Quote from algotrading:
Let see some exact formula to attempt to quantify this concept.
Depending upon your stock selection criteria that is not difficult to do.
If you read the longer post above (NihabaAshi), you see where ommissions in selection criteria can necessitate compensatory measures.
The general formula that handles the rational thinking process is well known and findamental (compound interest formula). If criteria is tied to the formula, then the priorities for improving trading effectiveness and efficiency come to the fore (optimizing riding winners).
Another alternative is to eliminate the downside risks by ranking them according to the damage they are doing.
So it comes down to incorporating a strategy that will take the makret's offer that is available. The following ranked considerations solve your and the OP's stated problems.
1. Always make or have cash available to take opportunities.
2. Maximize the cycles per year in trading profit segments of instruments.
3. Minimize risk by entering late.
Subtending these are facilitating considerations:
4. During RTH's monitor properly.
5. Exit when a hold is marginally less effective than a timely opportunity.
6. Do weekly planning in order to have the trades for the week in view.
7. Always have some potential back up stocks available to substitute in the plan of 5.
8. Always have your Universe in the picture and available (sorts) by current individual leading indicator performance criteria.
The nitty gritty is in the depth of the above.
Selecting the Universe is a qualty control issue and all instruments in the Universe behave the same way. The criteria for making money is found on the Universe master list in every way to take care of the above items.
An optimum trader is doing as many turns as possible and each profit segment is tuned to the optimum money velocity available. This eliminates having to have a stop loss strategy. Every trade makes the maximum money possible because it is in competition with all other opportuniies available.
By looking at the decription of a trader's activity while doing the above, a picture of how the items got positioned where they did. Write out how the year unfolded for the last 12 months. The following have to be happening:
1. The number of cycles is increasing because shorter duration trades are occurring.
2. The profit per cycle is also improving.
3. Idle cash has been minimized.
Substantively, this looks like about 100 cycles per year and a profit of over 10% a cycle. Capital streams are being added by dividing streams that get too combersome by having to do too many partials fills to not disturb the market capacity and flow. In the past, prints have been posted of this performance using an ATS. The data was an average hold of 6.6 days and an average profit segment of 11.1% per segment.
The Universe is documented by having all the work done that describes the character of each instrument in terms of the ranked items above. No instrument gets into the Universe without being "qualified". the Universe member all perform roughly the same and they are culled from over 15,000 inital listings.
This means that the profit segment of each member is roughly uniform during the integration of three variable internal cycles that make up the observable cycle. For me it is the "natural cycle". The profit segment has a known money velocity and duration. The profit cycle repeats at a known frequency. This is on the Excel Universe and is capable of being sorted for various purposes. One column is always devoted to the next beginning date of the neaxt profit cycle.
To make it onto the list, a repeatability test has to be passed.
Regarding three variables cause, the complete cycle to be divided into 8 parts. Therefore a half cycle contains 4 parts and these cause three price moves within the profit segment.
Optimizing taking the maximum money velocity means choosing the portion of the cycle that eliminates the least effective money making. fortunately, these places are exidentiary in nature; that is they can be seen.
Position trading a 100 cycles a year is best seen by looking into a daily chart and using the next faster observable fractal where the parts of the cycle are displayed in terms of the three variables.
The variables contribute intracycles in a ratio of 2:1 as adjacent frequencies are considered; simplicity personified. Over all in terms ot the price cycle the ratios are 1:2:4 for P, V and A/D respectively. The optimum trade is ADA, respectively. Sitting out the other 5 parts DADAD, is the down cycle and the inefficient portion (unless you do short trading and there you use just the ADA portion. This is called front running and traders who do it are easily recognized by govenment agencies who monitor multiple account "bunch" trading.
If the government can do it, then there IS a specific, prima facia, formula for qualifying making money but not holding winners. Holding winner to extract all their momentum is inefficient after a certain point. The point is observable when A turns to D and the instrument coasts to its extreme as momentum wanes.
As people learn to trade, they change their ways as seen by the nature of the posts in ET.
Drilling down to observe the three prices moves in position trading is best done on the 30 minute chart. For carving the crossover of a held stock ending and going into a new stock that has gone from D to A in the beginning of ADA. Cross over can be done by looking at the second derivative of each. As they go through 0, they are proceeding with opposite signs and that is handled easily with ATS deductive type logic.
So in optimum trading exits are NOT determined by looking at one instrument but are, instead, determined by looking at the instruments competing for the scarce capital already making money.
For those who have moved to the understanding of long versus short money velocities, the above can be adjusted to move up to the next level of money velocity.
So the specific equation comes down to a binary logic equation and it is based on statistically derived derivatives with respect to time, all of which are binary vectors.
For those familiar with using the "pattern", simply use a 15 or 30 minute chart and trade fom the R2R 2B 2R ending FTT to the FTT ending the B2B 2R 2B pattern. Or for more time efficiency, hold off the entry until the BO of the RTL of the short at which time the A of the ADA begins.
The object is to trade short term prifit segments and the have the tie breaker for equal duration potential holds be the rank (money velocity of the instrument).
Doing two turns a week gives the riding winners new meaning. This is an exponent of 100 in the compound interest formula where getting half the price move comes down to an average of over 10% in the half week hold period.
By dividing 8 into the 100 you get the number of capital doublings per year using the two specific formulae. This means that the earnest trader can start with any amount of money and he can learn to trade in a few weeks or a month or two. Elsewhere there is a myth of needing 10,000 hours to learn and be expert.
To the government, this type of trading resembles, mathematically, "insider trading". The riding winners is better ended by usi8ng the A to D detector rather than the end of momentum detector. Maybe some momentum traders can kick in their momentum equations for those who do not do opotimum trading.
