Balancing open profit vs potential profit ?

A

Aston01

I would like to say I am mathematically inclined, but it wouldn't be true :)

...For those of you who are, I was wondering if it is possible to calculate the turning point where it is better to capture open profit then to risk anymore for profit potential.

As an example lets say I am up $65 in a trade and based on historical data it is relatively reasonable to think that a $100 total gain is possible. I am willing to risk a certain amount for that extra $35, but it surely wouldn't make sense to risk $50 already in hand to possibly make that potential extra little bit.

The way I have it calculated if I risked $35 of open profit for $35 gain that would be equivalent to 55% draw down for a 54% gain. The issue there is after a $35 loss it would take a 115% gain to get back to $65 and 230% gain to get to $100. So in a sense losing $ in hand is far more impactful relatively speaking than gaining the equivalent amount of potential.

How can I calculate that cross over point where I am not risking more in hand than potential return is worth.

...it seems if not calculated correctly this is a bit like the old cliché "Penny wise and dollar dumb"
 
Quote from Aston01:

I would like to say I am mathematically inclined, but it wouldn't be true :)

...For those of you who are, I was wondering if it is possible to calculate the turning point where it is better to capture open profit then to risk anymore for profit potential.

As an example lets say I am up $65 in a trade and based on historical data it is relatively reasonable to think that a $100 total gain is possible. I am willing to risk a certain amount for that extra $35, but it surely wouldn't make sense to risk $50 already in hand to possibly make that potential extra little bit.

The way I have it calculated if I risked $35 of open profit for $35 gain that would be equivalent to 55% draw down for a 54% gain. The issue there is after a $35 loss it would take a 115% gain to get back to $65 and 230% gain to get to $100. So in a sense losing $ in hand is far more impactful relatively speaking than gaining the equivalent amount of potential.

How can I calculate that cross over point where I am not risking more in hand than potential return is worth.

...it seems if not calculated correctly this is a bit like the old cliché "Penny wise and dollar dumb"
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I said it a million times already in this forum and other forums, your optimal stop and target must be determined IN ADVANCE through intensive backtesting, this is not a value that you now must choose after you initiate a trade.

Your stop and exit strategy must be clearly defined right from the start, otherwise you have no business trading.
 
I am not disputing that such things should be calculated in advance, but back testing is a test of effectiveness not mathematical validity.

That's like saying just because a trade was profitable that everything you did was right ... even if you did suffer an 80% drawdown in the process.
 
I'm not sure there is any closed form solution, but it's easy to see the effect in a backtester. As you take profits more aggressively, your sharpe ratio will go up but you'll make less overall due to the winners being smaller. You can also look at the time factor, profitable RTM trades usually happen quickly while the losses are the longer trades (and vice versa for trend trades), but as soon as you try and impose a time condition, you start reaping big losers which would have come good given more time, basically, it changes the distribution. So I'd be interested in what other people have to say as well.
 
Quote from Aston01:

I am not disputing that such things should be calculated in advance, but back testing is a test of effectiveness not mathematical validity.
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Backtesting will reveal if your trading system has at least some kind of statistical edge. Do not ever trade unless you are confident that your system can at least beat the spread and/or the commissions.

Quote from Aston01:That's like saying just because a trade was profitable that everything you did was right ... even if you did suffer an 80% drawdown in the process.
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My friend, if your "system" goes into a 80% drawdown, throw it in the garbage.

Quickly.
 
you could scale out of a position and take partial profits and leave a little in to see if you get that extra, I try to exit at targets and trail a stop, you do get closed out sometimes and watch the trade turn into a winner when your out of it, but not much you can do about that
 
Its definitely a balancing act to a large extent and mathematically determining how to balance it is no doubt tricky. I find that a lot of decision making is based around some variation of curve fitting where people do something because that worked for this particular situation as opposed to be being hard line math based.

... Someone can suggest a 20% stop, but few can tell you why 20% and not 23% (and not necessarily because it backtested over a particular dataset well).

I would like hear more from those few.
 
Came in a chevy…. now it appears you’re attempting to leave in a ford

Meaning;

A strategy got you in this trade

A strategy gave you a target (although I don’t agree with this thinking)

Why not use the same to get you out

Altering strategies in mid trade is nuts – imo (eta, which is not the same as adapting as PA evolves)

RN
 
Quote from Redneck:

Altering strategies in mid trade is nuts – imo

RN
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Agreed. My trading plan includes exit strategies for every setup/price environment combo (hereinafter referred to as "setups") I trade. I already did the statistical research involving max favorable and adverse excursions surrounding each setup and developed exit strategies based on that research. Some setups include fixed targets and others are flexible. Although the flexible targets do not always involve a specific technical price level, the method of realizing those profits is well-defined.

There is no better feeling in the world for me than to look at a completed trade and see that I followed my plan, whether it's a gain, a loss, or a draw.
 
Quote from Aston01:


As an example lets say I am up $65 in a trade and based on historical data it is relatively reasonable to think that a $100 total gain is possible. I am willing to risk a certain amount for that extra $35, but it surely wouldn't make sense to risk $50 already in hand to possibly make that potential extra little bit.

How can I calculate that cross over point where I am not risking more in hand than potential return is worth.
More...

poker pot odds and implied odds might help you.
 
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