Reducing Size after Extreme Profitability

O

oldtime

I just wonder if I'll get the same negative replies to this one.

Does anybody think it is wise to reduce size after periods of extreme profitability?

I'm talking when everything you have on is trending your way and another trade is in the works. Stay with what's working? Or anticipate a return to more normal returns and make the next one a little smaller.
 
I don't think its wise but most newer traders (and some older ones too) do it as they don't want to give profits back. It's an emotional not a tradecraft decision, usually.

The "correct" trade management is to maintain your risk per trade equally for all trades, adjusting size to balance risk. This way, subjective decion making won't break the mathematics of your trading plan.

EL
 
Quote from electroniclocal:

I don't think its wise but most newer traders (and some older ones too) do it as they don't want to give profits back. It's an emotional not a tradecraft decision, usually.

The "correct" trade management is to maintain your risk per trade equally for all trades, adjusting size to balance risk. This way, subjective decion making won't break the mathematics of your trading plan.

EL
More...
good answer
 
Quote from oldtime:

I just wonder if I'll get the same negative replies to this one.

Does anybody think it is wise to reduce size after periods of extreme profitability?
More...

not to worry about the negative replies, its a hard lesson I learned here, best just to ignore them.

I am thinking about the same issues as you are, about winning and losing streaks or strings.

speaking for myself, the systems I trade have a 65% probability of winners. So I have long winning streaks, if I look at the winning series, and the number of series, most of the time I will have 1-4 profitable trades in a row, then followed by a loss. but then, there are also 11, 15, 20 winners in a row as well. i have found it very hard to 'predict' winning streaks.

however due to the high win rate, I find more opportunities in the losing series. they are well defined and have stable boundries.

I think the reverse may be true for systems that have a low win rate of lets say 33%. One system in the public domain, richard dennis turtle system, he had a rule to skip the next trade after a major winner.

i would like to hear your and other posters thoughts. thanks
 
Quote from oldtime:

I just wonder if I'll get the same negative replies to this one.

Does anybody think it is wise to reduce size after periods of extreme profitability?

I'm talking when everything you have on is trending your way and another trade is in the works. Stay with what's working? Or anticipate a return to more normal returns and make the next one a little smaller.
More...

As one of the ones that gave a negative post in the other "increase size with drawdown thread" I thought I should chime in here. Most people would agree with a fixed risk ratio as someone described above as the "correct" way to manage your risk. This is easily the easiest and safest way to trade.

However, instead of reducing size after an extreme win many professional traders INCREASE size after extreme profits. It really depends on the objective of the system. If a system is well tested and has PLENTY of statistics (which MOST DO NOT HAVE) then one would know the ideal % of capital to risk per trade to meet your objective. EVERY OBJECTIVE IS DIFFERENT FOR EVERYONE... this statement is important to understand. Everyone has different goals in their system for % gain per year and maximum draw down allowed. Many trend traders are willing to "GIVE UP" profit that has been made in order to amp up or virtually supercharge their returns AS LONG AS THEIR MAIN OBJECTIVE IS NOT IN DANGER OF FAILING. So if for example a system that risks 1% per trade and whose goal is with a 90% certainty to reach 25% return with less than 10% chance of reaching a maximum 10% drawdown exists and that trader has already reached 30% return say in July (5 months left before year end) then he may risk 1.2% or 1.3% or whatever he calculates as the new risk that would allow a 90% chance of reaching a 25% return and max 10% draw down.

SO,..Increasing the risk would increase profit but also increase risk of draw down. Since there is a cushion of profit you may be willing to INCREASE risk to try and "supercharge" your returns. However, these tactics should ONLY be used when you have good statistics on your trading system to know as closely as possible the exact amount of risk you are taking of losing that realized "extreme profit"

The SAFEST thing to do is stick with simple fixed risk ratio of 1% or whatever you choose as safe risk of capital and not mess around with these tactics.

I just thought I would try to present some methods of maximizing gains since it seems that is what you are trying to understand in the first place.
 
Quote from oldtime:

I just wonder if I'll get the same negative replies to this one.

Does anybody think it is wise to reduce size after periods of extreme profitability?

I'm talking when everything you have on is trending your way and another trade is in the works. Stay with what's working? Or anticipate a return to more normal returns and make the next one a little smaller.
More...


What I think wise is to constantly monitor one’s self….

If you’re able – then do...

If you’re not able – then don’t...

Period


Scared money comes in several forms – extreme profit is but one of them – potentially…

RN
 
Quote from electroniclocal:

I don't think its wise but most newer traders (and some older ones too) do it as they don't want to give profits back. It's an emotional not a tradecraft decision, usually.

The "correct" trade management is to maintain your risk per trade equally for all trades, adjusting size to balance risk. This way, subjective decion making won't break the mathematics of your trading plan.

EL
More...

QFT

To elaborate on what electroniclocal said, you should should have a predetermined risk amount as a % of your total account you can risk per trade. Generally in the 1%-2% range. That is what you should always do. Don't risk more based on a feeling that a trade is a "sure thing", what if it's not? Don't risk less on trades you aren't sure of, if you feel you need to risk less then risk 0.
 
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