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take loss or increase risk?
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take loss or increase risk?

  #11 (permalink)
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Hi @mcteague
For this to work, you need to play with the rate of change of your P&L, because if the relationship is 1:1 then in the end you will always lose, this is not a zero sum game because there is the commission and the spread in between that you can't avoid; so you will not be flat, but I repeat, losing money.

One idea for example, is to go long the SPY long term (a 1x tracking ETF of the S&P500); then every now and then, when you get good reversal signals, to play the SDS (a 2x reverse tracking ETF of the S&P500) in the same account (no need for two separate accounts).
In this case, since the rate of change of price is different, for every 1$ you lose with your SPY as it turns against you (price dropping), you gain 2$ from the SDS.

The strategy that you are trying to develop works for me well combined with options as the leverage is huge.
Also, I am not limited to some ETF's and they short equivalents.

For example, I am long the 30 blue chips of the dow jones since the lows of 2008/2009; and when I see significant turning points in the making I buy puts to hedge these longs. This way, I still receive the dividends which often remains the same regardless of actual share price. It saves me the commission of closing my positions every time and then perhaps also going short and having to pay dividends to the person I borrowed the shares from.

Either way, this works exactly like my example described above, for every 1$ drop in my IBM position let's say, my put on that same IBM position recuperates me several times that drop in dollar value.

Hope that was a little helpful
Cheers
Fadi

Successful people will do what unsuccessful people won't or can't do!
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  #12 (permalink)
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mcteague View Post
Once I have moved the stop I can just wait for price to come back to me. Now it occurs to me that some of the price movement before it gets back my way is lost to me. Although the longer term may be good for a long, there might be good short term shorts available. ( I do know that I can increase my long position) I can't go short when I have a long position. My broker will just sell my long. But that is not what I want. I want to be long long term and short short term.

Your strategy of selling short term while holding on to your long, is really just a way of recalibrating the entry point of your long position.

Anyway, other choices you can implement in the short term are: you can buy puts, you can sell a different month in futures (this actually is iniating a calendar spread), or you can sell calls

Be careful about doing a calendar spread because it either (a) gains you nothing if both months move 1-1 in tandem; (b) makes things much worse for you if the spread tightens; or (c) makes things much better if the spread widens. In cases of (b) and (c) you are simply taking on more risk, so you might as well just trade a different leveraged product unless you know how to trade calendar spreads (which from your post it's apparent you don't)


Quoting 
So I am considering opening a separate account somewhere else to take advantage of these situations.

No need to do that. You can do all the above from the same account


Quoting 
But this whole idea frightens me a little. I could just be a way to lose money two or three times as fast.

That's trading. I mean, I do suggest going ahead with your ideas, because you'll learn more for it. Don't let the fear talk you out of it.


Last edited by mwtzzz; February 17th, 2013 at 12:34 PM.
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  #13 (permalink)
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Fadi View Post
Hi @mcteague
...

Fadi one of the few people I see on this forum recommending the use of options in conjunction with futures, which is what I recommend as well.

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  #14 (permalink)
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mcteague View Post
What you are saying is true in a way. One could say that every time one is holding both long and short positions at the same time they cancel out, and that that is like being flat. But since we are looking at trades based on different time units we can also say that they do not really cancel each other out.

the way to think about it, is you are doing nothing more than recalibrating the entry point of your initial long position.

Look at Fadii's response a few posts up - he's got the right approach. You need products that don't move 1-1 with the underlying instrument


Last edited by mwtzzz; February 17th, 2013 at 12:40 PM.
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  #15 (permalink)
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I just had not had a chance to drop in and thank the people who replied for their comments and insights. So thank you all.

The trade management side of this is to me by far the most difficult. I had heard of using options as a way of protecting positions. I have never done it. But it is worth learning about. It would help me avoid some of my stop moving problems. Kevin confronts me with a certain amount of inescapable mathematics. My tendency has been to separate realized profit and loss from unrealized. Although he does not say it specifically, underlying his thinking is the idea that that is a somewhat false distinction. Realized vs unrealized is a psychological not mathematical distinction.

If I am up $1000 and fall back to up $500 before I exit should I say that I lost $500 or made $500. I have to consider the correct balance. The math is really inescapable. The money is mine whether in the instrument or my wallet. But we should not ignore the importance of psychology. Held to that standard practically every trade would be a loser. Eventually we might find it hard to get out of bed in the morning.

Anyway there is much to think about. Thanks again for the replies

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  #16 (permalink)
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mcteague View Post
I just had not had a chance to drop in and thank the people who replied for their comments and insights. So thank you all.

The trade management side of this is to me by far the most difficult. I had heard of using options as a way of protecting positions. I have never done it. But it is worth learning about. It would help me avoid some of my stop moving problems. Kevin confronts me with a certain amount of inescapable mathematics. My tendency has been to separate realized profit and loss from unrealized. Although he does not say it specifically, underlying his thinking is the idea that that is a somewhat false distinction. Realized vs unrealized is a psychological not mathematical distinction.

If I am up $1000 and fall back to up $500 before I exit should I say that I lost $500 or made $500. I have to consider the correct balance. The math is really inescapable. The money is mine whether in the instrument or my wallet. But we should not ignore the importance of psychology. Held to that standard practically every trade would be a loser. Eventually we might find it hard to get out of bed in the morning.

Anyway there is much to think about. Thanks again for the replies


Have you ever seen those game shows where they put a contestant in a booth full of dollar bills, turn a big fan on, and then give the contestant a minute to grab as many swirling bills as possible?

Certainly, after time is up, the contestant counts his winnings and walks away happy. He doesn't say to himself "I could have had much more had I grabbed all the bills." He knows going into it that there is no way to get all the bills. Yet, he is still happy with the end result - a few handfuls for him, with a lot left in the booth.

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  #17 (permalink)
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mcteague View Post
But recently, meaning this week, if I think the trade is good on the long term than I just move my stop considerably lower.

A little lower... ok. Considerably lower... here's the problem. You have predefined your risk (you have, right?) before taking the trade, and determined that a stop of "X" is your risk on the trade. You now move the stop, but do so without having taken a profit (or reduced your position) to be able to increase your open risk. So you are modifying your pre-defined risk. This is not usually (ever) a wise thing to do, as you don't get smarter when you are risking money.



mcteague View Post
Once I have moved the stop I can just wait for price to come back to me.

Or, go further against you, and completely wipe you out and prove the wisdom of keeping your risk parameters as they should have been, before the trade was put on.


mcteague View Post
But that is not what I want. I want to be long long term and short short term. Hopefully making money both ways. So I am considering opening a separate account somewhere else to take advantage of these situations. After all I don't really need a big move in futures to make money. This kind of situation should happen quite often.

Since you use NT I suggest you simply use their ATM feature and it will make it look like you can have two opposite positions at the same time.

Use one ATM strategy for a long, and when you want to short, use another strategy. One open strategy will show a long, and another will show a short, and you will be blissfully both long and short, while you are in reality flat.

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  #18 (permalink)
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I've been told that if a person learns to tell the difference (behavior) between a winning trade and a losing trade, you'll learn when to cut a trade when it's not acting like it should.

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  #19 (permalink)
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mcteague View Post
The trade management side of this is to me by far the most difficult. I had heard of using options as a way of protecting positions. I have never done it. But it is worth learning about. It would help me avoid some of my stop moving problems.

You might take a look at a couple of my recents posts (and thread) where I'm talking about options.


Quoting 
Kevin confronts me with a certain amount of inescapable mathematics. <snip>

If I am up $1000 and fall back to up $500 before I exit should I say that I lost $500 or made $500. I have to consider the correct balance. The math is really inescapable. The money is mine whether in the instrument or my wallet. But we should not ignore the importance of psychology. Held to that standard practically every trade would be a loser.

I like your thinking! And I encourage you to think more along these lines, especially the bolded part. Consider this: it is not just that every trade is a loser, it is also that the more trades you complete, the more you are compounding and emphasizing the losing aspect of trading. To help visualize this, let's consider a very simple breakeven strategy: a fixed stop loss of 10 ticks and a fixed profit of 10 ticks, and an entry determined by flipping a coin. This strategy obviously is a totally breakeven one. But if you look at the results of any specific, fixed period of time, you will not see a "breakeven" P/L. You will see a profit or a loss, perhaps a large one. You may therefore incorrectly infer that you have a "winning strategy" or a "losing" strategy. however if you look at a large number of trades over time, it is easy to see that it is nothing more than breakeven.

Despite the simplicity of the aforementioned strategy, the markets often manifest themselves in such a manner regardless of how sophisticated your strategy is. This is of course due to "randomness" and "unpredictability" of financial markets (ugly words to trader's ears) and is the bane of the trader's existence.

How to deal with this? In my opinion, you need to use options + futures combination. With such a combination you attempt to artificially create an imbalance due to the fact that OTM option premiums do not move 1-1 with futures prices and time decay is slower than futures price volatility. Imbalance of any kind is desirable because imbalance is the only way to make money in the markets. Trading futures alone does not provide any imbalance.

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  #20 (permalink)
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lsubeano View Post
I've been told that if a person learns to tell the difference (behavior) between a winning trade and a losing trade, you'll learn when to cut a trade when it's not acting like it should.

Yes, this is a discretionary approach, however the properties of a winning trade and losing trade change as market conditions change, and markets sometimes change in unprecented ways. What consistuted "winning behavior" before will not be the same as what it is now. As long as you are flexible and stay on top of things, then you might do well. But if you are rigid, then no.

Basic price behavior remains the same, but whether it is exaggerated or numbed changes as the market changes, and this is what you have to be on the lookout for. A breakout will always be a breakout, but it's magnitude and duration will be different each time a breakout happens and those parameters cannot be known beforehand.

A retracement will always be a retracement, but the point at which it begins and its length will not be constant.

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