Why should we reduce trade size when losing?

Discussion in 'Trading' started by neutrino, Jan 25, 2004.

  1. You should only cut back on size, or increase size,
    if your analysis shows non-random "streaks" in your
    winners and losers.

    If the distribution is random, then you should never
    increase or decrease size.

    Now for the human element... if you need to decrease size
    because it will help you get back on the horse, after
    a RANDOM streak of losers has shaken your confidence,
    then go ahead.

    Assuming a system that does not have real streaks, you
    are simply downsizing your edge by doing this, but it
    may be required to recover psychologically.

    Notice.... a CASINO never drops its size after a streak
    of losers :D


    peace

    axeman
     
    #21     Jan 27, 2004
  2. A Casino makes its own plastic money
     
    #22     Jan 27, 2004
  3. traderob

    traderob

    This is excellent samson. how about starting a new thread and giving us some insights into how your poker days applies to trading? I see daytrading as very similar to poker.
     
    #23     Jan 27, 2004
  4. There are two reasons that are intermixed:
    - probability
    - risk management

    - Probability since it is the basics of rationality in decision theory: you make a choice instead of an other because this choice has the greatest chance of realisation. When you are trading poorly this can mean that you are playing against probability because you are in countertrend for example. So you made a bad choice you have to reduce your exposure.

    - Risk Management because capital is never unlimited and acts as a constraint. The basics is to know the so called risk of ruin (see formula below) which applies even if you have an edge. For example even a casino is submitted to a risk of ruin nevertheless she has less chance than you to be ruined because she has much much more capital. You can imagine that the market, like a casino, in term of capital in infinitely much more capitalised than you so that, since we are in a zero sum game, you can be ruined easily if you don't take the capital constraint into account - and if you have no edge you will almost certainly be ruined (almost only since with chance even the dumbest trader can succeed if he stops the game at the right moment or after succeding he bets so small relatively that the risk of ruin is over his age of death :D).

    http://www.econometric-wave.com/faqs/probability/home.html.html

    "What is the probability of ruin ?
    In a coin flipping game, if p is the probability of winning 1$ at each bet and q = (1-p) the probability of losing 1$ at each bet, if K0 is your initial Capital and K the fortune you would like to reach, the probability of getting it is P[K]={1 - (q/p)^K0}/{1 - (q/p)^K}. The probability of ruin is then 1-P[K]. If p=q=1/2 the game is said to be "fair" and P[K]=K0/K. "


     
    #24     Jan 28, 2004
  5. Mecro

    Mecro

    harry got a point.

    It really varies cause sizing up after a losing streak will pay off big time IF you keep your head clear and you take the right position.

    Problem is that traders get desperate and make themselves believe that they absolutely have to size up and get back on track. Making back the money in small size trades is very hard and irritating. Hence why the rule about reducing size comes in. It forces you to keep ur losses small because of the bad trades and bad trading mentality you get to. But you really should focus on making the right trades and shaking off the stigma that comes with losing streaks.

    I do a mix of sizing up and sizing down when hitting that bad streak. I got much better at hitting the right trades and not letting the bad streak affect me. But at first, I would blow out with bad streaks.
     
    #25     Jan 28, 2004
  6. I have to admit I haven't read all the posts. Don't have to. This is simple for anybody with a math/stat background. Look up martingale and anti-martingale strategies and read the data. If you want to stay in the game, scale back when you are losing, and scale up when you are winning. Theres no controversy over this point. Those who would argue that if you double up, sooner or later you will make it all back are just accounts waiting to blow up. For those that care, there are a lot of smart folks who think that doubling up when you lose is OK. For options traders, there is a section in McMillan's book "Options as a strategic Investment" where he suggests a similar strategy. Doesn't work. Anybody really interested in the subject can head on over to www.wilmott.com and read the posts on this subject. Another way to get to the same conclusion is to use a Monte Carlo Engine to test it out. Been there, done that. Ok thats my good deed for the day. Good luck traders. Steve46
     
    #26     Jan 28, 2004

  7. Trading the same size (or larger) after losing repeatedly is like driving faster when you are lost. The idea is to slow down until you get your bearings again. If it makes sense in every other scenario, why not trading?
     
    #27     Jan 28, 2004
  8. well... the way I feel about it... I'm all for *adjusting* but...

    after a loss, to reduce your size for the sake of your emotional/financial trading health/balance (so to speak) ... if your trading doesn't warrant it... is to miss your objective that is...

    size of risk = size of (potential) reward, so...

    to cut back on your potential reward(s) and win(s) size is...

    sort of contrary to yourself and conflicting with you - working against you because...

    it is just rubbing in your loss - thus you are in a way agreeing that you are a loser.

    I feel that, the only reason to reduce your size is for stategic adjustments that would have happened anyway... despite your number of losses or gains... in order to win the most on your next trade.

    no use beating yourself up or holding yourself back if you learned your lesson - just go on and APPLY what you learned.

    instead of reducing your size maybe you should just to the beach for a walk (read get away from trading altogether for awhile) and sort things out (read don't overtrade!).

    It's probly good to get away from trading after a win or a loss anyway just to shake it off and rebalance yourself.

    ol
     
    #28     Jan 28, 2004

  9. Excellent analogy
     
    #29     Jan 28, 2004
  10. Mecro

    Mecro


    So if ur hitting the wrong trades and then you see a great trade, should u size back up or keep reducing size?

    It's nice to apply math/stats to the idea but the reality is that the trading mentality changes and emotions start to take over. Thats where these bad streaks and blow outs really come from.
     
    #30     Jan 28, 2004