Cut your loses and let your winners run. That is what they say, and what until recently I did. I would go long in ES futures. And if it turned out that due to my being wrong, bad timing or any reason price fell to my stop, usually set at a recent swing pivot or some multiple of ATR, I would exit and accept my loss.
If I am wrong justice demands that I pay the price of my error.
But recently, meaning this week, if I think the trade is good on the long term than I just move my stop considerably lower. I just get out of the way of the retracement , other peoples covering, or whatever else might cause price to move against me. I just wait for the trend to continue. Reasoning that there is not reason for me to have to pay for other peoples fear, greed, or stupidity.
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. 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.
But this whole idea frightens me a little. I could just be a way to lose money two or three times as fast.
You see although I list myself as “beginner” I am really not. I am in the dangerous post beginner, but a good distance from expert, period. Where knowledge is both expanded and becomes more discrete. And there is often considerable fluctuation in result at this level. Sometimes it is easier to be a beginner and just follow simple rules to achieve relatively safe average results.
So I just wonder where people come down on the pay for your mistakes vs the more aggressive greater risk greater reward approach. I tend to favor the second, but I better be sure that I am right.
Realize that if you are long long term and short short term, you are really just flat short term. All you really accomplish by doing this with multiple accounts is 1) tying up more margin and 2) paying more commissions and spread costs.
If you really think being long long term and short short term is a viable approach, then just add the positions in your head, and trade the end result.
Example: Let's say in 2012 you were long long term the whole year, and the months of Jan, Mar and July you wanted to be short short terms those entire months.
Add the two approaches in your head, then trade this in your account:
Jan - flat
Feb - long
Mar - flat
Apr, May, Jun - long
July - flat
Aug thru Dec - long
Note how Jan, Mar and July you'll have $0 margin tied up. With your idea of multiple accounts, you'd have 2 x margin tied up.
Feel free to ask if you don't understand, or if you disagree.
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.
Whether one trades by indicators, candlestick patterns, or chart patterns, one can often observe a different story based on the time frame you are looking at. It is almost like looking at completely different instruments. The ES for example can be bullish long term yet bearish short term. To the long term trader the down moves may appear as noise or fib retracements or something else, but to the short term trader it is a clearly defined trend.
For example I look at ATR a lot. Not really for setting stops, but to give me a sense of noise range. I don't really worry about price movements within some percent of ATR. Prices fluctuate. I try not to panic about noise. But the ATR on 5 minute chart will be substantially different than that of a daily, or hourly one. They can really be considered almost completely different animals. I say almost because the long term trend should eventually dominate.
If I take a position and put out a stop and a target there are three things that can happen at any moment. One I can hit my target and take profit. Two I can hit my stop and close for a loss. Three price can be fluctuating somewhere in between stop and target. During this period of fluctuation (noise), which can also be defined as shorter term price movements, opportunities should exist for trades that are correct within those faster time frames. It is during these times that I am considering taking positions opposite my longer term one.
The risk though is that these fluctuations are not really noise, as it would be described in the longer time frame, but are rather true indications that my analysis of the long term is just wrong. And I really should be closing that position completely. Admit I am wrong and move on. But having price move against you short term does not mean you were wrong. It might be an additional opportunity.
I'm not expert but this is my thoughts. When I get into a trade I know whether I am in a long term or a short term trade and I set my stops and targets accordingly. The only time I have changed from short to long term is when the entry worked really well and I might possibly leave a couple contracts on as a runner IF the long term chart backs up a continued swing in my favor. This year that has only happened once and I did finally get a higher sell price on my contracts but it was not a huge difference from where I normally would have closed my runners. And if I were in front of the computer I would have been shorting the tops, but I have a day job and so just left the stop above break even and went to work. Close the position when I got home.
You mentioned something about adding to the losing position. That's against my rules period. Every time I try it I take a bigger loss then I should have if I stuck to my game plan. This goes for moving my stops once the trade is entered. I occasionally move them right when I enter a trade but after the trade is placed and working the only way I move my stops are in my favor.
There have been some instances where I have been thinking two accounts would be nice. one account to let the runners run then an additional account to try reversals areas that are possibilities. Something I might consider in the future but as I said I have a day job and I think that may make too much for me to manage right now.
This is just my experience, take it for what it is worth
We will disagree on this one. What I am saying is 100% true, and when you are long in one account, and short in another account, the 2 positions absolutely 100%, no dispute, cancel each other out while you have both positions on.
I know exactly what you are trying to do - I have multiple systems that trade the same instrument, and when they have opposite positions, I am just flat. It doesn't impact placement of any exit orders.
What you are proposing can be done in one account - I know, since I do exactly that.
I have explained a way to 1) not have to open a second account, 2) free up margin and 3) save on spread and commission costs. The cost to you is that you have to do the long term and short term position accounting in your head, or on a spreadsheet, or have automated software do it for you, and then just trade the cumulative action in your account.
This is similar to what used to be called "hedging" in forex, which a lot of people liked, and tried a million ways to justify. Eventually, even the US gov't realized this was a useless tactic (except for brokers, who loved the extra commission), and banned it.
I am not offended in anyway. I very much appreciate commentary and advice from those with more knowledge and experienced than I.
I have to look at the math more carefully regarding this. You may be correct. I am really not sure. Part of me agrees with you. The other part thinks what you are arguing is like saying; A man put a turkey in the oven. While waiting for the turkey to cook he got hungry and decided to make a peanut butter and jelly sandwich. And so he starved to death because the turkey and PB&J cancelled each other out. Okay I know that's not what you mean.
The mathematics of trading is quite complicated in comparison to other forms of gambling. It is very hard to know if one is making a correct play. But it is still important to analyse things as best we can. And to learn from those around us. I thank you for your contribution to my and others learning.
Whenever I get confused by the math in different situations, I blow it up to really big numbers, and see what happens.
So, let's try that...
You and I are both thinking that long term, being long Euro is a good bet. So we want to be long, long term. But, we also both think the next week will be bad for the Euro, so we want to be short the whole week, exiting at Friday close. We feel so strongly, we are willing to bet the account on it (not a good idea, but that is another thread).
It is Sunday night, and we decide to take action on our conclusions.
Margin for the Euro is $2475. Right at Sunday night open, the bid is 1.3357, ask is 1.3358
You go first:
Account 1 you have $250,000. You go long at the market 100 Euro contracts. Your commission at $5 RT, and your price is 1.3358 (ask price). It ties up $247,500 of your margin.
Account 2 you have $250,000. You go short at the market 100 Euro contracts. Your commission at $5 RT, and your price is 1.3357 (bid price). It ties up $247,500 of your margin.
So overall, you have 100 long contracts, 100 short contracts, $495,000 tied up in margin, and you paid $1,000 in commissions. You are also out $1,250 is spread cost (you bought at 1.3358 and sold at 1.3357)
Account 1: $500K. Since my "system A " says go long 100 contracts, and "System B" says go short 100 contracts, I do the math in my head, add the 2 systems together, and do nothing - I am net flat.
During the week:
You: for every dollar you gain in acct 1, you lose a dollar in acct 2, and vice versa. All during the week, your net equity will never change when you sum the accts. Your purchasing power, though is only $5K at the most (not counting commissions). You can make no other trades. (this is probably the key to your understanding - you MUST see that your equity during the week NEVER changes. Your 100 longs in one account ALWAYS balance your 100 shorts in the other acct)
Me: I am flat, so my equity stays at $500K. My purchasing power is at $500K. I can make lots of trades.
Fast forward to end of the week:
At the end of the week, we both decide to exit our short term position, but keep the long position on. The price is 1.3300/1.3301 right before close and settles at 1.3301.
Your account 1: Net equity is $250,000 + 100*125000*(1.3301-1.3358) [price change]- 5*100 [commissions]= $178,250
Your account 2: Net Equity is $250,000 + 100*125000*(1.3357-1.3301) - 5*100 = $319,500 (you buy your short back at ask price)
Your overall account: 178250+319500 = $497,750 or a loss of $2,250 during the week
Me: at Friday close I buy 100 at 1.3301 = equity = $500K - 5*100 = $499,500, $500 loss during the week
So, your method cost you $1750 more than my method, yet we ended up the same place, and most importantly took the same net path to get there.
I hope that makes it crystal clear. My point: just do the math in your head, and trade the net position dictated by the sum of all your systems.
Edit: fixed my mistake. All numbers correct now
Last edited by kevinkdog; February 17th, 2013 at 08:56 AM.
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It should terrify you. For the reason you give in the second sentence. Just call it the 'add to losers system' and statistics and human nature will ensure many blown accounts. Been there, done that, we all have. Please don't go down this route. Accept being wrong, its ok, then the 'right's will happen when you least expect them.