One dilemma facing position traders is how best to place a trend-following position when there is no obvious low-risk entry point. When a market is mid-trend (let's say up), support can be quite far away. And in any case, do you really want to place a stop just below that support, so it can get taken out by a few ticks, then the market reverses?
Yet you don't want to stay flat and miss the trend entirely. Yes, you may have to take more risk, but then if you stay flat and wait for a retracement, you are taking the much more costly risk of missing the entire move for the sake of a couple of points.
So the solution would appear to be just get in, set a stop at the same level as you would have done had you entered at the right time, and put the missed profit down to experience. But then you are risking a much higher % of capital on your initial entry. Should you therefore reduce size such that the % of capital risked is the same as if you had entered at the right point?
An even more tricky dilemma is what to do if you have completely missed a large move (e.g. if you have been on vacation, off sick, or for some reason just didn't pull the trigger earlier). Now, you really do have a lot of risk - a 50% retracement (not uncommon during trends) or a move to the 50 day moving average, would hand you a nasty loss. And on the other side, the market may be somewhat ovextended, so you likelihood of profit may be much lower than if you faded a short-term countertrend. Yet the market is still trending with momentum on its side, and you don't want to miss the rest of the move.
Again, we can use the position size to reduce the risk. But in this case, it may make the position so small that it's hardly worth bothering with. Any solutions to this dilemma? I have one or two ideas, but would be interested in hearing what people have to say.
Yet you don't want to stay flat and miss the trend entirely. Yes, you may have to take more risk, but then if you stay flat and wait for a retracement, you are taking the much more costly risk of missing the entire move for the sake of a couple of points.
So the solution would appear to be just get in, set a stop at the same level as you would have done had you entered at the right time, and put the missed profit down to experience. But then you are risking a much higher % of capital on your initial entry. Should you therefore reduce size such that the % of capital risked is the same as if you had entered at the right point?
An even more tricky dilemma is what to do if you have completely missed a large move (e.g. if you have been on vacation, off sick, or for some reason just didn't pull the trigger earlier). Now, you really do have a lot of risk - a 50% retracement (not uncommon during trends) or a move to the 50 day moving average, would hand you a nasty loss. And on the other side, the market may be somewhat ovextended, so you likelihood of profit may be much lower than if you faded a short-term countertrend. Yet the market is still trending with momentum on its side, and you don't want to miss the rest of the move.
Again, we can use the position size to reduce the risk. But in this case, it may make the position so small that it's hardly worth bothering with. Any solutions to this dilemma? I have one or two ideas, but would be interested in hearing what people have to say.
