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Adding to trades - best practice? Calculation attached
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.
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.
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.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,051 since Dec 2013
Thanks Given: 4,391
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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.
Why you should add to winners and never add to losers
I recently got an email from Kevin Davey of KJ Trading, aka kevinkdog, regarding his latest blog post entitled Peel Off Trading (. Kevin is a highly respected member of nexusfi.com (formerly BMT) …
Trading: The one I'm creating in the present....Index Futures mini/micro, ZF
Posts: 2,311 since Nov 2011
Thanks Given: 7,341
Thanks Received: 4,518
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
Worked on correcting a few issues in the Position sizing Excel sheet and added a second tier of risk percentages for when the acct is above a users defined amount. Idea is to test out these diff strategies once you have a set of percentages you are comfortable …
and here is a link to the post with a short video explaining it
I am going to post my Excel work on this Position sizing 'game' I made to help me understand winning and losing streaks. It based off of Van Tharp's marble game but with actually marbles it take super long to witness the turn of events. With …
Thanks again for this Homework......
Ron
...My calamity is My providence, outwardly it is fire and vengeance, but inwardly it is light and mercy...
The steed of this Valley is pain; and if there be no pain this journey will never end.
Buy Low And Sell High (read left to right or right to left....lol)