"Decrease your trading volume when you are trading poorly; increase your volume when you are trading well." - Paul Tudor Jones I am sure that this rule is required to achieve a long term success in trading. However I am having a little difficulty in following it strictly because I don't understand very clearly what is the reason behind it... Why would I make more money (or lose less) if I follow it? Such rule can be justified only if we accept the existence of trends in a trader's equity curve. If you believe that such trends do exist (WHY?!?), then do you "trade" your equity curve?
Or if you accept the existence of emotion. If you're trading poorly (ie. not following your play, this doesn't mean taking losses), than you're being emotional and should either stop trading or limit your size
Ok...it works this way....if your are losing it is probably a day you should not be in the market. If I lose twice in a row....I stay out until I see the next large wave...and I use a smaller position size. Prevents losing it on revenge trading. If I win 3 times in a row, I also stay out until the next larger wave. Or decrease my position size. It reduces the overconfidence loss. Statistically you only win 50% of the time, so in 4 trades statistically you will lose the 4th trade.
In swing trading, I am now doing just the opposite. I take a small position in a stock and if I lose, I double my next position. Sometimes, I have 3 losers in a row but so far, I haven't had 4. Once I have a winner, I revert back to my original trade size. But I wouldn't try daytrading like this because my daytrading system isn't that great.
i cut back my size - or tighten my selection entry - because i want to make sure i don't lose my confidence or get emotional. either of those can cause me to sometimes ignore entries, not adhere to my stops, or other bad things.
Hi Neutrino, Maybe the definition of trading poorly needs to be defined for you. To me...if I'm following my trading plan but still getting loses...I don't consider that trading poorly. However, if I'm not following my trading plan and I get losses...I do consider that to be trading poorly. Same is true if I'm winning while not following my trading plan...I consider that to be trading poorly. Also, if I'm winning while following my trading plan...I'm trading well. Trading Poorly can be anything...discipline problems, emotional trader (impulsiveness), not having a trading plan, lack of mental energy, lack of self-esteem et cetera. Answer this question... Based on my definition above...why would someone continue trading with their normal size or even increase their size if they are trading poorly? Just the same...if your trading well via following your trading plan...why would you not increase your size (as long as your not violating your money management rules) and try to milk it while your at the top of your game? Simply...you may be able to understand the reason behind what Jones is saying via first defining to yourself the term trading poorly. NihabaAshi
"In swing trading, I am now doing just the opposite. I take a small position in a stock and if I lose, I double my next position. Sometimes, I have 3 losers in a row but so far, I haven't had 4. Once I have a winner, I revert back to my original trade size." that system will only work if you trade a very small amount of your total capital. I belive it is called the Matendale system which many blackjack players use until they lose a number of times in a row and blow their whole bankroll (granted the fact that their is a maximum bet in blackjack does make it impossible to double down indefinitely)
Do some google searches on martingale and anti-martingale (or search here), also do some searches on fixed ratio trading, fixed fraxtional trading and optimal f, money management, van tharp, etc. It basically comes down to the fact that "streaks" are inevitable. They happen no matter how random or trendy or whatever the data is. Blackjack, poker, trading, the NE Patriots, etc. Money Management or in this case reducing yoru trade size when losing (bad streak) simply minimizes the damage, on the flipside it helps you maximize the upside as well. You might find this helpful as well. (the drawdown table) http://www.iitm.com/tips/Tips-MM.htm
Like many other maxims in trading, this one doesn't hold true in many circumstances. In my case, for example, if I were to cut back when my equity curve began to drop, I would lose out on many of my best trades and seriously cut into my overall gains. Why? Because I buy weakness, and when the overall market exhibits weakness, I tend to have many more trades, greater volatility, and larger temporary drawdown. Although this period is always accompanied by some fear - even though I've been through it many times - it would be stupid for me to cut back or stop trading. In fact, it is the time that I should be greatly increasing my bets.
One becomes a good trader if he/she is able to win by holding and adding to a winning position. For more, see Rule 2 at Phantom of the Pits: http://www.spytrdr.com/PhantomOfThePits.pdf Also, another quote: "You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you can't afford to do is throw away your capital on suboptimal trades." -- Richard Dennis One more: 80% of profits comes from 20% of the trades. It's a constant challenge to figure out which 20% without hindsight's help. Thanks.