Okay, but you're still either misinterpreting what I said in this thread or you're making assumptions about my style that are inaccurate.
I'm not a gambler. The terms "house money" and "playing with profits" have no business on the trading floor.
Bond Futures
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Okay, but you're still either misinterpreting what I said in this thread or you're making assumptions about my style that are inaccurate.
I'm not a gambler. The terms "house money" and "playing with profits" have no business on the trading floor.
You're missing the point about the analogy. Let's forget cars altogether. Your mention of the Dow mini snafu is a perfect example. There were traders who were convinced those profits were their money, only to discover the trades were broken and in fact it was never their money to begin with.
And to answer your question about an unrealized loss, from a technical standpoint, yes, it is still not your money being lost until you've closed out the trade, and the money has been deducted from your account, at which point it is. Likewise on a profitable position, it is not your money until the trade has been closed and the money deposited in your account. Same deal. What we're dealing with here is the difference between real gains and losses and potential gains and losses. They are most certainly not the same.
And to answer your question about an unrealized loss, from a technical standpoint, yes, it is still not your money being lost until you've closed out the trade, and the money has been deducted from your account, at which point it is. Likewise on a profitable position, it is not your money until the trade has been closed and the money deposited in your account. Same deal. What we're dealing with here is the difference between real gains and losses and potential gains and losses. They are most certainly not the same.
This is one of the most intelligent and relevant discussions I've seen in a while..
I think that was the point.. not that you would be using incorrect risk management, but that you would be using *different* risk management for no apparent reason other than that your last trade (albeit unclosed) was a winner. To me, this is like changing your risk parameters or position sizing based on the outcome of the previous N trades (wrong IMO), rather than on the total account balance (correct IMO).
To rephrase what I think trade-ya was trying to say, because I had the same thought.. Your car example refers to execution risk, which is much much smaller in the markets. You can do both legs in the blink of an eye, with not much slippage (i.e. chance that the other guy will back out or change his price).
I'd also like to point out that by exiting half the position now, half later, you are actually employing two separate methods, and they can/should be considered separately. You could analyse all your trades and see which method works better. I am guessing you will find that the half/half method feels better psychologically, but the single-shot method makes more money. At least that's how it was for me..
I would also argue that the "house" profits are actually your profits, and should be guarded like your own money. An unrealized profit is still a profit, just as an unrealized loss is still a loss.
I think that was the point.. not that you would be using incorrect risk management, but that you would be using *different* risk management for no apparent reason other than that your last trade (albeit unclosed) was a winner. To me, this is like changing your risk parameters or position sizing based on the outcome of the previous N trades (wrong IMO), rather than on the total account balance (correct IMO).
To rephrase what I think trade-ya was trying to say, because I had the same thought.. Your car example refers to execution risk, which is much much smaller in the markets. You can do both legs in the blink of an eye, with not much slippage (i.e. chance that the other guy will back out or change his price).
I'd also like to point out that by exiting half the position now, half later, you are actually employing two separate methods, and they can/should be considered separately. You could analyse all your trades and see which method works better. I am guessing you will find that the half/half method feels better psychologically, but the single-shot method makes more money. At least that's how it was for me..
I would also argue that the "house" profits are actually your profits, and should be guarded like your own money. An unrealized profit is still a profit, just as an unrealized loss is still a loss.
See my last post about the broken Dow mini trades for a perfect example of what I'm getting at about it not being your money until it's deposited in your account.
I certainly agree that it is dangerous to change parameters based on previous trades and whether they worked out or not. Where we disagree is in the perception of what constitutes multiple trades. For me selling halves is all part of one trade, one setup, and my management of such is not dependent on the fact that I closed out part of the trade at 117 or break even, what have you. Before I ever entered the trade I had an entry point, a target price, an initial stop loss, and stops to sell halves. None of that changed in execution once I was in the trade.
The only way I can see one could have made more profit than selling halves in the case of the trade I did would have been to not take any profits and not move their stop from break even at all. Yes, in this trade that would have netted more profit. But I have seen plenty of setups where all the profit potential has eroded completely or turned into a loss, where selling halves would have at least resulted in some measure of profit for the overall trade. In my experience, over the long run, selling halves has significantly increased my profit/loss ratio. To each his own.
Finally, I agree that paper profits should be guarded so as not to erode, which is exactly why I employ the halves strategy. I disagree, however, that an unrealized loss is still a loss. For instance, if I take a position and it goes against me, on paper it is a loss, but not a real loss, at least not yet. Now, let's say I stay in the trade and it turns around and becomes profitable and I close it out with profits. Did I ever really lose money? I say no, because the trade was never closed while the position was negative. I had the potential to lose money, but did not in reality do so. The loss existed for a time in theory, but not in reality.
Now, from your perspective one could look at it and say it's the same thing as if the position went negative, you closed out and took the loss, then re-entered the position and ended up making a profit. However, this is not the same, as technically your margin requirements may have changed and could conceivably affect your ability to re-enter the trade. In fact, I recall an occasion when I started out trading, taking a big loss on a trade that I then wished to re-enter and could not because closing out the loss had taken enough money out of my account that I no longer had enough to meet the initial margin requirements, whereas had I stayed in the trade without closing out the first time I had enough to maintain the maintenance margin requirements.
The margin/account numbers issue aside, in the end, this argument comes down to philosophy and nothing more. It's the old "if you shoot an arrow, does the arrow move or is it still and all the reality around it is moving" question. Personally I don't really care, as I've honed my strategy over the years, and it's been tremendous for me. Obviously, others' mileage may vary.
I certainly agree that it is dangerous to change parameters based on previous trades and whether they worked out or not. Where we disagree is in the perception of what constitutes multiple trades. For me selling halves is all part of one trade, one setup, and my management of such is not dependent on the fact that I closed out part of the trade at 117 or break even, what have you. Before I ever entered the trade I had an entry point, a target price, an initial stop loss, and stops to sell halves. None of that changed in execution once I was in the trade.
The only way I can see one could have made more profit than selling halves in the case of the trade I did would have been to not take any profits and not move their stop from break even at all. Yes, in this trade that would have netted more profit. But I have seen plenty of setups where all the profit potential has eroded completely or turned into a loss, where selling halves would have at least resulted in some measure of profit for the overall trade. In my experience, over the long run, selling halves has significantly increased my profit/loss ratio. To each his own.
Finally, I agree that paper profits should be guarded so as not to erode, which is exactly why I employ the halves strategy. I disagree, however, that an unrealized loss is still a loss. For instance, if I take a position and it goes against me, on paper it is a loss, but not a real loss, at least not yet. Now, let's say I stay in the trade and it turns around and becomes profitable and I close it out with profits. Did I ever really lose money? I say no, because the trade was never closed while the position was negative. I had the potential to lose money, but did not in reality do so. The loss existed for a time in theory, but not in reality.
Now, from your perspective one could look at it and say it's the same thing as if the position went negative, you closed out and took the loss, then re-entered the position and ended up making a profit. However, this is not the same, as technically your margin requirements may have changed and could conceivably affect your ability to re-enter the trade. In fact, I recall an occasion when I started out trading, taking a big loss on a trade that I then wished to re-enter and could not because closing out the loss had taken enough money out of my account that I no longer had enough to meet the initial margin requirements, whereas had I stayed in the trade without closing out the first time I had enough to maintain the maintenance margin requirements.
The margin/account numbers issue aside, in the end, this argument comes down to philosophy and nothing more. It's the old "if you shoot an arrow, does the arrow move or is it still and all the reality around it is moving" question. Personally I don't really care, as I've honed my strategy over the years, and it's been tremendous for me. Obviously, others' mileage may vary.
Your point is well taken about the margin requirements, and that is a real consideration in some cases, especially if you are trying to maximize returns by using full margin..
I think the YM broken trades scenario is not the norm, and should not be weighted as such. i.e. in reality that will affect a very small number of trades, though if they start breaking trades more often, it could get worse!
But let me ask you another one.. if you went through your trades for the last year and found that half/half decidedly underperformed (edit: or outperformed, for that matter) single-shot (however you want to call it), would you change your strategy?
OK how about this.. If you have a loss, keep averaging down until the whole position shows a profit. Then consider them all one trade, as you do similarly on the exit side (i.e. entering in lots vs exiting in lots). Then declare the trade a success, with no drawdown. If the position never comes back, just never close it out. Then you don't have a "real" loss, right? The truth is, you are paying in every real sense (account balance, margin, opportunity cost), but you aren't putting the trade in the loss column.
I submit that the total liquidating value of the portfolio, or simply the equity, is the most meaningful measure of value.
More simply put: Consider two portfolios. Both started with $100k. One has an open position in a drawdown of $5k. Which portfolio is worth more?
I think the YM broken trades scenario is not the norm, and should not be weighted as such. i.e. in reality that will affect a very small number of trades, though if they start breaking trades more often, it could get worse!
But let me ask you another one.. if you went through your trades for the last year and found that half/half decidedly underperformed (edit: or outperformed, for that matter) single-shot (however you want to call it), would you change your strategy?
OK how about this.. If you have a loss, keep averaging down until the whole position shows a profit. Then consider them all one trade, as you do similarly on the exit side (i.e. entering in lots vs exiting in lots). Then declare the trade a success, with no drawdown. If the position never comes back, just never close it out. Then you don't have a "real" loss, right? The truth is, you are paying in every real sense (account balance, margin, opportunity cost), but you aren't putting the trade in the loss column.
I submit that the total liquidating value of the portfolio, or simply the equity, is the most meaningful measure of value.
More simply put: Consider two portfolios. Both started with $100k. One has an open position in a drawdown of $5k. Which portfolio is worth more?
There's no doubt that the broken trades scenario is not the norm, but that's not my point. I simply use it as an analogy to illustrate the concept of potential profits versus real profits that have been deposited in one's account, and to show how they are indeed NOT one and the same. Focus only on the concept itself, not on how often the example I gave might occur. But here's another example. I was once in a short stock trade where I was slightly negative. I lost money, right? Well, suddenly the stock was halted for news pending, which turned out to be horrible news. When it reopened for trading, it gapped down 10 points. Did I lose money? Of course not, because the time that my position was negative was temporary and never translated to real money taken out of my account.
Obviously, if upon review of my trading records it showed that single shot trades outperformed half strategy, I would use that. But that hasn't been the case, as I stated earlier.
As far as your example, by the strictest sense, yes, you do not have a loss until you actually close it out. As far as averaging down, if that was part of the strategy beforehand, then fine. But we both know that almost every trader who averages down on a losing position did not intend that to be part of their strategy, that's just a denial of the fact that they were wrong. Obviously no concept exists in a vacuum, so yes, for those who hold onto losing trades they compound the cost with margin, opportunity, etc. if those losing trades are closed out. But again, I maintain that there is a difference between capital preservation and profit. You start with $100K of your own money. You short 20 contracts at 118 and are 3 points in the positive on the trade. You have $60K of potential profit on the trade, but let's say you let it ride and it goes back to break even. If you didn't close out the trade, was that extra $60K ever really yours? It's like the Zen koan about a tree falling in the woods.
Your example of the two portfolios shows that yes, one has a greater asset value at that particular given time, but depending on at what level the trade is closed out, it may in real possessed money terms end up equal to or greater than the other account's value. How much something would be worth if it was closed out is quite different from how much it may be worth when it actually is closed out.
We're just chasing our tails here talking about these concepts in the abstract, so let's bring it all back to the real world situation. Based on your strategy, how would you have handled my trade? Here's the info: short 20 September03 30 year bond contracts at 118 as it breaks down from a head and shoulders pattern, target price 113. Based on this info, where do you place your initial stop loss? Once the trade moves in your favor, do you move it? If so, where, and for the entire position or part?
Obviously, if upon review of my trading records it showed that single shot trades outperformed half strategy, I would use that. But that hasn't been the case, as I stated earlier.
As far as your example, by the strictest sense, yes, you do not have a loss until you actually close it out. As far as averaging down, if that was part of the strategy beforehand, then fine. But we both know that almost every trader who averages down on a losing position did not intend that to be part of their strategy, that's just a denial of the fact that they were wrong. Obviously no concept exists in a vacuum, so yes, for those who hold onto losing trades they compound the cost with margin, opportunity, etc. if those losing trades are closed out. But again, I maintain that there is a difference between capital preservation and profit. You start with $100K of your own money. You short 20 contracts at 118 and are 3 points in the positive on the trade. You have $60K of potential profit on the trade, but let's say you let it ride and it goes back to break even. If you didn't close out the trade, was that extra $60K ever really yours? It's like the Zen koan about a tree falling in the woods.
Your example of the two portfolios shows that yes, one has a greater asset value at that particular given time, but depending on at what level the trade is closed out, it may in real possessed money terms end up equal to or greater than the other account's value. How much something would be worth if it was closed out is quite different from how much it may be worth when it actually is closed out.
We're just chasing our tails here talking about these concepts in the abstract, so let's bring it all back to the real world situation. Based on your strategy, how would you have handled my trade? Here's the info: short 20 September03 30 year bond contracts at 118 as it breaks down from a head and shoulders pattern, target price 113. Based on this info, where do you place your initial stop loss? Once the trade moves in your favor, do you move it? If so, where, and for the entire position or part?
I have a related thread that may be of interest to those looking at this thread.
http://www.elitetrader.com/vb/showthread.php?threadid=20034
http://www.elitetrader.com/vb/showthread.php?threadid=20034
Maybe we are just arguing semantics like you said.. I would say that the account suffered a small drawdown, and then went positive.
I view it as my total net worth at any given instant (mark-to-market down to the tick), as if I were to suddenly need to liquidate everything. Holding through a drawdown costs time/opportunity, and I find it difficult to feel the trade is not a loser.
I was incomplete in my argument. What I wanted to say is backtest scaling out vs not scaling out. What you have are two distinct targets. One will likely be superior. So, I would either exit all the position at what you call a "half," or exit all where you usually go completely flat.
I submit that the greater asset value portfolio is always superior, since you can enter the same positions as the first portfolio, except at a better price, and outperform indefinitely.
I can't comment on that, since I have never been a bond trader, and I wouldn't have taken a H&S trade. It would be too easy for me to look at it in hindsight and come up with an unrealistically optimistic strategy.
But I can say that with certainty that I would exit the whole position at once, rather than half out and let the rest ride
