A Rachet System to lock in gains and limit the losses

thecoder

thecoder

A Rachet System to lock in gains and limit the losses

I long dreamed of a trading method with these characteristics (rules):
1) Limit losses (to say 5%)
2) If position (stock and its option/s) makes say 2.5+% gain then apply a rachet-like mechanism to lock in the new gains by taking the new result as basis for rule #1

I searched/tried/experimented for some time now, couldn't find a way, was resigning, but today have got a brand new blitz-idea which seems to indicate that it's indeed possible! Will now try to work it out.
If anybody knows already of a solution to this problem, let me know pls :-)

As the name indicates, the basic idea comes from this old mechanical device: :-)
https://en.wikipedia.org/wiki/Ratchet_(device)

There is also an exotic options type called "Rachet option" (aka "Cliquet option" --> https://en.wikipedia.org/wiki/Cliquet_option ), but it seems to operate differently than my above idea.

I also should mention the idea of "Brownian ratchet" (or "Feynman–Smoluchowski ratchet) in philosophy, an apparent perpetual motion machine of the second kind: :-)
https://en.wikipedia.org/wiki/Brownian_ratchet
 
longandshort said:
Are you looking for a trailing stop?
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Sounds like it. It might work with some strategies but I don't think it will be nearly as "dreamy" as T.S. thinks. He'll be surprised how often it stops out at 5% or for very small gains.
 
thecoder said:
A Rachet System to lock in gains and limit the losses

I long dreamed of a trading method with these characteristics (rules):
1) Limit losses (to say 5%)
2) If position (stock and its option/s) makes say 2.5+% gain then apply a rachet-like mechanism to lock in the new gains by taking the new result as basis for rule #1

I searched/tried/experimented for some time now, couldn't find a way, was resigning, but today have got a brand new blitz-idea which seems to indicate that it's indeed possible! Will now try to work it out.
If anybody knows already of a solution to this problem, let me know pls :)

As the name indicates, the basic idea comes from this old mechanical device: :)
https://en.wikipedia.org/wiki/Ratchet_(device)

There is also an exotic options type called "Rachet option" (aka "Cliquet option" --> https://en.wikipedia.org/wiki/Cliquet_option ), but it seems to operate differently than my above idea.

I also should mention the idea of "Brownian ratchet" (or "Feynman–Smoluchowski ratchet) in philosophy, an apparent perpetual motion machine of the second kind: :)
https://en.wikipedia.org/wiki/Brownian_ratchet
More...

The Rachet system won't work in market, because market trend progress goes in waves. In Ratchet system you definitely know when it goes backward.
But in market, you never know when it is a pullback in up trend, when it is a trend reversal.
However, I did figure out a strategy that calculates short term trend reversal points, which are not 100% accurate, but with high probability .So my strategy enters and exits at the points where most likely the short term trend reversals occur. I can't tell you the machanic since it is really a holy grail, but I can show you my entries and exits in real time.PM me if you are interested.
 
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The Rachet System does not have anything to do with market prediction.
It works for a stock by using also some options for it to achieve the mechanism of the rachet system.
It simply shall limit the losses to say 5% for the whole duration of the time (ie. till the expiration date of the accompanying option/s), as well re-adjusting the basis each time when the position makes a new peak gain (ie. highest high profit) say >= +2.5%, for example tested and applied once daily (ie. no realtime requirement needed, though the more testing intraday, the better of course).
It resembles the "trailing stop loss" mechanism, but it's not; one can say it's the mirror mechanism (or the inverse) of it :)
That's just all, but still IMO a mighty tool if you think about it.
At this stage it's still just a theoretical idea, not yet implemented nor tested with real mkt data.
 
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thecoder said:
The Rachet System does not have anything to do with market prediction.
It works for a stock by using also some options for it to achieve the mechanism of the rachet system.
It simply shall limit the losses to say 5% for the whole duration of the time (ie. till the expiration date of the accompanying option/s), as well re-adjusting the basis each time when the position makes a new peak gain (ie. highest high profit) say >= +2.5%, for example tested and applied once daily (ie. no realtime requirement needed, though the more testing intraday, the better of course).
It resembles the "trailing stop loss" mechanism, but it's not; one can say it's the mirror mechanism (or the inverse) of it :)
That's just all, but still IMO a mighty tool if you think about it.
At this stage it's still just a theoretical idea, not yet implemented nor tested with real mkt data.
More...


It limit loss but also limit profit. So what merit it has?
A trailing stop has been proved not working for the market, or everyone has become a billionaire.
You simply don't have basic understanding for the market.
 
@wmwmw, I'm just simulating and testing it. It works, but requires options with tight strikes, ie. many strikes, for example for a $100 stock, it needs strikes in increments of 1 (or 0.5); ie. 100, 101, 102, 103, ... and 99, 98, 97, ...
But it shows that such a Rachet System is theoretically indeed possible and it works.
Just give it all the option strikes it needs, and it will function!
 
wmwmw said:
I can't tell you the machanic since it is really a holy grail, but I can show you my entries and exits in real time.PM me if you are interested.
More...

Cool! Let me know when you make your first trillion $ in the market.
 
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