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My case against a Millionaire Trader

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  • First Post: Jun 5, 2009 6:19pm Jun 5, 2009 6:19pm
  •  hanover
  • Joined Sep 2006 | Status: ... | 8,096 Posts
The math behind pyramiding (adding to positions already in profit, or 'averaging up')

Because I like to be a provocative smarta$$ , I (a rookie who trades only in demo) would like to very respectfully challenge a point made by a Millionaire Trader (Roland Campbell, interviewed in Boris and Kathy's book).

In the scenario being discussed here, Roland had added to a position already in profit, and moved his SL to BE on the original position. Roland says that "Your unrealized gains are not profits and therefore should not be considered as such. When you double down and move the stop to breakeven your trading with the houses money."

IWVRAT (I would very respectfully argue that) unrealized P/L is very real P/L, and that there's ultimately no difference between the "house's" and one's own money. Let's suppose that I am currently short 1 lot. I could immediately close the position and open another short of equal size. Now the P/L is realized, and I'm playing with my own money instead of the house's. Apart from the additional spread cost, my P/L, my net position (1 lot short), and my total exposure are all exactly the same as if I'd left the P/L unrealized. (Of course it would be senseless to do this, due to the additional cost, but I'm merely trying to demonstrate that there's no difference between realized and unrealized profit).

A similar argument has been put forward by those who hedge (in the same pair). They close profitable positions, on the assumption that the offsetting (unrealized) losses don't count until the trades are closed. But it's the net (realized plus unrealized) P/L that is significant, when it comes to funds that may be withdrawn from the account, or otherwise utilized elsewhere. If a margin call occurs, the trader can't say to the broker "hold on, those losses don't count, I haven't closed the positions yet". Everything else being equal, any unrealized loss has a 50/50 probability of either returning to breakeven, or worsening.

Now let's say that I'm short, in profit with my SL at BE, and I add to the position. In terms of considering overall bottom line, the second trade will win or lose on its own merit. If it tanks, it is decreasing my annual P/L, regardless of whether the first trade is a "free trade" or not. In fact, its effect is the same even if the first trade had never existed. Hence IWVRAT the "house money" concept is nothing more than an illusion.

Assuming one has opened a short position at "A" (see the diagram below), pyramiding is smart only if the probability of a continued fall at "B" exceeds 50%. In fact, if the probability of price falling at "B" is not significantly better than it was at "A", then one's overall expectancy is greatly improved by putting the entire position on at "A". Work through an imaginary example and prove the math for yourself.

As Roland points out "….you wouldn't use this strategy in a ranging market or when you expect a support/resistance level to hold." I agree, but IWVRAT it's the analysis (or market knowledge) that price will continue to fall that's providing the edge, not the operation of pyramiding itself.

As I've always attempted to point out, MM in itself can never provide an edge. Positive expectancy can only be achieved by the effectiveness (accuracy in timing) of entries and exits, on every component trade. It's all about being net long when price is rising, and net short when it's falling (more detail here).

Don't get me wrong. I happily congratulate (and admire) those who are more successful traders than I am. Their market knowledge and experience is vastly greater than mine, and I seek to learn from whatever crumbs they are willing to share. But I'm willing to take a David-vs-Goliath type stance when I want to allow math and logic to speak for itself.
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  • Jun 5, 2009 6:39pm Jun 5, 2009 6:39pm
  •  equilibrium6
  • | Joined Sep 2008 | Status: always treading carefully | 100 Posts
The principle behind moving SL to BE or moving it tighter is given:

Quoting hanover
Disliked

As Roland points out "….you wouldn't use this strategy in a ranging market or when you expect a support/resistance level to hold." I agree, but IWVRAT it's the analysis (or market knowledge) that price will continue to fall that's providing the edge, not the operation of pyramiding itself.
Ignored
It's obvious that moving the SL tighther in a ranging market would only decrease our wins and decrease our losses overall. It wouldn't change anything, only that the potential profits and losses would be smaller. But if the market is trending, then moving the SL tighter makes total sense, since if you're with the trend you'll probably not get stopped out and if the trend suddenly breaks in the opposite direction your SL would minimize your risks of huge drawdowns.

Adding to one's winning trades simply means that the person is confident that he caught the wave (trend) and price is going to continue in the desired direction. Adding to winning trades doesn't make sense in a ranging market.


These principles are very simple.
freedom
 
 
  • Post #3
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  • Jun 5, 2009 6:54pm Jun 5, 2009 6:54pm
  •  hanover
  • Joined Sep 2006 | Status: ... | 8,096 Posts
Quoting equilibrium6
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The principle behind moving SL to BE or moving it tighter is given:



It's obvious that moving the SL tighther in a ranging market would only decrease our wins and decrease our losses overall. It wouldn't change anything, only that the potential profits and losses would be smaller. But if the market is trending, then moving the SL tighter makes total sense, since if you're with the trend you'll probably not get stopped out and if the trend suddenly breaks in the opposite direction your SL would minimize your risks of huge drawdowns.

Adding...
Ignored
I am not disputing anything that you say. My point is that if the probability of price continuing to fall from point "B" is less than 50% (for whatever reason, e.g. about to enter an area of heavy support), then adding to the position is counter-productive. It is the weight of the technical justification, not the act of pyramiding itself, that is providing the winning edge. Pyramiding every trade simply because it is X pips in profit is not necessarily a profitable strategy.

I was talking about pyramiding, not the use of stoplosses.
 
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  • Jun 5, 2009 9:22pm Jun 5, 2009 9:22pm
  •  tunera
  • | Commercial Member | Joined Sep 2005 | 2,784 Posts
Quoting hanover
Disliked
I am not disputing anything that you say. My point is that if the probability of price continuing to fall from point "B" is less than 50% (for whatever reason, e.g. about to enter an area of heavy support), then adding to the position is counter-productive. It is the weight of the technical justification, not the act of pyramiding itself, that is providing the winning edge. Pyramiding every trade simply because it is X pips in profit is not necessarily a profitable strategy.

I was talking about pyramiding, not the use of stoplosses.
Ignored
I think the same as you, a trader should not give much importance to opened positions, no sl at be or add position, if the price is going to fall again, and u are already short, so that's good to sell.. but if u'r going to sell just because u've already sold 50pips ago, that's a stupid move.. like to put sl to be, when it's time to close position, close it! don't wait to let it go to the sl, and don't add other positions just because you are in profit and it's a "free" trade, it doesn't exist a free trade...
 
 
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  • Jun 5, 2009 10:00pm Jun 5, 2009 10:00pm
  •  Craig
  • Joined Feb 2006 | Status: Blah blah blah | 1,410 Posts
Scaling in is simply a way of trying to maximize winners for momentum based strategies, of course placing successive trades does not dictate the future direction of the market, but as always it's about the right tool for the right job, the market should be one that is conducive to a momentum approach. If you keep trying to scale into trades that get stopped out maybe a RTM approach is better for that particular environment. So IMHO scaling is neither intrinsically good or bad, just a tool to be applied where appropriate.
The breaking of a wave cannot explain the whole sea.
 
 
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  • Jun 5, 2009 10:18pm Jun 5, 2009 10:18pm
  •  Obaidah
  • | Joined Jun 2008 | Status: Member | 1,079 Posts
If im going to follow your theory, then you dont even have a realized capital when you're in a trade
I recommend you read something else as this sentence is now concluded.
 
 
  • Post #7
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  • Jun 5, 2009 10:52pm Jun 5, 2009 10:52pm
  •  equilibrium6
  • | Joined Sep 2008 | Status: always treading carefully | 100 Posts
Quoting hanover
Disliked
I am not disputing anything that you say. My point is that if the probability of price continuing to fall from point "B" is less than 50% (for whatever reason, e.g. about to enter an area of heavy support), then adding to the position is counter-productive. It is the weight of the technical justification, not the act of pyramiding itself, that is providing the winning edge. Pyramiding every trade simply because it is X pips in profit is not necessarily a profitable strategy.

I was talking about pyramiding, not the use of stoplosses.
Ignored
Yes, naturally; i thought this was pretty obvious and didn't need to be mentioned. And about stoploss, you did talk about stoploss in your post (the whole "whether or not it's the house's money" talk).
freedom
 
 
  • Post #8
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  • Jun 5, 2009 11:22pm Jun 5, 2009 11:22pm
  •  winningfx
  • | Joined Mar 2009 | Status: keep it simple stupid | 423 Posts
many a times, when i read things in this forum. someone will talk about a theory. which maybe stock or futures based. although they made sense but sometimes i don't think they apply to forex trading.

this strategy of adding to your already in profit positions are good. alot of famous stock traders credit this strategy in part for capturing big gains. but in forex wise, i think it's too risky. you maybe adding a position when prices are going to retrace. or even worse, a change in trend. there is nothing certain in the markets.
 
 
  • Post #9
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  • Jun 6, 2009 4:24am Jun 6, 2009 4:24am
  •  tinkywinky
  • | Joined Mar 2009 | Status: Member | 99 Posts
Last week was a good example. All were "seeing" things coming AFTER they happened and pointed on some past comment. Just like politicians :" refer to my comment of xxxx". But how many other comments have passed inbetween and one can fit at least one to the condition.

Last week was difficult and a friend of mine tried to close gbp/usd in profit when suddenly "rate has changed" came up and in the next second this pair dropped 120 pips. What do you do?

Stops, yes, but the problem was her broker does not allow putting stops in the same time as openinig a transaction (how stupid is that!!!!). So you open a trade, it executes and the window comes up assigning a stop, but your trade is already running. This was my first time seeing that as I use 3 different brokers but not hers.

Terrible. So all sort of things can happen in the markets and so good old theories may not be so valid any more. When your price drops through weekly/monthly supports/res in a matter of minutes (even seconds) several times a day on some roumors, I think we have to rethink the strategy.

I remember the days when eur/usd had about standard 76 pips move per day ad was really easy to trade. Or eur/gbp moved only 56 pips per day because the two currencies were (more or less) moving in the same direction etc.

Not any more. We just have to start "retraining" IMHO. difficult to break old habits though.
 
 
  • Post #10
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  • Jun 6, 2009 8:05am Jun 6, 2009 8:05am
  •  akukaya
  • | Commercial Member | Joined Jul 2008 | 567 Posts
Quoting hanover
Disliked
In the scenario being discussed here, Roland had added to a position already in profit, and moved his SL to BE on the original position. Roland says that "Your unrealized gains are not profits and therefore should not be considered as such. When you double down and move the stop to breakeven your trading with the houses money."
Ignored
Yes, I have the same opinion as Roland(although I am not as successful as him yet )

Hanover, dont you heard that many times people who trade with demo had more successful trades compare when they trades with real.
Why? One of the factors because of the phsycology or state of their mind that it is not their real money.

The same concept goes to when you get profitable money from your trades and think that as house money. The trades results after that is something like you trade on demo. Yes, I agree it just an illusion but the concept is the same as demo vs real thinking.

my 2 cents.
 
 
  • Post #11
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  • Jun 6, 2009 10:23am Jun 6, 2009 10:23am
  •  StoragePro
  • Joined Jun 2006 | Status: Vivere! | 1,034 Posts
In 1987 a good friend of mine had on a large position built over some time in the bond market. With stop losses in place, those markets reversed with power on October 19, AKA, "Black Monday".

The "House Money" soon became his losses because his stops took about a week to execute.

Moral of the story - it is not your money, until it is in your pocket. I dislike the idea of 'house money'. Psychologically, it is unclean. Financially it is unsound.

This is a good topic to discuss. Hanover settled on a big thing that has killed many traders.
I'm pretty much done with all this ...
 
 
  • Post #12
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  • Edited 3:25pm Jun 8, 2009 2:58pm | Edited 3:25pm
  •  hanover
  • Joined Sep 2006 | Status: ... | 8,096 Posts
Thanks to everybody who replied. I've read every post carefully. If I was to respond, I would probably only end up re-stating points that I made in the original post.

To summarize, my point is that if I'm going to take on more risk by adding to a position, there needs to be some technical or statistical justification for my doing so, as opposed to the fact that I have some 'unrealized' profit, which makes it seem more palatable.

To some that may seem overly pedantic, but I don't think there's any harm in thinking about WHY we make the trading decisions that we do.
 
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  • Post #13
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  • Jun 8, 2009 3:29pm Jun 8, 2009 3:29pm
  •  daytrading
  • Joined Sep 2007 | Status: Member | 801 Posts
The technical justification can be quite simple: if the price keeps going up (trend), keep buying - you can only be wrong once - when it stops going up. Same on the way down. When the market (on the way up) makes a new high, trail at 50% (or just below). Do the same with each new position (and move the previous positions' stops with it). If the last one eventually gets caught in a 'first lower high' pull-back, your out with profits from all but the last position. Take high enough time frames for larger identifiable trends (not 5 minute charts).

regards
daytrading

P.S. never overcomplicate and make it too technical.
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  • Jun 8, 2009 5:35pm Jun 8, 2009 5:35pm
  •  hilmy83
  • Joined Jun 2006 | Status: Do NOT tilt | 5,708 Posts
Quoting daytrading
Disliked
The technical justification can be quite simple: if the price keeps going up (trend), keep buying - you can only be wrong once - when it stops going up. Same on the way down. When the market (on the way up) makes a new high, trail at 50% (or just below). Do the same with each new position (and move the previous positions' stops with it). If the last one eventually gets caught in a 'first lower high' pull-back, your out with profits from all but the last position. Take high enough time frames for larger identifiable trends (not 5 minute charts)....
Ignored
when i switched over from swing trading to intraday charts, i used this same method and it just did not work for me. It does depend on where you trade.
Working towards CME membership
 
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  • Post #15
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  • Jun 8, 2009 5:48pm Jun 8, 2009 5:48pm
  •  daytrading
  • Joined Sep 2007 | Status: Member | 801 Posts
Quoting hilmy83
Disliked
when i switched over from swing trading to intraday charts, i used this same method and it just did not work for me. It does depend on where you trade.
Ignored
Hilmy, hi -

No, I would not expect this to work intraday. Whatever time frame the charts are displayed in, one needs to see at least a few weeks of data.

regards
daytrading
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  • Post #16
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  • Jun 9, 2009 7:15am Jun 9, 2009 7:15am
  •  PeterFM
  • Joined Apr 2006 | Status: Suaviter in modo, fortiter in re | 1,851 Posts
Quoting StoragePro
Disliked
In 1987 a good friend of mine had on a large position built over some time in the bond market. With stop losses in place, those markets reversed with power on October 19, AKA, "Black Monday".

The "House Money" soon became his losses because his stops took about a week to execute.

Moral of the story - it is not your money, until it is in your pocket. I dislike the idea of 'house money'. Psychologically, it is unclean. Financially it is unsound.

This is a good topic to discuss. Hanover settled on a big thing that has killed many traders.
Ignored
The 'House' didn't fund my account; the 'House' didn't tell me not to enter a trade as they maybe knew it was a dumb move; the 'House' never tells me when is the right time to take profit; the 'House' owes me nothing and I owe it nothing.

At every point in my trading it is always MY money that is on the line. The profits are mine and the losses are mine.

As to your question, I often have multiple trades running when my instincts tell me that a move with the trend (as I see it) can be exploited.
 
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  • Post #17
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  • Jun 9, 2009 7:35am Jun 9, 2009 7:35am
  •  G33maroon
  • | Joined Nov 2007 | Status: I Don't Care! | 749 Posts
What it is the meaning "playing with house money"?

unclean?? financially unsound? too academically? i am crazy......
I am bored..
 
 
  • Post #18
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  • Jun 13, 2009 2:16am Jun 13, 2009 2:16am
  •  hanover
  • Joined Sep 2006 | Status: ... | 8,096 Posts
Quoting G33maroon
Disliked
What it is the meaning "playing with house money"?

unclean?? financially unsound? too academically? i am crazy......
Ignored
Playing with 'house money' refers to taking risks with profits already made. In gambling-speak, the casino is referred to as the 'house'. So if I am ahead $100 while playing Blackjack or Roulette, then the money was not mine to begin with, it came from the 'house'.

Frequently gamblers (and some traders) are more willing to take greater risks than usual, when it is their winnings ('house money') that's at stake. I believe that the concept is flawed, for the reasons I gave in post #1.
 
 
  • Post #19
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  • Jun 13, 2009 2:58am Jun 13, 2009 2:58am
  •  bosun2007
  • | Membership Revoked | Joined Feb 2009 | 256 Posts
Quoting daytrading
Disliked
Hilmy, hi -

No, I would not expect this to work intraday. Whatever time frame the charts are displayed in, one needs to see at least a few weeks of data.

regards
daytrading
Ignored
It works for me even on intra-day.It depends on your method
we cannot succeed without a well defined risk management.
 
 
  • Post #20
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  • Jun 14, 2009 12:48pm Jun 14, 2009 12:48pm
  •  4XWeezal
  • | Joined Jan 2007 | Status: Member | 419 Posts
how far in profit is recommended? and how much more to add? and how long do you stay in the trade? House money or not;.. I think those answers woud be interesting to know... I don't know about the big breakeven slide. Ive never had any success on that. Also, sometimes the market goes up; sometimes it doesn't. I mean; what is the theory? Make money and double down and hope it goes further. If it's let your profits run; would it not be better to look for a 3-1 or 4-1 reward to risk than add to a a position that could be counter trend?
Also, has this guy just written a book for suckers or did he actually make a ton of cash as live trader? Most of these dude's are monday morning fingerpointers; not true traders.
 
 
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