Why should we reduce trade size when losing?

that isn't "where these streaks come from". Nobody knows where these streaks come from. One problem may be that your edge is gone. How do you know? Well you won't know till its too late unless you scale back for each loser, AND if necessary (if you continue to have losers) you should stop trading and re-evaluate your setups. As I have said before, there is no controversy about this principle. Take it for what its worth. I do want to make money and I have to admit I want to be on other side of traders who continue to trade size while they are in a downdraft, but on the other side, I hate to see folks blow out just because they didn't pay attention to the basics. Good luck, Steve46

 

I don’t agree with money management...

Let me take the flip coin example:
Suppose you have a winning strategy (= an unbalanced coin) doing consistently 60% faces, 40% backs and suppose the win/loss reward is the same, say 5% of your bet size.
What will be your ‘Money Management’ strategy?
Mine will be to bet all my $ (and all I can get) on every play because you never know if the next one is a winner or a looser, you only know that over time it has a probability of 0,60 to be a winner and I want this favorable probability to apply to the largest possible amount of money.
Show me how a ‘Money Management’ strategy can do better? If it could this implies that you know on every trade (not the whole series) which probability you have. In this case you have a great edge and what you have to do is to modify your strategy using it, to reach an ever more better win/loss ratio (and find as $ as you can to bet in)

The only thing you have to ‘Money Manage’ is the max. draw-down you can afford before you have to reduce your bet size to zero... Any other size reduction will translate over time into profit reduction.
Of course this implies that you are confident and consistent with your strategy and ready to psychologically accept large draw-downs.

If you really have a time-consistent winning strategy (even a 51% consistent win/loss ratio), the only way to maximize profit is to maximize size. IMO, ‘Money Management’ seems as an impossible attempt to make profitable a non-profitable one (50% win/loss ratio as the unbiased coin flip).
You can also see it as the price to pay for an insurance of not being ruined, but always reducing your profit without bringing you a 100% guaranty.

My 2 cents...
Best regards.

 

There is a controversy about this sizing down principle because most of the traders use it and still 90% of the traders do not make money. So obviously, the way this rule stands, it does not really work. It's basically not as simple as it sounds.

 

Gentlemen:
First, "everybody" dosen't follow good money management rules. In fact, this is what separates profitable traders from retail traders (money management). I have already done my homework. To do your own, just use a Monte Carlo engine to work out a series of trades where you double up after each loss. Compare to a system where you cut back by half after each loss. The result is that the trader who cuts back is forced to quit before "ruin" (blowing out the account) occurs. This is a good thing because IF IT HAPPENS, IT MEANS YOUR EDGE ISNT THERE ANYMORE! Conversely, if you look at the returns obtained by scaling into successful positions (adding to an existing position at intervals), the positive effect on the equity curve is dramatic. A trader who is able to accomplish this can say with some authority that he has an edge (otherwise he/she wouldn't be able to add to the position). I'm just pointing a finger in a direction here. You are going to have actually do the research yourself. What I can say without any qualification is that controlled use of leverage is what separates the really profitable traders from the retail traders who fluctuate around the breakeven point, or whose accounts just slowly bleed dry. I appreciate your opinions and hope you find some benefit from mine. Best Regards, Steve46

 

Steve,

I took a look around Wilmott but did not see any discussion on trade sizing. Can you point me in the right direction? Thanks.

 

It is always good to share opinions. All that you say sounds really neat given the viewpoint that you are coming from.

I keep track of about a dozen approaches to making money. They differ and when arranged in an order of performance, and there is some overlap of considerations. It is not possible to add a twist to each one to improve it and find myself sitting in the next better of the systems.

The streak concept is an improtant one. I use the two questions thing to locate which of four places is where the problem lies.

Steaks seem to fit into the personal performance areas and specifically into the non technical part. I do the same thing with golf.

You did your homework and feel that tweaking the mechanics is the obvious place to deal. What I tweak for streaks is my emotions and get them back in balance.

I do screw up. When I do, the odds are for me that something is out of whack emotionally.

If you look at scientist's daily routine (See the journal of one of his buddies) you will see a beautiful thing. He keeps track of what is going on. The key part of it that I like for streak repair is the journal that deals how he feels as he does stuff. I think that is what applies to PTJ's admonition. If he had a debriefing sheet for each day, I bet it would have more emotional stuff in it than monte carlo stuff. If he had a sheet for noting preopen considertions, I bet it would deal lot with his emotional state re the up coming day.

Streaks, I feel, come from personal considerations. Inflamed emotions that are required to be in balance seem to be the first place to look. Where to look is in a journal of how daily emotions are serving each of us. Debriefing notes is what tends to fix the stuff out of line.

I'm currently saddling up with some folks who do emotions as their profession. I need, especially, to get my being well connected for the future. That may be part of the reason for my bias. The other part is that I know the data monitored as time passes can only be sensed as part of anemotional context. The emotional context has to be in balanced working order or the easy part, 1. e., gathering data and doing analysis isn't possible at all.

Applying a strategy comes rather late in the trading game. Scaling is a nice thing to do but it is not a primary optimization technique vis a vis making money. One thing it does work well for is tuning your emotions, though.

 

Grob:
I have noticed the effect of emotions as well, and I experience this effect as substantial. For instance, I notice that when I am wrong initially, I am tempted not to re-enter the market after my position is stopped out. For those that may be experiencing the same problem, let me say that being stopped out is one of the most valuable things that can happen to a trader. Depending on how you analyze the event, it can provide all the information you need to correctly position yourself on the right side. I notice that I am tempted to stand aside and "lick my wounds" so to speak. What I have learned to do instead is to ask myself specific questions about the nature of the price action that caused the stop to occur as follows:
1. Did I place the trade "with the larger trend"
2. Was I stopped out because price bounced off a pivot and was there volume activity that might have given me a clue to that action?
3. Am I wrong or is this the start of a new "leg" up or down?
4. Am I using the correct "size" stop?
I have learned to accept that I may have to re-position myself several times before I am on the right side. Before I learned this lesson, I would simply take my loss and wait. Now I am profiting from having a little humility (admiting I am wrong) and "going with" the market more often. Unfortunately my ability to correctly position myself has not been very good. I am wrong more often than right. The only thing that I can point to that is different is my willingness to do something that doesn't "feel" right at first, but turns out to be right in the end. This is how I experience the effect of emotion in trading. I hope it is of some help. Best Regards, Steve46

 

One:
At the Wilmott site there is a technical forum where you can surf for threads that deal with position size. Also I have read articles by contributors to the site's Magazine dealing with that subject. Unfortunately I don't have all the references at hand. I hope this is a productive lead for you. Give me some time to think about other avenues that may help. Best Regards, Steve46

 

I rarely comment stridently and bluntly with regard to deep and difficult problems people are facing.

If you do not mind being a basic example, I will do that with respect to this post. I think you are a quality person who can handle input and if say it is out of line then you can put it is the waste basket.

Jones made a pronouncement that is a cardinal one and as you can see here most people don't have a clue.

What I have available to say to you is something I can back up in spades and, if necessary I can give you why history failed to deal with this properly.

I did not read your post until right now.