Reducing Size after Extreme Profitability
- Thread starter oldtime
- Start date
"Does anybody think it is wise to reduce size after periods of extreme profitability?"
This is something I've pondered on for quite some time for simple mathematical reasons.
Say you have a great deal of data and have constructed a system that produces a steady 10% profit without much volatility. Say your profit suddenly grows way beyond your steady 10% line, is your system due for a bout of mean reversion ? If the basis for your system hasn't suddenly changed longterm, then my feeling would be that mean reversion is more likely than not and I'd reduce my stake. Obviously, if things HAVE changed with your underlying data then you may be wrong but this technique has worked well for me in the past. But I may have just been lucky.
This is something I've pondered on for quite some time for simple mathematical reasons.
Say you have a great deal of data and have constructed a system that produces a steady 10% profit without much volatility. Say your profit suddenly grows way beyond your steady 10% line, is your system due for a bout of mean reversion ? If the basis for your system hasn't suddenly changed longterm, then my feeling would be that mean reversion is more likely than not and I'd reduce my stake. Obviously, if things HAVE changed with your underlying data then you may be wrong but this technique has worked well for me in the past. But I may have just been lucky.
For what it's worth, I think it is a personal prefernce, no one size fits all in this biz, I see the logic both ways, nothing wrong with reducing size to protect profits, of course it limits them too, I rather protect profits then limit them, 
yep shillwood, I'm starting to see that most disagreements between otherwise intelligent traders is mostly a result of different strategies. For instance the biggest waste of time is an argument between a target shooter and a let it ride trader. They speak the same language but each word has a different meaning to them.Quote from 1765hillwood:
For what it's worth, I think it is a personal prefernce, no one size fits all in this biz, I see the logic both ways, nothing wrong with reducing size to protect profits, of course it limits them too, I rather protect profits then limit them,
Like when a woman says "We need to talk" and you turn off the game and listen waiting for the information she wants to convey to you, and finally after just setting everything up and never coming to a conclusion she says she feels better and you turn the game back on.
So her idea of "talking" is different than your idea of "talking."
So it's the same way with size and scaling and averaging in.
For one guy it is a disaster and for another guy it is a part of his strategy. Yet, both of them have a good oldtime arguing about why they are right and the other guy is wrong.