Techniques for Managing a Random Entry

[Gordon Gekko]

Quote from Lightningsmurf:

Gordon brought up the idea of taking partial profits at specified intervals. Despite the improved probability of a vehicle going half as far as the implied risk, I think this is probably not such a great idea. By taking profits at a "half-way" junction you end up carrying more potential risk for less potential gain.

Gordon later said that someone pointed out why his logic was a bit off. I wondering if he could share his insights for the rest of us.?

actually, my idea wasn't about taking partial profits. it was about scaling out of losers. my example was: say you entered at 50, target 52, stop 48. hold entire position if it goes your way, but if it drops to 49, sell half. exit all shares at 48 or 52. so, a full position would be exited at 52. but if it went to 49, you'd sell half.....if it dropped further to 48, you'd sell half a position instead of a full position.

as for not saying why it won't work, i don't know the explanation yet. i was just told that my idea wouldn't work.

 

[inandlong]

lippi,

Very nice post. That is exactly the stuff I am hoping to elicit from you guys. Significant landmarks, S/R, etc. Good stuff!

The time frame is up to you. I started by looking at the daily chart to see the opportunity for a bigger move vs the 1 minute chart. I look at all the common time frames then to determine where my long position has the best opportunity for the most gain.

If all the time frames are headed down except the 1 and 5 minute, I will look to them and my trade will most likely be very short term. But if the hourly, daily, and weekly are up for example, I don't give a hoot what the lesser time frames are doing. I am already in.

Again nice post lippi. Thanks for your ideas. Keep 'em coming!

 

[Katrina Johns]

Quote from inandlong:

Okay I see we're having a little trouble gettng started here.

The newbies aren't posting because they don't know what to do yet and they would like to learn without being reemed by the criticizers.

The criticizers aren't posting because there is nothing to criticize yet, and the newbies haven't posted anything worth reeming. Not that they ever do, but they get reemed regardless. As if losing money early on isn't bad enough...

LOL you've captured it perfectly

 

[Gordon Gekko]

Quote from Gordon Gekko:


actually, my idea wasn't about taking partial profits. it was about scaling out of losers. my example was: say you entered at 50, target 52, stop 48. hold entire position if it goes your way, but if it drops to 49, sell half. exit all shares at 48 or 52. so, a full position would be exited at 52. but if it went to 49, you'd sell half.....if it dropped further to 48, you'd sell half a position instead of a full position.

as for not saying why it won't work, i don't know the explanation yet. i was just told that my idea wouldn't work.

i was told it will not work through a PM. i will not repost PMs here. however, i will post something i read which gave me my idea...

Day traders are in for the quick profit so it is hard to have a good add plan. Their best trade is to put all positions on at once where original and adds are all placed at once and use rule one to take them off unless or until proven correct.

Believe me this is the proper probability in a loser's game as is trading. Rule two says you must add to your winners without exception. As a day trader you are only keeping a position if proven correct or until proven correct. In a sense the market is deciding how large your position will be. The variable can be from all to none in this situation.

Trend traders will get larger when they are correct but day traders will start larger and get smaller when they are wrong. Day traders can be large when they are wrong but Trend traders will never be large when they are wrong. This is due to the nature of a loser's game for day traders.

By reducing your positions when wrong, your exposure is not extreme for a day trader provided rule one continues to be followed. Exposure and risk are also an element of time in a position. That is the edge the day trader is expecting to work to their advantage. Trend traders are expecting higher probabilities in smoothing out the swings.

 

[bidmasterx]

Gordon - I think I have an explanation...

Aphie touched on this...he used 3 possibilities, but they were not all equally likely to happen. The following 4 possibilities are equally as likely to happen as explained below.

A: 50 --> 49 --> 48 = -1.5
B: 50 --> 51 --> 48 = -1.5
C: 50 --> 49 --> 52 = +1
D: 50 --> 51 --> 52 = +2

The asset has a 50% chance to rise to 52 or fall to 48.

P(52) = 0.5
P(48) = 0.5

If we are assuming the asset price is random such that,
P(52|49) = P(52|50) = P(52|51) = P(48|49) = P(48|50) = P(48|51)
meaning that the probability of the price rising to 52 (50%) is not affected by whether the price is currently 49, 50, or 51. And the probability of the price falling to 48 (50%) is not affected by whether the price is currently 49, 50, or 51. This means that P(A) = P(B) = P(C) = P(D).

Given these assumptions, we know that the sum of P(A) and P(B) which ultimately result in the price falling to 48 are 50%, and the sum of P(C) and P(D) which result in the price rising to 52 are 50%.

Combining,
P(A) + P(B) + P(C) + P(D) = 1, and
P(A) = P(B) = P(C) = P(D)

We know that the probability of each case is 25% and thus the expected value = (0.25 * -1.5) + (0.25 * -1.5) + (0.25 * 1) + (0.25 * 2)
expected value = (-0.375) + (-0.375) + (0.25) + (0.5) = 0

Therefore this strategy will not generate profits.

 

[Lightningsmurf]

Where you are coming from now. Some of that makes sense to me...

Most of my positions (the ones that work, anyway) are held for more than one day. So for me, the stop point represents the point at which the premise for the trade is invalidated.

I like the idea of reducing exposure in non-performing holdings, but for me the original stop point of $48 would represent an invalidation of the premise. Unless something positive happens, or a time limit expires, there is no reason to self-invalidate my own ideas.

Interesting ideas about adding and reducing - maybe fodder for a separate thread?

 

[inandlong]

Whoa... talk about shrinkage!

:eek:

Okay newbies, bidmaster's post is awesome, truly awesome.

Perhaps a bit more than you need to know to make a profit.

But an awesome post regardless.

Thanks bidmaster.

 

[Gordon Gekko]

Quote from Gordon Gekko:

as for not saying why it won't work, i don't know the explanation yet. i was just told that my idea wouldn't work.

i spoke again to the mysterious person and we came to the following conclusion:

he was right, but i basically phrased my idea bad. if something is 50/50, no amount of manipulating it will change it. (nitro said this well in another thread, too) HOWEVER, if you believe the market is not 50/50 (as i do), then the concept probably has legs.

 

[Te']

Out of curiosity why are people assuming that there is a 50/50 chance with a 'random' entry???

 

[TSaimoto]

OK, OK... the critisizer for a 50/50 $2 profit/loss is back.

Simple, it's great to look at a dynamic market from a static standpoint but most of the time it ends there. The conclustions of a static environment has to be leading into dynamic market.

Martingale, Anti-martingale, other positioning techniques.. great... OK. Who makes money using Martingale? Lose, double... lose, double... lose, double... win... Does it work? Sure in a static environment but in real market situation? No. Unless you have a $1,000,000 account and use $10 risk.

Again, it's great that all these techniques and ideas are derived from static scenarios but market is real, it's dynamic, there's realistic limits.

$2 targetting stuff? The market can be trading in the $1 range... what would you do... it can happen... it's the market....

Also, we're talking about trading... not number games...

I just hope people understand that number games are important but it's still not trading...