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This is where the beauty of optimization comes in.
If for instance, you have an initial stop, you can vary the secondary stop activation level and the secondary stop amount and the optimization will not only tell you where to activate, but what value to assign it (to optimize profits over the given data set). You can then do a "robustness" check and vary the values to ensure that it's able to withstand some variation and remains an asset and not a hindrence. If your strategy then becomes more profitable over a wide range of activation and secondary stop levels, you know that it's adding value to your overall exit plan.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
Can you help answer these questions from other members on NexusFi?
Furthermore, I've seen some optimization software and drooled over the ability to create 3 dimensional "heat" maps that show nodes for 3 dimensions...a test target parameter (net profit, drawdown, win%, inexes, etc) and then plotted the output of varying the 2 test parameters (activation level and stop amount, target value and stop mount, etc).
It plots the areas that those two variables in combinations produce the best results. This allows the user to then select values that are in the fattest portion of a "hot" area, which is essentially, selecting the most "robust" settings or areas that can vary the most and still add value to a system.
With TS optimzation reports, I can export the top 200 or so test settings and plot them excel and generate the same thing.
VERY prolific with respect to evaluating and selecting the appropriate level of strategy settings...in the case for our discussion, stop levels and profit targets.
I'll try to drum up an example, where you'll see multiple nodes, some of which are more robust than others (the "hilltops" are higher, and wider and broader than other less robust areas which the same variation in the settings yield significant changes in the target variable.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
Helping a crack addict, to some, might be "adding to a loser." To those that would help them, there's something that tells them that the person can turn it around.
More times than not, helping an addict is simply throwing your money down the toilet. Developing some method of picking out the ones that aren't a waste of time, is valuable......because it would mean that you were able to make good use of your charity (and not flush it down the toilet).
Being able to recognize which restaurants in your chain are profitable (and for good reasons) and which are not profitable (and most likely never will be) and then identify the bad ones that are worth salvaging or capable of being turned around....is what makes successful business leaders who can improve their bottom line and those that end up being fired for someone who can.
Jack Welch was notorious for being able to "weed out" the lesser performing sectors of GE and focus on the winners. His ability to not chase bad money with more money is what made him famous.
I admit, that in trading, the concept is a bit nebulous...but being able to distinguish out of tolerance drawdowns that ocurr in a trade suddenly, that if you're patient you can overcome them and the trade will remain profitable.....and knowing when the market has changed for the worse and your trade isn't going to recover is the essence of being able to know when to cut your losses and move on to the next trade, and when to hold tight.
It's not an easy thing to do, particularly if you have no plan beyond the entry. I notice a lot of traders develop a simple entry edge and then the remainder of the trade is simply rigid and statistical. If you're able to make money doing that, great, but the question you must ask yourself...is...even though I'm profitable, could I be leaving money on the table by exiting out of trades that were profitable shortly after exiting. AND, am I holding on to trades too long.
A simple drawdown analysis and MAE will show you the "point of no return" where the majority of your trades end up being a loser, so it's time to start scaling out of those positions. Even on this fundamental, mechanical analysis, there's a bit of the "never add to a loser" principle in removing your equity from what's most likely a loser.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
I think that is a losing game, unless you are a long term trader building a large position size and averaging down as the market comes back against you.
Regarding trailing stops and break evens, here's what I said on wordwary's thread:
In terms of trailing stops, I guess some people say that once you start trailing, you are reducing your risk on the trade, but I don't really see it that way. I think the initial stop is the true risk, because if you get stopped out before your trailing stop ever even gets activated, your initial stop is the amount you are going to lose.
In terms of breakeven stop movement. I do use them and favor them, but I actually calculate the expectancy of my break evens. I look at how many of my break evens would have gone on to a stop out, and how many would have gone on to target. If you are trading with a 2:1 or greater reward/risk, and you find that half your break evens would have gone to target and half to a stop, then you will be more profitable if you don't use break evens.
Before pulling the trigger on any trade, I ask myself how much will I lose on this trade if it goes straight to my stop without going 1 tick in my favor, trailing stop never even had time to kick in, multi lot scaleout target triggers never had time to fire. My trade target will be based on that answer, and then I will look if the market will be able to easily give me that target, without having to pray to the cme gods. Any of the answers to these questions are not satisfactory, the trade is a pass. You could say that I actually think about losing more then I think about winning. How is that for NLP, psychological positive thinking?
I agree and wish I would have come to this conclusion sooner. I spent way too much time trying to develop strategies that double down in pursuit of a super high win rate. This to me is the most difficult way to trade on a psychological level as the losses, when they come, are huge.
There's a guy named Rob Hoffman who now works with John Carter at TradetheMarkets - he uses an interesting system and has a documented string of no losing trades in over a year and a half. He trades live in a trading room and no joke, no losing trades in over 18 months.
His strategy is much like redratsal's in that he just adds to his positions as the market moves against him. He does so in a very structured way though so that his adds bring his average price to within 3 or 4 ticks of where his last entry is - so for instance he may open a trade with 1 car, add 4 when the market goes 10 ticks against him, then add 16, 48, 160, etc, etc - he gets geometric very quickly. It is actually ridiculous to watch.
I joined his trading room for a couple weeks 5 or 6 months ago and the very first day in his room, in fact his very first trade was going short CL just before a rumor came out that Gaddafi had been shot. CL jumped about 120 ticks over 10 minutes or so and I watched as he, very systematically mind you, added to his short position. At the end he had built a position of 317 contracts. I think he was down around $30,000 at one point just before his last add and then when the market just moved back a little bit, he had such a huge position that he closed the trade with a $13,000 profit. I was completely horrified. I quit the room shortly thereafter but that trade was the most incredible thing I'd seen. It was all in a live account, documented.
I guess I just always wanted to tell that story but I think it illustrates (as does Mr. Hoffman's undeniable track record) that a no-stop strategy can work very well for some. Obviously this strategy differs quite a bit from a "mental stop" strategy. For the record, I think the guy is a genius - not because he has no losses in 18 months but because he's created a method that frustrated traders flock to - he charges around $400 a month and has well over 1000 subscribers. All of whom are likely very frustrated by their own losses and so are drawn to a strategy that promises "no losses".
Seek freedom and become captive of your desires. Seek discipline and find your liberty. - Frank Herbert
Surly that is interesting. I suppose if you had massive amounts of capital per say and could continue to add and add you would eventually get a bounce and could get out positive. A matter of sweating it out until bounce happens. But eventually something like CL could black swan on you and will get wiped out. You have to believe guys like that days are numbered and will eventually blow out. I actually heard Hoffman blew his account this year. I cannot confirm as true. But read it on another board. Below is what I read would not surprise me if true.
"Hoffman blew up today. He had Martingaled short about 852 TF contracts and was down about $250K when the system (He uses Infinity) locked the account and closed his position. Total loss about $312K as I guess the Infinity system closed him out with a market order..
I think his ego got to him. There were many times during the 1 1/2 hours he was in the trade that he could have gotten out with a small loss or profit in the $3K to $5K range. He has a number of trend indicators that were all showing down and getting worse, but he ignored them, though he almost never mentions them when he trades."
"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
I lost $6k like that in my very first week of trading...ouch! The guys I was following at the time taught a method of managing such losses from large gaps against your stock positions, by scalping out multiple portions of the position on bounces. It didn't help me very much, as I did not get that far in the training yet
