Trading Profits

[FXtrader8911]

you do need to be able to compound your capital base from accumulation of some of your trading profits.

I have a different view, nothing to do with taking the profits to pay bill but more to do with your personal ability as a trader. I firmy believe that each trader should set aside a fixed $ capital to trade and withdraw profits as they come. If your level of expertise increases and thus become more comfortable with bigger stakes then increase the $ capital but do it consciously and with a revised plan/strategy, compounding should not be a strategy for traders. In fact, the first target for a trader is to reach infinity return, only then should he consider increasing the stakes (infinity returns are reached when the capital is equal to the withdrawals)

Trading always has a risk, as you said yourself, chances of a drawdown are real, even Stanley Druckenmiller who had an unbeatable 30-year record got caught-out twice (once in the 1995 Asian crises, second with the GFC) and withdrew from trading due the stress related to trying to cover the 2nd drawdown.

The point is that there comes a time that several bad events line-up, so keeping all your eggs in one basket as one does by compounding means that when that happens, even if its a one in 30-year event, you loose it all.

The likes of Druckenmiller has an army of analysts and advisors behind him, still, he gets cought-out. Traders on ET trade part-time, probably asleep during a major black swan event, their change of a drawdown is grater than for a Druckenmiller so, in my opinion, compounding is not a good strategy.

 

[ironchef]

but if you trade on fundamentals then hedging is the way to go... remain convicted to the fundamentals but take out insurance against sentiment swings, when sentiment goes against the fundamentals then, rather than STOP the positions, add to them, being hedged will allow you to do that and come out the other side with 6 fugure profits.

The highlighted comment is very enlightening. Can you give us an example of hedging?

I trade options and the call premium is a natural stop loss. Do you consider covered call/cash secured put as natural hedges?

Thank you.

 

[ironchef]

I have a different view, nothing to do with taking the profits to pay bill but more to do with your personal ability as a trader. I firmy believe that each trader should set aside a fixed $ capital to trade and withdraw profits as they come. If your level of expertise increases and thus become more comfortable with bigger stakes then increase the $ capital but do it consciously and with a revised plan/strategy, compounding should not be a strategy for traders. In fact, the first target for a trader is to reach infinity return, only then should he consider increasing the stakes (infinity returns are reached when the capital is equal to the withdrawals)

Trading always has a risk, as you said yourself, chances of a drawdown are real, even Stanley Druckenmiller who had an unbeatable 30-year record got caught-out twice (once in the 1995 Asian crises, second with the GFC) and withdrew from trading due the stress related to trying to cover the 2nd drawdown.

The point is that there comes a time that several bad events line-up, so keeping all your eggs in one basket as one does by compounding means that when that happens, even if its a one in 30-year event, you loose it all.

The likes of Druckenmiller has an army of analysts and advisors behind him, still, he gets cought-out. Traders on ET trade part-time, probably asleep during a major black swan event, their change of a drawdown is grater than for a Druckenmiller so, in my opinion, compounding is not a good strategy.

Many roads, All roads lead to Rome.

True, compounding is not for everyone. All I can do is shared my experience which I am sure is different than yours.

I think Druckenmiller and Soros compounded their trading profits to become billionaires.

 

[FXtrader8911]

Do you consider covered call/cash secured put as natural hedges?

Well no, the term hedge is commonly used incorrectly, often the option's cost is referred to as a hedge against a greater loss, but to me it is a STOP. (I don't do options so I might not fully understand all the mechanics nor terminology so I could be wrong)

Can you give us an example of hedging?

.

A hedge technically prevents a loss by moving inversely to the position held. If the question is related to equities, a hedge might well be Oil, Treasuries, Gold or the VIX, or even another stock in a sector that moves inversely to the sector you are trading. It is not a straight forward thing, one needs to see what is inversely correlating to the instrument you are trading at the time. The trick is to put TRAILING STOPS on the hedge rather than on the trade itself, then, if the market moves against you, the hedge covers the loss, if there is a recovery then the hedge will get stopped-out (sometimes at a profit) and the trade can go to target, if there is no recovery then the trade and the hedge are married with each other at little to no loss.

 

[Overnight]

...The trick is to put TRAILING STOPS on the hedge rather than on the trade itself, then, if the market moves against you, the hedge covers the loss, if there is a recovery then the hedge will get stopped-out (sometimes at a profit) and the trade can go to target, if there is no recovery then the trade and the hedge are married with each other at little to no loss.

Hmm.

Have you traded real money before? So you put a trail stop on the hedge, but not on the original position.

But what if the hedge gets stopped out and then the original position starts going in the direction you hoped, but right before your target goes back to the stop level on the hedge?

The nuances of something like this are pretty deep I think, and yer not explaining it clearly enough for folks to understand.

All you're really doing is net-zeroing everything, and there is zero money to be made. Eventually, one side of the hedge HAS to be closed and the other has to be able to breathe in profit.

If tick for tick your are hedged opposite, yer just your broker's bantha pudu.

 

[FXtrader8911]

But what if the hedge gets stopped out and then the original position starts going in the direction you hoped, but right before your target goes back to the stop level on the hedge?

What if a meteorite hits and the NYSE gets wiped-out with the test of the USA, what if.... anything can happen, nothing is foolproof, all positions need to be managed untill closed but some strategies are better than others. To answer your scenarion specifically, once the hedge gets STOPPED because your trade is in profit, then put a traling stop on the position at that time, simple.

 

[FXtrader8911]

Have you traded real money before?

You brough this up before, my reply was STFU! All your posts all over ET just nitpick, U try to find undotted i and uncrossed t in every post. Try to contribute something since, according to you, you are the only one trading real money, surely you can tell us how to trade rather than just nit pick other's posts.

 

[erensenez]

The pool vote is too few

 

[ironchef]

Well no, the term hedge is commonly used incorrectly, often the option's cost is referred to as a hedge against a greater loss, but to me it is a STOP. (I don't do options so I might not fully understand all the mechanics nor terminology so I could be wrong)

.

A hedge technically prevents a loss by moving inversely to the position held. If the question is related to equities, a hedge might well be Oil, Treasuries, Gold or the VIX, or even another stock in a sector that moves inversely to the sector you are trading. It is not a straight forward thing, one needs to see what is inversely correlating to the instrument you are trading at the time. The trick is to put TRAILING STOPS on the hedge rather than on the trade itself, then, if the market moves against you, the hedge covers the loss, if there is a recovery then the hedge will get stopped-out (sometimes at a profit) and the trade can go to target, if there is no recovery then the trade and the hedge are married with each other at little to no loss.

Thanks for the post.

 

[FXtrader8911]

The nuances of something like this are pretty deep I think, and yer not explaining it clearly enough for folks to understand.

All you're really doing is net-zeroing everything, and there is zero money to be made. Eventually, one side of the hedge HAS to be closed and the other has to be able to breathe in profit.

If tick for tick your are hedged opposite, yer just your broker's bantha pudu.

For someone that said has made $½m trading you don't seem to have much of a strategy nor much of an understanding of risk management nor are you aware of the tools available to manage risk, yet you nitpick and badmouth real traders, so, try to shut-up and lern instead, I'll spell it out as I would to a newbie...

1. The hedge is not placed simultaneous to the main trade, it is placed when the main trade is accumulating a loss. If you are watching the market then you place the hedge manually, if you are not watching the market then use an SE STOP order to place the hedge, whichever, it need to be managed at some point... every trader needs to risk manage all open positions no matter whether they are trades or hedges.

2. The hedge will have a tight trailing STOP place on it, i.e. it gets closed when the price starts moving in favour of the main trade, sometimes at a profit, sometimes at a small loss

3. Hedging should not be an "automatic" process, it needs common sense to get satisfactory results i.e. it is to be entered into when the price moves decisively against the main trade and not when markets are flat or fickle (moving a few pts between + and - as in the example you gave, use common sense, all on whether a hedge is necessary, when to place the hedge and choice of instrument used as hedge. As a thumb rule, price the hedge were you would normaly place a STOP)

4. If fundamentals change and it becomes evident that the main trade was a mistake, you marry the main trade with the hedge and so exit the trade at a small loss even if markets have moved 000's of pts against you.

5. Hedging works best when trading on fundamentals and target t/p is over 100pts i.e. when sentiment moves the price against the fundamentals. Hedging does not work well for pure technical trades (scalping 10 or so pts)

6. Once hedging is mastered, scaling can be a usefull tool, particularly if the hedge was entered when the main trade was already at a substancial loss.

Used properly, hedging is not a zero-sum game, it does not result in zero profits as you say, it is not a broker's bantha pudu (Believe you meant to say "bantha fodder"), it is a technique that at worst results in a small loss, at best can double or triple your profits by: a) protecting the main trade against losses b) keeping your account liquid giving firepower to add to the main trade at better levels.

If you cannot understand any of the above, particularlu the using of common sense, then don't hedge, don't even trade because you know nothing about trading.