Minimizing drawdowns vs maximizing gains

[illiquid]

Wanted to throw this out before bed and wake up to glean the wisdom of all ye west coasters and beyond .

I find giving back open profits to be one of the most mentally destabilizing factors during the trading day, so in effect I'd rather lock in 5pts before I get a good chance of a 3pt drawdown instead sitting in for the entire 10 pt move. However, I know that to capture those moves of 10+ pts drawdowns are probably a necessary evil.

Does the manner in which one deals with drawdowns dependant upon one's target and trading style? For example, a reversal trader that attempts repeatedly to catch bottoms or tops with tight stops would seem to need to go for the big move to make up for the multiple small losses in finally picking that reversal, and would trade with a stop GTC until he felt his ultimate target was reached. Momentum traders on the other hand probably must minimize drawdowns at all costs and use trailing stops. Thoughts?

 

[Pabst]

Illiquid, my thoughts have changed on this issue recently. It bothers me far less to miss a big move by getting out early, than having a small to moderate profit slip away. If the small profit evaporates, I take solace that I was merely wrong in my play and go on to the next one. But to get out of something that winds up working big, causes me extreme mental and financial anguish. I find many of my worst trades are counter positions against trends that I exited too soon. The situation you describe is perhaps the most perplexing in trading. Since you trade several contracts(or more) at a clip why not just lighten up. I know a lot of traders disagree, but I see nothing wrong with moving in and out from 1x to 2x back to 1x back to 2x ect. Do whatever makes you comfortable enough that you reach your ultimate goal.

 

[daniel_m]

Originally posted by Pabst
Illiquid, my thoughts have changed on this issue recently. It bothers me far less to miss a big move by getting out early, than having a small to moderate profit slip away. If the small profit evaporates, I take solace that I was merely wrong in my play and go on to the next one. But to get out of something that winds up working big, causes me extreme mental and financial anguish.

I think you may want to re-read that Pabst. you firstly say that missing big moves doesn't bother you (or bothers you less) and then say that missing big moves causes you mental anguish.

 

[Pabst]

Originally posted by daniel_m


I think you may want to re-read that Pabst. you firstly say that missing big moves doesn't bother you (or bothers you less) and then say that missing big moves causes you mental anguish.

Wow! I could blame my confusion on the late hour, or typing in the dark, or a Murray Turtle moment...but as I unclearly meantmissing the big move bugs Pabst more than being stopped out of a small winner! Thanks Dan!

 

[Lobster]

My approach to this is a little different: If I am at the point of decision (5 pt gain, possible 3 pt drawdown, possibly 5 more pts to go), I try to determine whether or not I would enter a new trade here. If not, I'm out. The only "exception" to this is if I would wait for a pullback of less than or equal to 2 commissions plus 2 times slippage and then get in. In this case, of course, I stay in.

The more I have thought about it and the more I have traded, the more I have come to look at every moment independently of all the others. "Averaging down" is really just a new trade that happens to be in the same instrument and the same direction as the original one. "Staying in a trade" is really starting a new trade from there (less 2 x commissions + 2 x slippage of course!).

Others put what I believe to be the same idea a little differently: They say as long as the reason for entering the trade still exists, they stay in, as soon as it changes, they get out, no matter how big the gain (or loss).

 

[illiquid]

Originally posted by Pabst
[B I find many of my worst trades are counter positions against trends that I exited too soon. The situation you describe is perhaps the most perplexing in trading. Since you trade several contracts(or more) at a clip why not just lighten up. I know a lot of traders disagree, but I see nothing wrong with moving in and out from 1x to 2x back to 1x back to 2x ect. Do whatever makes you comfortable enough that you reach your ultimate goal. [/B]

Yeah, I find myself doing that alot as well -- missing some big move I anticipated and then countertrading against that move subconciously hoping that it will reverse and prove my first intentions wrong -- friggin ego.

re: scaling out, I figured that was the sensible thing to do when things are undecided, but I have a really hard time actually carrying through -- once I let go of the 1st half, the other half seems to follow extremely quickly, not sure why that is.

On certain days when I have a strong bias towards the market, I've tried putting on a half-position with a wide stop in that direction, and then daytrading full size positions around that; for example, if a long bias will buy 3 contracts and set wide stop, then continue trading shorter term moves with 6 contracts, so my net position will vary between long 9 and short 3, with a certain portion sitting through every drawdown and the rest locking in quickly. Still a real pain in the ass to think in separate time frames, and I'm not sure if it's worth the attempt to win both ways.

 

[Pabst]

Originally posted by Lobster
My approach to this is a little different: If I am at the point of decision (5 pt gain, possible 3 pt drawdown, possibly 5 more pts to go), I try to determine whether or not I would enter a new trade here. If not, I'm out. The only "exception" to this is if I would wait for a pullback of less than or equal to 2 commissions plus 2 times slippage and then get in. In this case, of course, I stay in.

The more I have thought about it and the more I have traded, the more I have come to look at every moment independently of all the others. "Averaging down" is really just a new trade that happens to be in the same instrument and the same direction as the original one. "Staying in a trade" is really starting a new trade from there (less 2 x commissions + 2 x slippage of course!).

Others put what I believe to be the same idea a little differently: They say as long as the reason for entering the trade still exists, they stay in, as soon as it changes, they get out, no matter how big the gain (or loss).

Lobster I have subscribed to your thinking for many years. However this is what I believe to be the problem. Commisso described it a few months back as cognitive illusions. You see setups that just aren't there. When one has on a "winner", there seems to always be a reason to get out. Contrarily with a loser, it's too easy to believe that the opportunity is still there so why not do more and achieve a better average on the package. This invariably, almost by working definition, is the opposite of what usually produces a winning strategy. Clearly if you have good entries and achieve a high "hit" ratio you can survive very nicely trading like you do. But you really have to watch your downside.

 

[Lobster]

Originally posted by Pabst


Lobster I have subscribed to your thinking for many years. However this is what I believe to be the problem. Commisso described it a few months back as cognitive illusions. You see setups that just aren't there. When one has on a "winner", there seems to always be a reason to get out. Contrarily with a loser, it's too easy to believe that the opportunity is still there so why not do more and achieve a better average on the package. This invariably, almost by working definition, is the opposite of what usually produces a winning strategy. Clearly if you have good entries and achieve a high "hit" ratio you can survive very nicely trading like you do. But you really have to watch your downside.

Pabst, what you are describing is exactly what I have experienced, and I have even arrived at the same conclusions: I had to come up with a system that gave me a very high hit ratio, and I have to put in hard stops on every trade so that I don't get stuck in a bad trade for psychological reasons just like you describe it. It also helped that I made my system very objective, so there is not much judgement on my part involved with the individual actions I have to take in my trades.

 

[illiquid]

Originally posted by Pabst

Commisso described it a few months back as cognitive illusions. You see setups that just aren't there. When one has on a "winner", there seems to always be a reason to get out. Contrarily with a loser, it's too easy to believe that the opportunity is still there so why not do more and achieve a better average on the package. This invariably, almost by working definition, is the opposite of what usually produces a winning strategy. .

Reminds me of the following part in New Market Wizards, quoting William Eckhardt:

"The market does behave very much like a tutor who is trying to instill poor trading techniques. . . Since most small to moderate profits tend to vanish, the market teaches you to cash them in before they get away. Since the market spends more time in consolidations than in trends, it teaches you to buy dips and sell rallies. Since the market trades through the same prices again and again and seems, if only you wait long enough, to return to prices it has visited before, it teaches you to hold on to bad trades. The market likes to lull you into the false security of high success rate techniques, which often lose disastrously in the long run."

 

[nitro]

Originally posted by illiquid

... once I let go of the 1st half, the other half seems to follow extremely quickly, not sure why that is.
...

Put the second half on first!

nitro