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Bond Futures
- Thread starter spreadem
- Start date
Not trying to be a smart ass, however, to Dr. Zhivodka, et al. what does the fact that you are short from 122-00 or so (anywhere else for that matter), have to do with the price of tea in China? In other words, who cares where you are short from and how much profit you have in the trade, the money in your account today is your money. If you lose $1 of it, you have had a drawdown. It's no different than if you put on a new trade today and the position downticked. I would suggest treating your profits as you would treat the rest of your capital, same risk management approach, it doesn't matter if it's profits, new capital, old capital, inheritance, whatever. Remember, whenever you are in a position, it's as though you are re-entering that trade at every given price at every given time (minus commissions of course). So in other words, if you are holding a short position you are effectively saying, i would like to be short today, this hour, this minute, this second, etc. etc. I think you get my drift.
Actually, where someone enters a trade is extremely relevant, since it marks the point where one makes money or loses money, and is significant if for no other reason than as a reference for stop loss management. And there is indeed a difference in practical real world terms between losing money and losing profits. Once your trade is profitable, you are playing with the "house's" money, and can afford to employ stop management measures you otherwise would be loathe to do. It is impossible to maintain a good stop management system without being prepared to give up some profits. It's called wiggle room, which allows one to stay in a trade longer and give themselves the opportunity to capture even more profit. Otherwise, one would be closing out their trades prematurely every time.
Sure, perhaps in the strictest, most technical sense, any penny of lost profit is lost money, but what in the world does that have to do with the price of tea in China? It certainly doesn't apply at all to real world trading.
Sure, perhaps in the strictest, most technical sense, any penny of lost profit is lost money, but what in the world does that have to do with the price of tea in China? It certainly doesn't apply at all to real world trading.
Quote from trade-ya:
Not trying to be a smart ass, however, to Dr. Zhivodka, et al. what does the fact that you are short from 122-00 or so (anywhere else for that matter), have to do with the price of tea in China? In other words, who cares where you are short from and how much profit you have in the trade, the money in your account today is your money. If you lose $1 of it, you have had a drawdown. It's no different than if you put on a new trade today and the position downticked. I would suggest treating your profits as you would treat the rest of your capital, same risk management approach, it doesn't matter if it's profits, new capital, old capital, inheritance, whatever. Remember, whenever you are in a position, it's as though you are re-entering that trade at every given price at every given time (minus commissions of course). So in other words, if you are holding a short position you are effectively saying, i would like to be short today, this hour, this minute, this second, etc. etc. I think you get my drift.
Why are profits the house's money and not your money? Also, when you talk about "real-world" situations, you are referring to breaking from the proper risk management techniques. I'm not denying that it's sometimes different in the actual world of trading, however, what is actually happening, is you are breaking the rules of proper risk management when you leave the trade on a little longer than normal because you have profits in it. This unfortunately, is something that we are all guilty of, however, it doesn't make it correct.
Quote from trade-ya:
Not trying to be a smart ass, however, to Dr. Zhivodka, et al. what does the fact that you are short from 122-00 or so (anywhere else for that matter), have to do with the price of tea in China? In other words, who cares where you are short from and how much profit you have in the trade, the money in your account today is your money.
You misinterpreted my "122.00" comment entirely. It was not in reference to how much unrealized profit I had. Personally I try very hard to remove the profit "thought" from all of my trades.
The comment was simply to point out that since Bonds and Currencies tend to trend very well by virtue of my entry price I now had the luxury to sit back and observe the Macro landscape verses the Micro minutia.
This is in contrast to what brother spreadem was doing which was taking quick profits and reserving and getting stopped for losses and then reversing again and etcetera etcetera. My point to him this sort of Micro minutia is unnecessary when Bond and Currencies change trend. But to each his own. There's certainly no monopoly on trading ideas out there.
I just found this past three weeks very interesting because we all had the self-confidence to post our thoughts in real-time. I simply perceived that some of fella's were making some of the same mistakes that I've made over the years by not letting their profits run. I think it was a very fortunate and productive exercise but other opinions may vary on that.
With regard to your comments about my risk management you should know that I deploy many different risk management and bet sizing algorithms depending on the market and the circumstances. But thanks for suggestions.
Regards,
Dr. Zhivodka
I agree with you that there are many styles. I also appreciate your helpful spirit with respect to others. My post was not meant to be critical or egotistical. However, I believe that this idea of "playing with profits", "house's money", etc. etc. is a common major mistake amongst traders. I have first hand experience with some self-made Billionaires in this business, and I can tell you, they would sell their grandmother down 10% and they don't consider weather or not they are working from profits or starting capital, etc. I personally believe that this strict adherence to controlling losses is what has made them so successful. We all know the adages about cutting losses quick, etc. However, I strongly believe that this concept of "letting it ride" is inconsistent with cutting losses quickly. The way it should work in practice is as follows: you start with $100,000 in capital, you utilize a 10% ultimate stop loss on your capital, thus risking $10,000. You instead make $50,000 on your money bringing your total capital to $150,000. Now, you continue to utilize a 10% ultimate stop loss on your capital, however, you are now able to risk $15,000. I think this is an important concept.
OK, let's break it down. It's the house's money because while in a trade, whatever "profits" one has are not your money until you close out the trade and the money is actually in your account, and not just on paper. Here's a perfect analogy. Let's say I know a guy who will sell me his car for $1000, and I know another guy who would buy that car from me for $2000. I've got a $1000 profit, but it's not my money until I actually buy the car from the first guy and sell it to the second guy. Until I do that and the money is in my hand, is it right for me to say I've got an extra $1000? No, it's not. Now let's say by the time I buy the car from the first guy, the second guy decides the car is only worth $1500 to him. In this scenario, I've lost some profits, but I haven't lost any of my money, because it wasn't yet mine to begin with. I still make $500 profit, and come out with more money than I started with.
And no, I'm not referring to breaking from proper risk management techniques, since there is no one set technique that everyone uses, it is variable upon each trader's risk tolerance. For instance, when I first enter a trade, my risk tolerance is very low, as I am loathe to risk any of my money. Therefore, my initial stop loss is often set at break even. However, once a trade is in my favor, I am willing to risk some of those profits for an opportunity to stay in the trade longer and reap the rewards of even greater profit potential, without risking any of my capital. So, in this case, I am willing to increase my risk, not of losing any of my money, but of losing some profits that could potentially become my money.
So it is not at all breaking any rules of proper risk management to leave a trade on longer, since again, there is no one universal technique. As far as correct or incorrect, you're focusing on the wrong thing. If one makes money on a trade, and followed their own management style, guess what? It was correct. It would only be incorrect if you broke from your own predefined strategy.
To bring it all back to the real world, which ultimately is all that matters, let's look at how I've done in my bond trade. I initially shorted at 118 with a break even stop loss, and a target price of 113. Once my trade was profitable by two points, I employed one of my strategies of selling half my position to lock in profit, and let the other half ride with a break even stop at 118. The price moved back up and triggered my stop at 117, giving me a 1 point profit on half my position. It came close to stopping out the rest of my position at 118, but didn't make it, and then continued down. I would have closed out the other half when it reached 113, but it blew through it so strongly that I closed out half of my remaining position, leaving 1/4 of my original position intact with a new stop at 114. Had I employed different management techniques, I very well might have had my entire position stopped out at 117, and missed out on the much greater profit I was able to book by employing the stop strategies I did. Perhaps other traders would have used different strategies, but the fact remains that I stuck to my plan, and in risking some profit, I was able to reap the reward of greater profits, so in the end what I did was correct for me. Even if my entire position had been stopped out at break even initially, it would have still been correct, because I would have adhered to my strategy.
You have to get over the idea that there is only one correct way to manage a trade. Correct or incorrect only applies to whether or not you adhered to the management you intended to apply in the first place.
And no, I'm not referring to breaking from proper risk management techniques, since there is no one set technique that everyone uses, it is variable upon each trader's risk tolerance. For instance, when I first enter a trade, my risk tolerance is very low, as I am loathe to risk any of my money. Therefore, my initial stop loss is often set at break even. However, once a trade is in my favor, I am willing to risk some of those profits for an opportunity to stay in the trade longer and reap the rewards of even greater profit potential, without risking any of my capital. So, in this case, I am willing to increase my risk, not of losing any of my money, but of losing some profits that could potentially become my money.
So it is not at all breaking any rules of proper risk management to leave a trade on longer, since again, there is no one universal technique. As far as correct or incorrect, you're focusing on the wrong thing. If one makes money on a trade, and followed their own management style, guess what? It was correct. It would only be incorrect if you broke from your own predefined strategy.
To bring it all back to the real world, which ultimately is all that matters, let's look at how I've done in my bond trade. I initially shorted at 118 with a break even stop loss, and a target price of 113. Once my trade was profitable by two points, I employed one of my strategies of selling half my position to lock in profit, and let the other half ride with a break even stop at 118. The price moved back up and triggered my stop at 117, giving me a 1 point profit on half my position. It came close to stopping out the rest of my position at 118, but didn't make it, and then continued down. I would have closed out the other half when it reached 113, but it blew through it so strongly that I closed out half of my remaining position, leaving 1/4 of my original position intact with a new stop at 114. Had I employed different management techniques, I very well might have had my entire position stopped out at 117, and missed out on the much greater profit I was able to book by employing the stop strategies I did. Perhaps other traders would have used different strategies, but the fact remains that I stuck to my plan, and in risking some profit, I was able to reap the reward of greater profits, so in the end what I did was correct for me. Even if my entire position had been stopped out at break even initially, it would have still been correct, because I would have adhered to my strategy.
You have to get over the idea that there is only one correct way to manage a trade. Correct or incorrect only applies to whether or not you adhered to the management you intended to apply in the first place.
Quote from trade-ya:
Why are profits the house's money and not your money? Also, when you talk about "real-world" situations, you are referring to breaking from the proper risk management techniques. I'm not denying that it's sometimes different in the actual world of trading, however, what is actually happening, is you are breaking the rules of proper risk management when you leave the trade on a little longer than normal because you have profits in it. This unfortunately, is something that we are all guilty of, however, it doesn't make it correct.
Thanks for your thorough explanation, however, i must respectfully disagree. With respect to your car analogy, the issue that you bring up is one of credit risk. Certainly, the guy that offered you $2000 for the car is quite a "high risk credit". In other words, he can back out, change his mind, be full of shit, etc. etc. However, we generally all assume that when trading in the markets the credit risk is close to nil. In other words, if we have profits, we are generally assured of receiving them (with the exception of trade breaks as occured in Dow mini's a week or so ago). I would say the idea that you have an unrealized profit on a trade of $1000 vs. some guy offering you $1000 more for a car is completely different issue. The difference is credit risk and reliability of the profits. Another question, when you have an unrealized loss are you still playing with the house's money? Why is it different on the losing side than on the winning side. Bottom line, I respectfully disagree and I say do whatever you feel is right. I guess if everyone knew the correct thing to do, there would be no profits available for the "others". Best....