is quickly and easily learned and this is why 90% of those who try trading for a living fail. Most will not put in the time or effort to master a strategy that will provide consistent profits and almost remove risk. If you are still interested in the subject of this thread then please let me know what you feel will allow you to study nondirectional trading more easily. Tell me, specifically, what areas you would like me to clarify. Most people who post here have, in my opinion, all ulterior motives – either to sell something or to obtain recognition. That is not the case here with me. However, there is no point in my spending valuable time if there is no interest due to the belief that this will not work for them because it is too difficult to learn.
In my case, I don't know if I will ever change my methodology, but at the same time it's good to have an open mind for other opportunities. I'm still curious about neutral trading and I would think others would be too. I don't know where they are? Busy with option expiration maybe? You've given a good explanation about the philosophy/concept of this type of trading, but what about finding an actual arbitrage opportunity in the numbers, and finding them frequently enough? What is looked for? If it's proprietary, I understand. Again, thanks for the information.
Nothing is "proprietary" -- nor does anyone have proprietary information unless they perhaps are selling something or have invented the car that gets 100 miles to a gallon of gas -- and then out of fear to reveal the secret -- they go to their grave never having benefited from doing something with their proprietary information. The fact that you were aware of options expiration indicates that you already have knowledge of options trading. With that in mind, I probably will not "knock myself out" in an effort to post here. BoneCrusher, if you have a profitable method for you -- then just keep trading it -- no need to add more to your method of trading or your disciplined system. Good Luck. Should you want the answers to the " what about finding an actual arbitrage opportunity in the numbers, and finding them frequently enough? What is looked for? " Then if PM me and I can fulfill that request. There will be numerous examples I can send you depending on which ones may fit your account size and or the underlying contracts you are trading.