Money management - relationship between profit and position size

[Trembling Hand]

Based on my research, the best way to exit from a trade is through a signal. That signal might be based on the same logic that caused entry to the trade with the same parameter set, but in the opposite direction. Or by the same logic but with a different parameter set. Or by a completely different signal.

The final way to exit a trade, and the least desirable one with the poorest performance by far, is the maximum loss stop.

Howard I not with you on this one

If you have a signal that is priced based then they can be the same? Both a signal and and a stop loss. Or are you saying that that is really just a signal?

And as a purely discretionary trader that has started to play around with system development I have come up with some ideas that are greatly improved by having a Max stop. Here is an example. Lets say I have a system that trades intraday based on the longer term trend/swing (10-20 day) so I enter at the open and exit at close OR maximum stop. The system with the stop has a 40% better profit than without over 300 days because it reduces the worst 50 losses.

 

[nizar]

And as a purely discretionary trader that has started to play around with system development I have come up with some ideas that are greatly improved by having a Max stop. Here is an example. Lets say I have a system that trades intraday based on the longer term trend/swing (10-20 day) so I enter at the open and exit at close OR maximum stop. The system with the stop has a 40% better profit than without over 300 days because it reduces the worst 50 losses.

Interesting observation.

For me, i couldnt find an initial stop that improved my system in any way (profit, drawdown, equity curve, etc) and I tried several.

In the end, I just made initial stop = the trailing exit because I wanted to use fixed percent risk for position sizing.

I agree with Howard that stops hurt systems and are the worst kind of exit, but as he has said in the past, this doesnt mean you shouldnt have them.

 

[MichaelD]

I agree with Howard that stops hurt systems and are the worst kind of exit, but as he has said in the past, this doesnt mean you shouldnt have them.

If you ask me, the worst kind of exit for a system is the "bottom drawer" exit (aka the "it's a good company" stop).

 

[Frank D]

Bassman,

3% stop loss!

So why haven’t you factored in your % profit?

Most system traders would find it hard to get a Risk: loss to 3:1

So if your stop is 3% are you happy with 7-10% profit per trade.

Why don’t you partial exit your trade into 2 lots to maximize reward?

Initially take the first target (first portion), and let the 2nd part of the trade run


Developing a trend based system on CBA and BHP, why do you need stops?

On average the markets compound every year 10-12%, so why place a stop on a company like CBA or BHP.

Having those stocks in the bottom draw for 20 years will make you more than not having those stocks.

The argument needs to be taken into context with what is traded, how it’s traded, and timeframe of the trade: - leverage or not. How large the position and how you manage winning trades and not just losing trades.

Are you trading leverage or not?

A trader with capital limitations because of their account size will need stops, especially trading leverage.

As an investor looking at the long term, and the fundamentals of the company they don’t need stops.

Take CBA for example; what stops should be used for CBA?

Maybe when they stop paying dividends.

You just can’t throw a blanket over the entire topic and say you need stops or you don’t need stops, unless trading leverage.


If you have a 50% LVR on your margins, you’ll get a margin call on a drop of about 30% of your portfolio.

You could actually buy a put call over your stock holdings to hedge your positions.

Everything is pretty manageable.


Personally I don’t know why people spend their time trying to develop systems. I know people try and convince me that back-testing is the silver bullet, but it’s so misleading.

Build a trending system and markets become trend-less. Build a swing system and markets trend and frequency drops. Whatever system you develop it will work for some time, and it will stop working some time later.

Learn to chart read effectively and flick systems in the dustbin where they belong.

 

[nizar]

If you ask me, the worst kind of exit for a system is the "bottom drawer" exit (aka the "it's a good company" stop).

LOL haha, yeh i cant argue with that.

 

[nizar]

Learn to chart read effectively and flick systems in the dustbin where they belong.

LOL what a funny guy

 

[wayneL]

LOL what a funny guy

You can LOL when you're a better trader than Frank, but until then,laughing at Frank just makes you look a fool.

 

[Frank D]

Nizar

Honest question...

Do you know how to chart read the market?

 

[tech/a]

3% stop loss!

So why haven’t you factored in your % profit?

Most system traders would find it hard to get a Risk: loss to 3:1

So if your stop is 3% are you happy with 7-10% profit per trade.

Frank that's not it!
That's capital risked /Trade not R/R.
8-12:1 (Average) we all have outliers-- for long term trading systems isn't un common.
33% win rate isn't un common either.

There is a place for everything.
Designing systems will teach you a heap about what will work in discretionary trading and whats likely not to.
You'll learn a lot about mechanisation and you'll be frustrated by the in flexibility that Systems trading by design hands you..
BUT you'll play the tortoise and most likely survive where most un trained discretionary traders will perish.

You'll learn trade management and the importance of each aspect of a trade from entry to management to exit. You'll dissect more trading ideas and plans then most discretionary traders will even dream up. You'll know to dismiss more than you accept and that which you accept wont be because its a good hypothesis.

But after many years of trading systems and designing them I finally bow to those who are competent discretionary traders who in times of uncertainty and lack of sustained trends (years) have demonstrated through both practical application and now through my own experience---that this is (Discretionary Trading) a truly profitable and viable trading style.

 

[nizar]

You can LOL when you're a better trader than Frank, but until then,laughing at Frank just makes you look a fool.

I didnt say I was a better trader than Frank.
But you shouldnt dismiss other methods when you dont understand them.
There is more than 1 way to make money in the market.
You should know this Mr. Moderator. So should Frank.

 

[nizar]

Nizar

Honest question...

Do you know how to chart read the market?

Regardless of whether or not I can chart read the market, it would be incorrect for me to say that charts belong in the dustbin, they way you said about systems.

There are many people who read charts and trade discretionary and clean up and there are others who trade using systems and clean up.

It is foolish to dismiss another idea just because its not your way of trading.

 

[vciscato]

Hi there,

As part of my money management project, I also wish to revisit my stops.

Can anyone recommmend any books dedicated specificially to stops. Heavy reading is ok by me.

Bassmann

Hi,
One of the best books on money management which includes stops is : The Aggressive Investor by Colin Nicholson.

From your earlier quote on % of capital per trade, I do think you are taking on too much risk from the levels you quoted. I use 6% of allocated capital as the maximum for each trade. Some trades I only allocate 3%, but never go past 6%. I find from experience that managing about 20 stocks when fully invested is about right. To do the maths 6% of capital will allow purchase of 17 stocks.

The risk per share or trade is 1% of allocated capital as maximum. I normally try and keep this down to 0.5% it depends on what you are comfortable with. I have found this has worked for me.
cheers,vic

 

[Frank D]

Nizar,

Don’t get your knickers in a not…

The fact is most don’t know who to chart read effectively so they have to rely heavily on the indicators that they use to trade with. There is no right or wrong answer to the question. Whether you can or you can't isn't important.

Personally I can chart read effectively so I don’t need a system to tell me when to enter trade. But I do need to know how to manage the trade.

As long as I know my money management, trade management and my 'end result'.

When building systems why not instead put the end result first?(monetary reward) and then try and build the system around that.

I have $20,000, and I would like to make %5 per month. Or I have $20K and I would like to make 5% per week.

Just those two scenarios will need two different systems, and completely different 'trade' management techniques.

If I want to make 50% on my account, do I have to trade 100 times a year or can I only 4 times a year?

The trader might actually realize that he or she might only need to trade 8 times per year to achieve the monetary reward on the account, than trying to build a system that triggers 100 times per year.

That was the point in asking how much are you happy with if risking %3 per trade? Do you want 7-10% or much more as an end result.

For many, systems usually start with price based indicators, which then try and achieve the greatest expectancy and profit ratio. A tweak here and a tweak there can increase the results favorably. After they build the system they then optimize it with money management techniques. Often what looks great in backtesting, often doesn't work in live trading.


You know I built the world's best price-indicator based systems when trading Index futures, and two weeks later they were the world's worse......

 

[WaySolid]

The final way to exit a trade, and the least desirable one with the poorest performance by far, is the maximum loss stop.

I found this comment interesting as well, are you able to expand on it Howard?

I view them as terrible things but am yet to find a better alternative to having them in place and exiting a decent (far too large sadly) % of my trades using them.

If you are exiting a losing position with anything other than a predetermined exit then I would ask why that exit isn't a potential SAR as well.

 

[howardbandy]

I found this comment interesting as well, are you able to expand on it Howard?

I view them as terrible things but am yet to find a better alternative to having them in place and exiting a decent (far too large sadly) % of my trades using them.

If you are exiting a losing position with anything other than a predetermined exit then I would ask why that exit isn't a potential SAR as well.

Hi WaySolid --

There are more flames and heat in this thread than I am comfortable with.

My comment comes as a result of testing systems.

Given that a trading system has a method for entering a long position, each of the exit techniques can be evaluated independently.

See if the logic that gave the signal to enter a position also gives information about when to exit the position. For example, if the trade is entered on a moving average crossover, see if there is an equivalent exit. If the system entered because the entry date is a certain time of the month, see if there is a time of the month that you do not want to be long.

If the system is intended to hold just a few days, try using a timed exit or a profit target. The system might buy on an extreme oversold condition. Try selling after one day or two days. Or selling when the trade has a 1% profit or 2% profit.

If the system looks for trends that last for several weeks, it is difficult to set profit targets of timed exits without picking values that fit specific events that occurred in the history. You might get better results by using a trailing exit -- the chandelier exit that moves the exit point up as the price rises is a good one.

If the trade goes against your position without ever becoming profitable, there must be some way to exit the trade. If the system has no other method, then the maximum loss stop is the last resort.

My point is that it is better to design intelligent ways to exit rather than allow the maximum loss stop to be hit regularly.

Should an exit from a long position be an entry to a short position as in SAR (Stop And Reverse)? Maybe, but it depends very much on what that trading system does. A system that looks for extreme overbought or oversold conditions and holds only a few bars would not be a good candidate to be SAR. A long term breakout system might be.

Thanks for listening,
Howard

 

[It's Snake Pliskin]

Hi WaySolid --

There are more flames and heat in this thread than I am comfortable with.

My comment comes as a result of testing systems.

Given that a trading system has a method for entering a long position, each of the exit techniques can be evaluated independently.

See if the logic that gave the signal to enter a position also gives information about when to exit the position. For example, if the trade is entered on a moving average crossover, see if there is an equivalent exit. If the system entered because the entry date is a certain time of the month, see if there is a time of the month that you do not want to be long.

If the system is intended to hold just a few days, try using a timed exit or a profit target. The system might buy on an extreme oversold condition. Try selling after one day or two days. Or selling when the trade has a 1% profit or 2% profit.

If the system looks for trends that last for several weeks, it is difficult to set profit targets of timed exits without picking values that fit specific events that occurred in the history. You might get better results by using a trailing exit -- the chandelier exit that moves the exit point up as the price rises is a good one.

If the trade goes against your position without ever becoming profitable, there must be some way to exit the trade. If the system has no other method, then the maximum loss stop is the last resort.

My point is that it is better to design intelligent ways to exit rather than allow the maximum loss stop to be hit regularly.

Should an exit from a long position be an entry to a short position as in SAR (Stop And Reverse)? Maybe, but it depends very much on what that trading system does. A system that looks for extreme overbought or oversold conditions and holds only a few bars would not be a good candidate to be SAR. A long term breakout system might be.

Thanks for listening,
Howard

Thanks for the perspective Howard.

 

[It's Snake Pliskin]

Nizar,

Don’t get your knickers in a not…

The fact is most don’t know who to chart read effectively so they have to rely heavily on the indicators that they use to trade with. There is no right or wrong answer to the question. Whether you can or you can't isn't important.

Personally I can chart read effectively so I don’t need a system to tell me when to enter trade. But I do need to know how to manage the trade.

As long as I know my money management, trade management and my 'end result'.

When building systems why not instead put the end result first?(monetary reward) and then try and build the system around that.

I have $20,000, and I would like to make %5 per month. Or I have $20K and I would like to make 5% per week.

Just those two scenarios will need two different systems, and completely different 'trade' management techniques.

If I want to make 50% on my account, do I have to trade 100 times a year or can I only 4 times a year?

The trader might actually realize that he or she might only need to trade 8 times per year to achieve the monetary reward on the account, than trying to build a system that triggers 100 times per year.

That was the point in asking how much are you happy with if risking %3 per trade? Do you want 7-10% or much more as an end result.

For many, systems usually start with price based indicators, which then try and achieve the greatest expectancy and profit ratio. A tweak here and a tweak there can increase the results favorably. After they build the system they then optimize it with money management techniques. Often what looks great in backtesting, often doesn't work in live trading.


You know I built the world's best price-indicator based systems when trading Index futures, and two weeks later they were the world's worse......

Thanks for your input and perspective Frank.

 

[It's Snake Pliskin]

It is foolish to dismiss another idea just because its not your way of trading.

In part this could be wrong, but worthy of a bigger discussion.

 

[wayneL]

I didnt say I was a better trader than Frank.
But you shouldnt dismiss other methods when you dont understand them.
There is more than 1 way to make money in the market.
You should know this Mr. Moderator. So should Frank.

You're shifting the goalposts dude. That was never the point.

You LOLing at Frank is like a Clydesdale LOLing at Secretariat.

The truth is that a proficient chart reader will outperform a mechanical system. It may be rarer, but that doesn't alter the truth.

One need look no further than your mechanical results as posted on your blog. A decent chart reader makes money while your system is suffering a calamitous drawdown. You may become profitable someday, but meanwhile, it's business as usual for the likes of Frank, Nick et al.

"But you shouldnt dismiss other methods when you dont understand them."

By this comment you have been hoist by your own petard... think about that Nizar.

 

[MRC & Co]

Some fantastic stuff here fellas.

One question, have any of you tried over any decent length of time, exiting a position if the trade does not go in your favour within a couple of days? (was it Jesse Livermore who used to do this?).

I personally found my most successful period came when doing this, I initiatied only 20 trades over a 3 month period and made a profit of just over 30%. Wish I could compound that over a year or two

Since, I have been using a traditional initial stop based on chart patterns (below a double bottom, support etc) and do not exit until either the stop is hit or the position moves in my favour before I adjust that stop, however I find this far less profitable (maybe simply due to volatility and now being a time where very short, high frequency trades are going to make you the $$ IMO). However, over the past week I have moved back to my initial exit strategy.

Any thoughts?