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Do you manage losers and let your winners run?

Quoting alphaomega
{quote} Perhaps I had to say it differently. If you place trades in a random way and without any structure/framework the expectancy per trade is always negative. It doesn't matter where you place the stop and where the target. It also doesn't matter if cut your losses or if let the "winner" run. The result is always negative. And the expectancy per trade doesn't change. However, if you find some specific (proven) pattern where you can extract consistent result, then the story is completely different. Of course you can have positive result with equidistant...
Hi alphaomega,

Agreed! You can't just shoot from the hip and expect to come out on top.

I have seen studies that claim coin-toss random entry methods can be net profitable if you cut losers on a fixed stop and trail profits, but I've never been able to replicate this in testing. If it does work it works by having a low success rate, very deep and long lasting drawdowns with lots of losers and the odd huge winner that pays for it all. Not sure many people have the emotional strength and discipline to trade that with real money, I certainly don't!
I let them both tunning
Quoting Sis.yphus
Think about this. We take 100 trades. Every trade is a long with a 100 pip stop and 100 pip target. 50 trades hit our target. 50 trades hit our stops. How many of the price paths that reach our stops were once profitable during it's way to the stop? How many of the price paths that reach our targets were once losing on its way to the stop? I think it'd be safe to assume 50%. So 25 of our winner trades were once losers and 25 of our losing trades were at some point winners. Do you manage the losers and let the winners run? Yes or No... and Why?
Thanks for posting this Sis.yphus. I see this as a thought experiment. If I have time I may use this as a starting point for performing some research, which if interesting I'll try to post some of the highlights.
  • Post #24
  • Quote
  • Edited at 5:27pm Dec 14, 2017 3:19am | Edited at 5:27pm
Quoting Sis.yphus
Think about this. We take 100 trades. Every trade is a long with a 100 pip stop and 100 pip target. 50 trades hit our target. 50 trades hit our stops. How many of the price paths that reach our stops were once profitable during it's way to the stop? How many of the price paths that reach our targets were once losing on its way to the stop? I think it'd be safe to assume 50%. So 25 of our winner trades were once losers and 25 of our losing trades were at some point winners. Do you manage the losers and let the winners run? Yes or No... and Why?
Hi Sis.

IMO there are two broad conditions that exist in the market that a trader can capitalise on and each is almost diametrically opposed in nature. As a result, your query relating to whether you manage the losers and let the winners run will vary between each.

1. Market divergence attributed to autocorrelation over a time series. Strategies that exploit this are typically price following in nature such as trend following strategies, momentum strategies (eg. scalping) or predictive in nature such as value mispricing based judgements (eg. FA). They are particularly successful in less efficient markets (eg. emerging markets ie. cryptocurrencies, new indices/ETF's etc.) or in times of high vol regimes...... but can be prone to higher drawdowns during periods of low volatility or in very efficient markets. An advantage of this style is the ability for potentially high upside given their strict risk management principles applied to limit downside risk and maximise upside potential through their open ended nature.
a) The assumptions surrounding the philosophy of Trend following and FA value-based judgements is derived from the notion of the serial repetition of directional price movements. Given the periodic nature of news events etc...these strategies require room to breathe and as a result a stop loss is usually an initial condition only to minimise the risk of an adverse excursion but there is a requirement to let profits run given their open ended nature. The typical profile of the trade statistics of successful trend traders and value-based predictive techniques therefore is a low win rate (eg. 25% - 35%) with a high return to risk ratio (say >3.0). As markets get more efficient (ie. mature) these class of traders endure less available alpha due to increased participation. These strategies have high positive skew and are typically close ended on entry (with an initial stop to mitigate downside risk) and open ended on exit. Scaling into the trade is often a feature of these strategies as resurging momentum over the course of the trade allow for pyramiding.
b) Momentum traders and scalpers adopt a philosophy of a finite duration of a discreet momentum event. As a result, the successful traders in this class derive their alpha from trade 'efficiency' whereby little room is given for the markets to breathe. They are in and out while the anomaly exists. These style of traders strictly manage the trade at all times from entry onwards to ensure it matches the profile of the momentum burst as closely as possible. They will cut losses as quickly as possible as soon as their are signs that momentum is giving way. They are far more selective in their entry than other forms of trader acting with a degree of sniper precision......as more efficient trades allow for higher relative position sizing than other techniques. The typical profile of the trade statistics of this class of trader have higher win ratio's than the former class of trader but lower reward to risk ratio's. These strategies have moderate to high positive skew and are close ended on entry with strict management following entry whereby the use of a trail or move to breakeven is typically engaged to lock in the momentum gains. They can be closed or open ended ended on exit with either profit targets or the ability to let profits run while the momentum signature is maintained. These trades are typically single entry trades with sniper precision.

2. Market Convergence attributed to the tendency for reversion back to a mean. This includes averaging down variants, Martingale strategies, pattern recognition strategies, classic mean reversion systems and some forms of FA. By their very nature (anticipating price to revert back to a mean) they are typically negative skew but have a much higher win rate but far lower reward to risk ratio. These strategies are typically open ended on entry and close ended on exit (eg. profit targets). They also differ from the divergent class by being typically predictive in nature as opposed to price following in nature..... given the embedded assumption that price will revert back to a mean after an extended overshoot. They are very successful during more stable less volatile market regimes where markets appear to become more predictable in nature (such as todays' very low vol environment). These styles of strategy can be successful for long periods of time while conditions last but have the ability (given the relatively high win rate) to lull the trader into a false sense of security and have the ability to cripple the trader during unpredictable events.
Quoting Copernicus
{quote} b) Momentum traders and scalpers adopt a philosophy of a finite duration of a discreet momentum event. As a result, the successful traders in this class derive their alpha from trade 'efficiency' whereby little room is given for the markets to breathe. They are in and out while the anomaly exists. These style of traders strictly manage the trade at all times from entry onwards to ensure it matches the profile of the momentum burst as closely as possible. They will cut losses as quickly as possible as soon as their are signs that momentum...

This is an excellent description of effective discreet momentum event trading. You get precise, short duration trades with tight stops that permit comparatively large position sizing as risk is both small and strictly controlled. The success rate is over 50% but the reward:risk is typically not huge.

I trade almost exactly in this way (it's a bit worrying that Copernicus has nailed my trading so accurately!) and my definition of a discreet momentum event for entry purposes is the resumption of the current dominant trend after a failed counter trend break from temporary consolidation. Many other valid entry methods obviously exist; it just depends what you see and what you are comfortable with trading.
Quoting Copernicus
{quote}1. Market divergence attributed to autocorrelation over a time series. Strategies that exploit this are typically price following in nature such as trend following strategies, momentum strategies (eg. scalping) or predictive in nature such as value mispricing based judgements (eg. FA). They are particularly successful in less efficient markets (eg. emerging markets ie. cryptocurrencies, new indices/ETF's etc.) or in times of high vol regimes...... but can be prone to higher drawdowns during periods of low volatility or in very...
Mostly based on this where you start buying and eating apples when they are sold $1 a piece when they are usually sold at $2.

Quoting Copernicus
{quote}b) Momentum traders and scalpers adopt a philosophy of a finite duration of a discreet momentum event. As a result, the successful traders in this class derive their alpha from trade 'efficiency' whereby little room is given for the markets to breathe. They are in and out while the anomaly exists. These style of traders strictly manage the trade at all times from entry onwards to ensure it matches the profile of the momentum burst as closely as possible. They will cut losses as quickly as possible as soon as their are signs that momentum...
Momentum + intraday scalping = intraday swing trader premise based on the above.

As usual C, I will reference to your post for description in the future. Thanks
Quoting jmn5611
{quote} I see. Personally I will lean on my stop if I use them, which I don't very often.
You and me both brother!

I personally don't like stops either in a lot my own trading. Still, like to discuss the ideas around them and hopefully introduce a new line of thinking to a lot of the new forum members.

Quoting Copernicus
{quote} Hi Sis. IMO there are two broad conditions that exist in the market that a trader can capitalise on and each is almost diametrically opposed in nature. As a result, your query relating to whether you manage the losers and let the winners run will vary between each. 1. Market divergence attributed to autocorrelation over a time series. Strategies that exploit this are typically price following in nature such as trend following strategies, momentum strategies (eg. scalping) or predictive in nature such as value mispricing based judgements...
Goddamnit C.

Is there ever a post where you aren't dropping major keys? Sheesh!

I also agree 100% that the application of this idea will be very dependent on the trading style you are doing.

Wishing you a Merry Christmas and a Happy New Year!!

Quoting FXEZ
{quote} Thanks for posting this Sis.yphus. I see this as a thought experiment. If I have time I may use this as a starting point for performing some research, which if interesting I'll try to post some of the highlights.
A thought experiment is a perfect way to describe what I was going for!

If you do find anything interesting, should you get around to diving deeper into this, I will be very excited to see it!
Quoting Sis.yphus
{quote} I should have clarified. In this scenario, there is a hard stop in place. When I say manage losers, I mean cutting the trade before it hits your stop. So the risk is always defined.
My 2 cents. Waiting for stops to hit or profits to hit is a time and energy consuming endeavor regardless of the outcome. Time is money. More energy does not equate to more money so why bother ? To me, it's all about

- exposure to the variables (mostly unknown and uncontrolled) during the life of your trade
- frequency of trade signals.

if frequency is often then it does not make any sense (to me) to keep on holding the trade until it hits a SL or TP. Here's what I do in HFT/aggressive mode.
0.25% risk and 1.0% profit target per trade
Take as many trades as the account margin allows
Take trades off the table when a collective of 1% is reaches across all profitable trades, add/free up margin, rinse repeat.

At the end of the session/day/week or whatever, close out the losers and hope you end up in net profit lol

EDIT: % varies during active/inactive session and I don't use hard SL either.
Staying in my lane...
Quoting Copernicus
{quote} Hi Sis. IMO there are two broad conditions that exist in the market that a trader can capitalise on and each is almost diametrically opposed in nature. As a result, your query relating to whether you manage the losers and let the winners run will vary between each. 1. Market divergence attributed to autocorrelation over a time series. Strategies that exploit this are typically price following in nature such as trend following strategies, momentum strategies (eg. scalping) or predictive in nature such as value mispricing based judgements...
Good post C. Perhaps there is a 3rd option....
MN+W1+D1+H4 >>> Up Direction (Long term)
D1+H1+M30+M15+(M5+M1 optional) OR M30+M15+M5+M1 >> Down direction (Intraday)

Wait for "Market Divergence" Up Signal on HTF (Trend Following) and then wait for "Market Convergence" Down signal and then go long (i.e. CounterTrend)

Doing this rinse and repeat across all pairs and across timeframe combinations will almost always place your trades on 3 price levels: 1-Overbought 2-OverSold 3- S/R Flip zone.

Flip zone, no SL, employ trade management
OB/OS - employ tight stops or move SL to BE
This is my universal market blueprint. I get right sometimes, I get wrong sometimes but what matters is how much I am left at the end of my accounting period when I close the books. Trade small, trade often and know when to hold and when to fold via time based exits gives me a structured approach to unpredictable markets :-)
Staying in my lane...
[quote=Sis.yphus;10596518]{quote} Wishing you a Merry Christmas and a Happy New Year!! {quote}

Same to you Sis. Have a great one.....now with the recent additions to your family
Quoting VEEFX
{quote} Good post C. Perhaps there is a 3rd option.... MN+W1+D1+H4 >>> Up Direction (Long term) D1+H1+M30+M15+(M5+M1 optional) OR M30+M15+M5+M1 >> Down direction (Intraday) Wait for "Market Divergence" Up Signal on HTF (Trend Following) and then wait for "Market Convergence" Down signal and then go long (i.e. CounterTrend) Doing this rinse and repeat across all pairs and across timeframe combinations will almost always place your trades on 3 price levels: 1-Overbought 2-OverSold 3- S/R Flip zone. Flip zone, no SL, employ trade management OB/OS -...
Nice V. :-)

Combinations of these two broad forms of tradable market condition is a very wise idea.

In essence....those that call themselves trend traders and who enter on retracements are really capitalising on a combination of both convergent (mean reverting) and divergent market behaviour.....and this is typically a very good strategy to deploy.....as is your multi-timeframe trend and counter-trend solution which attacks divergent behaviour on the longer term and convergent behaviour on the shorter time-frame (eg. counter swings in a primary trend).

If you don't at least consider both forms of behaviour in your trading technique then you can become over-exposed with building drawdowns for long periods of time....eg. the longer term trend following styles that have been suffering since 2010.

It does not however need to be integrated into a single strategy. For example you could deploy a successful divergent technique as one strategy and then deploy a successful convergent technique as another system and then blend the return streams of both.

FWIW....this is what I do with running a portfolio of systems. I use the building data history to appropriately scale the blends on a dynamic basis..... so that as convergent or divergent conditions remain in place for long periods of time.....the weighted blend will adjust correspondingly (with a lag of course) that allows you to manage your drawdowns without having to cross fingers and hope that market conditions will change. These broad forms of market condition can have lengthy lifetimes of 30 plus years and this accounts for why different systems shine during certain periods and contribute to capital exposure during unfavourable regimes.
Quoting Copernicus
{quote} Nice V. :-) Combinations of these two broad forms of tradable market condition is a very wise idea. In essence....those that call themselves trend traders and who enter on retracements are really capitalising on a combination of both convergent (mean reverting) and divergent market behaviour.....and this is typically a very good strategy to deploy.....as is your multi-timeframe trend and counter-trend solution which attacks divergent behaviour on the longer term and convergent behaviour on the shorter time-frame (eg. counter swings in a...
Agree and as you know, I hate drawdowns in my journey to cap it under 15% max. It is just NOT possible for trend followers to avoid long periods of drawdowns. short term trading for long term profitability is probably the only way I can think of.. but it is not easy as most of the time goes into PnL 'management.
Staying in my lane...
Quoting VEEFX
{quote} Agree and as you know, I hate drawdowns in my journey to cap it under 15% max. It is just NOT possible for trend followers to avoid long periods of drawdowns. short term trading for long term profitability is probably the only way I can think of.. but it is not easy as most of the time goes into PnL 'management.
Yep mate....however if you want to manage your drawdowns then short term divergent trading styles can achieve this such as momentum trading or scalping and short term swings etc. Even better if you combine these with convergent trading styles yet manage to maintain positive skew.

You will note that CP obviously actively tackles both divergence and convergence on the short term.....which is a very wise approach for the long haul from a risk management perspective.

These approaches may not offer the huge potential upside of more classic trend trading styles but you can more aggressively protect your capital this way and they have far better ability to act as cashflow generators as opposed to wealth creators.

For long term sustainability however with markets that have fat tails..... you want to ensure that your approach has positive skew as opposed to negative skew. A combo of divergent and convergent is a good idea but IMO......make sure your divergent approach is the major focus. The convergent techniques are simply used to manage your drawdowns through correlation offset.
I cut my losses early, and keep my methods simple. You can always re-enter the market later
  • Post #35
  • Quote
  • Edited at 4:54am Dec 16, 2017 4:43am | Edited at 4:54am
Quoting Copernicus
{quote} In essence....those that call themselves trend traders and who enter on retracements are really capitalising on a combination of both convergent (mean reverting) and divergent market behaviour.....and this is typically a very good strategy to deploy.
Hi Copernicus,
Absolutely. You talk a lot of sense. Combining divergent and convergent styles also means you can trade both trending/momentum and ranging markets (almost) equally well rather than having to endure extended drawdown, or having to sit on the sidelines for possibly long periods, when the basic market conditions are against a pure divergent or convergent style. And looking to enter on failed retracements additionally permits using a comparatively tight stop and gives the potential to extract a better reward:risk profile on the trade.

If you then apply this to a shorter term, relatively higher frequency trading style, so as to bring the law of large numbers on your side I think you have the makings of a very robust, low drawdown, consistent and reliable basic method. I certainly hope so, seeing this is what I try to do!
Quoting FXMasterZero
I cut my losses early, and keep my methods simple. You can always re-enter the market later
+++++++++++++++++++++++++++++

I'm in total agreement with your statement.

Regarding all the other statements, I do appreciate all of these Opinions. That's as much as I have to say about them, simply because I do not claim to Know anything to be 100% certain.

The only thing I've found to be consistent is having very tight fixed stops, with indeterminate profit levels. These TP levels are based (for now) on a fixed % of the retracement, contingent on distance traveled, with a minimum requirement (in) to insure a profitable trade. Otherwise, the trade is left to hit stop.

Not the Holy Grail, just my opinion.
Quoting VEEFX
{quote}most of the time goes into PnL 'management.
I think this is what gives new traders the hardest time. They want to be traders like what you see in movies and stuff, when in reality, your job is to manage risk.
  • Post #38
  • Quote
  • Edited at 9:07pm Dec 16, 2017 1:12pm | Edited at 9:07pm
Quoting Copernicus
{quote} Yep mate....however if you want to manage your drawdowns then short term divergent trading styles can achieve this such as momentum trading or scalping and short term swings etc. Even better if you combine these with convergent trading styles yet manage to maintain positive skew. You will note that CP obviously actively tackles both divergence and convergence on the short term.....which is a very wise approach for the long haul from a risk management perspective. These approaches may not offer the huge potential upside of more classic trend...
We tend to agree a lot. That's not a good thing bro lol

In my simple mind, its either trading a breakout or a boumce. Breakouts come with more Fakeout requiring higher SL and more difficult to assess the viability of trade duration. Compare that with a bounce back or continuation in the long term direction poses a better quicker shorter risk structure and confirmation. Meaning a bounce without momentum is a dud but breakout with momentum could possibly be a dud. I just find breakouts to be more risky than bounce based on the these characteristics. Now CP is a different breed and no one can trade like he does. I know for sure i cannot nor so i want to.
Staying in my lane...
Quoting VEEFX
{quote} We tend to agree a lot. That's not a good thing bro lol
That's a glass half empty statement V. T'is a good thing I tells ya :-)

Quoting VEEFX
{quote} In my simple mind, its either trading a breakout or a boumce. Breakouts come with more takeout requiring higher SL and more difficult to assess the viability of trade duration. Compare that with a bounce back or continuation in the long term direction poses a better quicker shorter risk structure and confirmation. Meaning a bounce without momentum is a dud but breakout with momentum could possibly be a dud. I just find breakouts to be more risky than bounce based on the these characteristics. Now CP is a different breed and no one can trade...
Spot on mate.....but you just have to have a bit of faith in the non-gaussian nature of markets to trade breakouts. If markets are not perfectly efficient......and if their long term distributions cannot be faithfully characterized by normal or gaussian distributions then the Law of Large numbers virtually guarantees that provided you cut your losses short and let your profits....this is what will contribute to your edge. Tom Basso/Van Tharpe demonstrated this with their random trader in that a simply random entry where you cut your losses short and had an open profit condition resulted in a long term profitable strategy. Yes the markets are getting more efficient which makes the game tougher.....but this is where the skill comes in with regard to drawdown management to allow you to stay in the game during unfavourable market conditions for long periods of time.

Cause we tend to agree so much.......IMO you are spot in with respect to seriously looking at ways to manage your drawdowns as the key to successful trading of the markets lies in risk management (eg. trade management process) as opposed to simply focusing on the outcomes.
The key to manage drawdowns as in to not be exposed to large drawdowns is to not open trades during unfavorable random market conditions.

This means that each individual potential trade has to be rigorously risk assessed prior entry.

When a drawdown has already occurred, the drawdown management process that follows to limit damage is a little too late.
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