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Building a daily cushion
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Building a daily cushion

  #1 (permalink)
 Vendor: diversifyportfolio.com 
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Building a daily cushion

Some people advocate building a cushion each day on small size before moving on to trading larger size. Essentially the advice is 'go for base hits' and once you've built up a cushion, increase size (or go for larger targets).

I'v tried to think of this from different angles but really do not see the benefit. I only see negatives in doing this.

Lets say your max position size is 3 contracts. You have a specific daily loss limit at which point you stop trading, and you also limit yourself to 3 losses before calling it quits for the day. Your money management allows you 3 max position losses before reaching your daily loss limit. If you subscribe to the 'build a cushion' philosophy you would likely trade 1 lots or perhaps 2 until you build up a few hundred dollars for the day (or go for smaller targets initially). At that point you may move up to your max position size of 3 lots.

The benefit of this is that you obviously start the day with reduced risk. Ok great.

The flaw in this logic is that the outcome of every trade is unknown. It doesn't matter if you have a 50% win percentage or an 80% win percentage. The outcome of the next trade is ALWAYS unknown. Therefore in my opinion you should treat every trade the same, irrelevant of how much you're up or down for the day so far.

Lets say you've taken 2 trades for he day on reduced size (1 or 2 lots). You reach your 'cushion' of $300 so you are now allowed to trade 3 lots on the next trade. Next trade comes along on increased size and it's a loser. But because of the increased size you wipe out the entire $300. You're back to zero.

However your money management dictates that you can afford 3 max position size losses in a day. If you had traded your max position size from the beginning, 2 winners plus 1 loser, you're up for the day.

Im really battling to see the benefit of building a cushion on reduced size other than the smaller risk at the beginning of the day. But that does not outway the fact that you then chop and change position size on each trade in an environment where you do not know the outcome of the next trade. It's like saying 'I've made $300 today so now I know my next trade will be a winner so ill trade bigger'. No,...the outcome of every trade is unknown.

Does anyone here advocate changing position size or going for bigger targets based on how much you're up or down for the day? I have honestly been looking at this to see if it will be beneficial but the math just doesn't seem to add up.

Thoughts?

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  #3 (permalink)
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A trader varying bet size sometimes (though not always) implies that (s)he does not understand the concept of 'edge' well.

I always advocate all-in all-out for most small accounts that trade leveraged products. This assumes that these accounts are under capitalized. Small and big are not relative terms - the position size has to factor in the account size.

Risk (stop-loss) always needs to be a function of the account size even when it becomes big enough to cater to the stops that are dictated by market structure.

So my advice usually is: trade small if you wish till your personal comfort is ready to move to the next level but do not vary bet size during the day.

However scaling-in using a plan (never averaging down) can be a built-in implication of a plan that starts small and then adds, but starting small to 'fetch winners' and then moving up is simply psychological trickery.

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  #4 (permalink)
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Forget the math - math is simply a small base

A trader must not consider that he is trading the 'market's money' when up for the day.

If he has earned the money and it shows up in his account it is his hard-earned income and should be treated with equal respect as the booty he started off his day with.

Here are the steps to address this issue if a trader alters his trading, bet size or attitude based on if he is up or down for the day. This is the way I addressed it:

1. Describe the problem:

'I trade too loose when I am up big on the day.'


2. Why does it make logical sense that you would react, think or feel that way?

Mental problems seem illogical or seem to be manifestations of deep psychological issues.

I used to think I am a psychological wreck.

Not true.

Each mental problem has a LOGICAL REASON.

The logical reason that when you have had a (big or otherwise) winner that day then:
a. your confidence is high, which leads to
b. trading seems easy at that moment and seems that WHATEVER YOU DO you will win

Thus we have defined the problem.

Moving to improvement:

3. Why is the above logic flawed?

Traders usually are semi-aware of multiple reasons that the above logic is flawed.

The way to solve this flawed trading habit logically is that:

a. You believe at a deeper level that you are in more control (of the market) (of your entries/exits) that you really are
b. You harbor a fantasy of perfect control, a militaristic regime where you watch every tick and thus 'stay in control'.

There are times when this is proved to be incorrect, and you reaction is
a. you win again - intense overconfidence
b. you lose at the next trade - boiling anger

4. What is the correct way to handle the situation?

'Don't worry about how much you are up' is a good logical reasoning to present to yourself.

But there may be a need of multiple answers.

We need to eliminate every flaw that me lead us down into the bottomless pit - it is well worth it.

So one more logical reasoning statement is:

'I cannot control market outcomes, I can only control how well I handle the trade and how I react'.


5. Why is that correction correct?

You need to state the rationale to to the answers.

Though this seems redundant now that you have your solutions - repetition helps the accelerated learning, and reinforces the logic and adds extra clarity that is critical in pressure situations like trading.

'If I loosen up because I am up for the day it means I will continue winning no matter what I do. Because of the nature of market participants this obviously is not true, so I JUST HAVE TO FORCE MYSELF TO KEEP TRADING WELL.'

This has to be learned over and over and over till you do it unconsciously.

Each time the problem happens the above five steps need to be repeated.

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  #5 (permalink)
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The cushion concept has no real positive impact on life trading. It has maybe a "tranquilizing" effect as long as it works.
But it might push you into a higher risk area where a negative trade with more cars easily erases any winners made
before as @DarkPoolTrading mentioned.
I do not use this in my trading.
In contrary I am doing my journal on a 1 trade basis to review the days where my trading plan worked well
versus the days it worked not so well. The result over a year shows then a theroetical result of that very
trading plan. No scaling up or scaling down - with distorting rules! So the bare net trading plan shows up in
one result which hopefully is positive.
The higher risk I am taking when trading more than 1 car (which I do not put into my trading journal) is
only on clear visible days where I know my trading concept is customized. On these days I try to squeeze
out some more gains out of the market.
To make it short - I have a journal based on 1 car per trade to see a theoretical result plus I get my real
balance with my statement. Comparing both I can get the performance by pushing the "risk" a bit

GFIs1

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  #6 (permalink)
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iqgod View Post
However scaling-in using a plan (never averaging down) can be a built-in implication of a plan that starts small and then adds, but starting small to 'fetch winners' and then moving up is simply psychological trickery.

Agreed. Scaling in is a different subject and is something that can be quantifiably tested within a strategy. However going for base hits and building up a cushion in a given day, then changing your strategy by either going for bigger targets or trading bigger size does not make sense. Essentially by taking that approach you are saying two things:
  • Because I am up X amount today, my next trade is more likely than the previous trades today to be winners and I will therefore trade more aggressively
  • Trades later in the day are more likely to be succesful than trades early in the day

In my opinion both of those concepts are not true and show that the trader does not truly believe that the outcome of every single trade is unknown and that every trade should be approached in the same manner when your edge presents itself. If you reach your daily loss limit, stop trading. But until that point no trade is more or less likely to succeed. By increasing size or changing trading style after a few base hits, the trader does not believe that.

Again, this is a completely different concept to scaling in, as well as longer term portfolio growth where you increase your position size as your account grows.

However I do find it interesting that some people advocate this, and would be interested to hear the reasoning.

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