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Adding to trades - best practice? Calculation attached
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Adding to trades - best practice? Calculation attached

  #11 (permalink)
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I'm not sure where you are at in your trading journey and what methods you have found worked / didn't work for you.

When I first got started trading a couple years ago I developed a plan based off market volatility. Essentially I had extremely large winners around 15% of the time, that made up for the losses I took along the way.

I found for me personally this system was extremely hard to stay disciplined in as the human psychological element to take smaller winners to get breakeven is difficult.

@Scalpingtrader stated my concerns about the non linear nature of the markets.

But what I would suggest doing is also perhaps doing a monte carlo / or some sort of analysis to get some idea of potential drawdown from different trading ideas.

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  #12 (permalink)
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Scalpingtrader View Post
the main problem with all of this imo is that the market is not linear. Your edge occurs at certain moments, so by linearly scaling into a position, you are not scaling into your edge but scaling into randomness, regardless of the initial position's edge.

I am absolutely in favor of scaling into winning trades to size up the instances that work compared to those that don't - but the where, how and how much in my opinion can only be decided individually for each trade.

For sure the market is not linear. Sometimes you are only aiming for 10, other times 20. You'll probably look for pullbacks to add, and they will occur in different places, and not every 2 points. The point of the exercise was to find out what happens if you let your winners run by doing nothing (AIAO), or whether you sized up as the trade moves in your favour. Not suggesting adding linearly is the way to go, or that this should be a template for trading, but just to find out mathematically which way (over time) I'm going to make more money, while not adding risk.

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  #13 (permalink)
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sixtyseven View Post
For sure the market is not linear. Sometimes you are only aiming for 10, other times 20. You'll probably look for pullbacks to add, and they will occur in different places, and not every 2 points. The point of the exercise was to find out what happens if you let your winners run by doing nothing (AIAO), or whether you sized up as the trade moves in your favour. Not suggesting adding linearly is the way to go, or that this should be a template for trading, but just to find out mathematically which way (over time) I'm going to make more money, while not adding risk.

But you are looking at risk in relation to only 1 trade when I think you should be looking at risk in relation to account size -

If you are looking at it from just a theoretical statistical model and you have 100 trades and 14 make a truckload of money, there is no way to predict when those 14 will come along. So you might have 30 losers in a row. If each loser is $1500 your account drops $45k.

I think that is the downside to trading a system where there are such few winners is that your potential drawdown is just so much greater.

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  #14 (permalink)
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sixtyseven View Post
The 'random entry' study - by default will come out at breakeven - regardless of parameters. Try re-running your study with a statistical edge and adjusting trade management and see what happens. I'm quite sure it won't come out at BE.

With 50% edge (randomness) you have equal chance to get 5 points or lose 5 - and you also have a 50% chance to gain 50 or lose 50 (ignoring long term bullish drift etc). On that I'm sure we agree.

So with a 56% edge I have a slighter higher probability to get 5, than I do to lose 5. And I have that same slightly higher probability of 56% to gain 50, rather than lose 50. So on that logic, at each increment in price I have a 56% chance it will move in my favour by 2, rather than against me by 2. And so by extrapolating it out (assuming 5 targets of 2 points) you end up with a risk:reward of 2:10 with 44% chance of losing 2, and 5.5% chance of gaining the full 10. So on that I think we also agree - the larger the target (relative to risk), the smaller the win %.

Thanks for the clarification.

I agree with using a monte-carlo simulation to account for the randomness / streakyness of system performance.

I also agree there is a psychological aspect underlying all of this. Either scaling in or scaling out, is done for psychological reasons, not in order to maximize profitability. A trader may have a theoretically optimal system, that maximizes profits, which they cannot actually implement, or stay with, due to the psychology associated with the risk inherent to that system.

Be Patient and Trade Smart

Last edited by trendwaves; May 26th, 2015 at 04:25 PM.
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  #15 (permalink)
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I'm not sure I understand your spreadsheet.
I did something a little more theoretical after reading one of Ernie Chan's blog's.
With the exception of one person I believe it was very well liked.

https://futures.io/traders-hideout/35452-why-you-should-add-winners-never-add-losers.html

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sixtyseven View Post
I've tried to model the ways you could manage the trade, to try and find what is best mathematically. The results are quite interesting.

4 scenarios's.
a) All in all out
b) Add contracts as the trade goes in your direction
c) Add contracts, and then start scaling out
d) Start scaling out as it moves in your favour.

They each have the same max loss / risk. As the trade moves in your favour you start adding size, so you aren't taking on more risk.

Each scenario has the exact same probabilities of reaching the various targets. I'm assuming you have a method / system - and so the outcome ultimately depends on how you manage the trade.

I have included 3 sheets.
a) 3 targets
b) 4 targets
c) 5 targets.

The reason being, at the start of the trade you are aiming for 5 targets (letting winners run), but perhaps you determine the market has changed after 3. So you exit. At that point you are only half way through your normal trade management - so I wanted to see how the results between management style would differ in that situation.

I've made the s/sheet so most things can be tinkered with (max risk, commission, equity etc etc). The most important one is the edge %. It gets interesting here. I was struggling in my head as to whether the edge % plays out over the entire trade. I came to the conclusion the probability of the market either going up or down (your edge %) stays the same regardless of how far price has moved. So if your edge is 56%, then after the 4th target there is still a 56% probability that price continues to move in your direction. I assume your edge includes being able to 'read' the market. So when have determined the market conditions have changed, and your edge no longer holds, you'll exit the trade - otherwise you are just gambling. For those who believe your probability decreases the further price moves in your favour, then there is an option on the 5 targets sheet to adjust the last 2 targets to random - i.e 50% of either going up or down.

Based on this s/sheet it is blatantly obvious the best method is to add to the trade, and then exit all out. And scaling out, without previously adding size just plain sucks. AIAO, even on small accounts sizes with a 10 points total target are a sub-optimal way to trade. And therein lies the reason why I'm posting this to the forum. It's quite possible there are errors or inconsistencies, or my logic is corrupt somewhere. So I'd appreciate it if people would look this over (or perhaps try and re-create your own and compare results) to see if you can find something I've done wrong.

Thanks for this sheet. Im looking over it to understand. I made something slightly similar but to help understand position sizing. I posted in my trade journal. Its based off the idea from Van Tharp's marble game for position sizing but I created it in excel with the random number generator function. So it takes less than a sec as opposed to hours.....lol.

If you dont mind I would like to hear your thoughts. Here is the link to the post with the sheet https://futures.io/elite-trading-journals/35004-ronald-s-trade-journal-7.html#post506713

and here is a link to the post with a short video explaining it https://futures.io/elite-trading-journals/35004-ronald-s-trade-journal-6.html#post505984


Thanks again for this Homework......
Ron

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The steed of this Valley is pain; and if there be no pain this journey will never end.
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