When to cut intraday losers (specifically/mathematically)

Discussion in 'Trading' started by Kaizen, Sep 5, 2003.

  1. Kaizen


    You guys that build systems what have you found is the best way to kill off losers if your holding period is just that one day?

    For example. If I generate a list of trading ideas each night say 5 longs and 5 shorts because I think the market is not biased in the short run either way.

    Is there a best way to determine when an intraday loss should be taken if I enter all positions on the open. In other words, I know that the stock may move randomly from the open up 20 cents or down 20 cents or whatever but at what point would it make sense to mathematically say, this position is likely going to stay a loser all day?

    The best I have come up with thusfar is to say that if the stock trades beyond its 10 day ATR against where I entered it (the open) I should throw it out. That seems to allow for enough degree of movement (or randomness) that it won't stop me out of positions that bounce around somewhat before they possibly move in my favor.

    Since the ATR is a measure the true range (not just one direction away from a fixed point (in my case the open) it seems to give me just enough room to allow for random movement and keep me in positions that I think have a higher probability of moving in one direction that day even if they don't go in that immediate direction the first hour or so.

    Basically what I am trying to do is eliminate the large losers from a strategy that is trading a basket of positions. I don't care about the small losers or even the midsize one but I am looking for a somewhat optimal point at which I can mathemitically say: the odds are that the position is going to remain a loser.

    That is, that the intraday move is not just the stock randomly being pushed around but that the stock is moving against me so much that it has a higher likely hood of continuing to move against me rather than going the way I had positioned myself.

    If someone has a suggestion other than ATR, or of using ATR differently I would appreciate your thoughts. I am trying to use a logical stop that relates to each individual stock so ATR is my first choice, but I am open to any other suggestions that might lend a marginal increase.

    Again, (Iknow I've been long winded) what I am attempting to do is pre-determine a stop loss for an intraday position that protects me from big losers while still having enough leeway to allow the stock to bounce around somewhat if the futures ramp or dump or whatever.

    All coments appreciated.
  2. If you select the stocks and directions the night before, then you give up a daytrader's edge.
  3. Kaizen


    I'm not sure I follow you. I have always generated list of both long and short candidates the night before that I often trade the next day. However I have always managed each positions seperately. Now I am using a basket strategy with pre-selected longs and shorts and I simply need a mechanism to kill off any losers that could be come excessive.

    I have not had a problem for the most part with the strategy thusfar as small winners balance out the small losers, and large winners well I am certainly not worried about those, but I need a mathematical way to cap an individual losing position that becomes excessive. Rather than go with a fixed dollar amount which is what I have been doing, I am hoping to find something that is more adaptive to each individual position.
  4. How about using a percent rule. For example, cut the loser when it goes 1% of it's price, against you.

    So, lets say you went long on a $50 stock. 1%=50 cents, so you would cut it when it went 50 cents against you. This is just an example. The actual percentage really depends on your account and risk tolerance.

  5. What I meant was that a huge edge in day trading is that you can select a stock which has just pre-announced or been served with a huge lawsuit or surprised on earnings. You usually don't know things like that the night before.
  6. Another edge is to not have any single bias, and trade the same stock Long and Short during the day. Ride the wave :cool:

  7. The concept you are applying is called maximum adverse excursion. Wealth Lab will display it for you if you have a system that you can program. Basically the idea is that once a trade moves against you by a certain amount, it is unlikely to recover within your trade timeframe. MAE will vary based on your entry and profit-taking methods.

    I think some variation of ATR or some sort of statistically derived number is probably a good start, although I've never attempted to develop it for stock daytrading. a percentage loss is not as good because different stocks display widely varying volatitlities. One percent might be a lot on GE but noise on SOHU.

    The downside of using this approach is you are basically exiting on a breakout or breakdown type move. In effect this is a reverse volatility breakout system. Vol b/o systems typically have poor win percentages. So you will be getting whipsawed a lot.

    Another approach might be to adjust your position size for volatility and just set a disaster stop based on the max loss you are prepared to take. If you sense a big trend day developing, you could blow out the bad trades early.
  8. Study the winners in whatever setup you trade.
    (Every day.)
    If your trade doesn't look like that, get out ASAP.