Trading Winning Positions - The optimal approach

[mschey]

I was reading through a post on stops earlier and a few interesting things caught my eye. Specifically, this post:

"I've done lots of tests on stops. On the tests for stops with a loss I found little difference in overall profits based on where a stop was placed. With tighter stops the percent of winners dropped but the winners made way more money than the losers. With looser stops the percent of winners went up but the total win/loss ratio decreased so the overall profits were the same. I've found it much more profitable to spend my time on the stops for profit and I think it's a big difference between ok and better traders.

One area of research you might want to check is entry size. If you don't do all in at once it can have a big difference in your trading.
I found if I go in partially initially, and then after a fixed period adding more if the position is profitable, the overall profits went up, the time between equity highs went down, the drawdown increased, and the sharpe ratio went down. If I did partial entry at first and then adding if the stop hasn't been hit, but the position is underwater then adding to the position gave lower overall profits, higher time between equity highs, lower drawdowns, and increased sharpe ratio."

Lately, I have been more focused on improving my trading, and an area I think I could improve upon is getting more out of my winning trades. Then I figured that this is an area we all could do improve in, and the focus of this thread.

As I see it there are two ways to improve the way we trade our winners:

1. What is the optimal frequency and/or strategy for
adding to winning positions?

2. What is the best overall stop strategy once you are in
the position?

I look forward to your posts, and good trading to all!

Mike

P.S. I will be posting my research and strategy a little later in the week.

 

[lundy]

I read Jesse Livermore book once and he always added to winners, thus his losers were small, and winners big. But he used higher highs and higher lows when buying, and added on specific breakouts. Thus, if he was wrong on adding, he figured he was wrong or ready to get out completely. eg. stock makes a "lower low". In this way he would exit his entire position.

This seems like the best strategy to me. It is more active, and requires more analysis.

 

[tireg]

Quote from mschey:

I was reading through a post on stops earlier and a few interesting things caught my eye. Specifically, this post:

"I've done lots of tests on stops. On the tests for stops with a loss I found little difference in overall profits based on where a stop was placed. With tighter stops the percent of winners dropped but the winners made way more money than the losers. With looser stops the percent of winners went up but the total win/loss ratio decreased so the overall profits were the same. I've found it much more profitable to spend my time on the stops for profit and I think it's a big difference between ok and better traders.

One area of research you might want to check is entry size. If you don't do all in at once it can have a big difference in your trading.
I found if I go in partially initially, and then after a fixed period adding more if the position is profitable, the overall profits went up, the time between equity highs went down, the drawdown increased, and the sharpe ratio went down. If I did partial entry at first and then adding if the stop hasn't been hit, but the position is underwater then adding to the position gave lower overall profits, higher time between equity highs, lower drawdowns, and increased sharpe ratio."

Lately, I have been more focused on improving my trading, and an area I think I could improve upon is getting more out of my winning trades. Then I figured that this is an area we all could do improve in, and the focus of this thread.

As I see it there are two ways to improve the way we trade our winners:

1. What is the optimal frequency and/or strategy for
adding to winning positions?

2. What is the best overall stop strategy once you are in
the position?

I look forward to your posts, and good trading to all!

Mike

P.S. I will be posting my research and strategy a little later in the week.

You're definitely on the right track with your experiments. As far as your questions go, what works for me is... if you do decide to add to winning positions, buy on 'secondary buy signals', usually dips on low volume etc. Usually I enter with my full position and if I get stopped out I get stopped out. My position size is based on how much I'm willing to risk per trade. As far as exiting winning positions and stops, I've found that a nice trailing stop works well. I like to set it below support levels as the stock moves up.. or sometimes in a certain %tage to lock in gains. Knowing when to exit winners is a pretty hard thing to master, because I guess the inherent greed 'maybe it will go up more' is there. So the trailing stops help lock in a part of it, and usually if you see the position about to turn sour (hitting resistance and not able to pass it, reversal formations or indicators) it doesn't hurt to exit half of your position, with the idea that you could always get back in at any time.

 

[coolweb]

What I currently do is

full size on first position

then 1/2 size a few cents up.

So lets say


STock is 37.20

I buy 2000 shares 37.20

when it goes up to 37.25

I buy 1000 more shares

if it falls back to 37.23

I sell 1000 shares

If it goes up to 37.26 , leave it alone.

Of course with this you need to micromanage, but There is the lowest risk @ initial entry , and the continuity is usually good.


So I'm developing a better strategy where I layer it 3 times,

1x. entry
2x. 3-5 cents after
3x. 15 cents after?


I think with this kind of stepping, I Can build up a nice 3000-8000 share position without any risk depending on liquidity.

 

[acrary]

The basic rule for adding to a position is to only add when the addition doesn't increase your initial risk.

Example

Say you use a trailing stop of 10 pts. in the ES.

In you're initial position you short 10 ES at 1289.
Your risk is then 10pts. * 10 contracts * $50/per-contract = $5,000

Now say the market moves to 1287. The trailing stop now only has 8 points of risk in the overall postion. 8pts. * 10 contracts * $50/contract = $4,000 overall risk. You could short an additional 2 contracts without increasing risk beyond the initial point. 8pts. * 12 contracts * $50/contract = $4,800.

This is how I was taught to add to a position while keeping the risk constant.

 

[Champion]

Quote from lundy:

I read Jesse Livermore book once and he always added to winners, thus his losers were small, and winners big. But he used higher highs and higher lows when buying, and added on specific breakouts. Thus, if he was wrong on adding, he figured he was wrong or ready to get out completely. eg. stock makes a "lower low". In this way he would exit his entire position.

This seems like the best strategy to me. It is more active, and requires more analysis.

A lower low or higher high sounds easy. You have to get a few bars along from each one before it can be identified in which case you can end up saying, I've missed it.

 

[achilles28]

Quote from acrary:

The basic rule for adding to a position is to only add when the addition doesn't increase your initial risk.

This is similar to what i use and it works well. Isn't this what Phantom of the Pits recommends as well??

 

[achilles28]

Quote from mschey:

I've found it much more profitable to spend my time on the stops for profit and I think it's a big difference between ok and better traders.

I've made it a point to study the same posts you're referring to and can lend a little insight. Most breakout and some trend following strategies enter using tight stops because anything more would 'be a waste', to paraphrase one poster.

The inverse rationale behind the, 'anything more would be a waste' comment, is elucidated by other members which can be summarized as, 'once entries are made, trades go profitable and never look back'.

Again, 2 sides of the same coin. Just traders expressing an entry phenomenon - usually for breakouts or trends - a different way.

Both perspectives serve to reinforce the superiority of tight stops for some strategies. Again, they don't work well for all.

Quote from mschey:

One area of research you might want to check is entry size. If you don't do all in at once it can have a big difference in your trading.
I found if I go in partially initially, and then after a fixed period adding more if the position is profitable, the overall profits went up....

Again, more sage advice. You need to learn when to step on the gas. Increasing the size and frequency of winners is just as critical to minimizing drawdowns as the direct approach to neutralizing dd (usually money management).

Pyramiding or stacking is really important and can be incorporated into a winning strategy to really press winners. Personally, I stack. Depending on the strategy, winning entries that occur in runs (dependency) enjoy a higher win probability after each iterative succession up until a certain point. Therefore, under such conditions, pyramiding or stacking makes statistical sense.

Quote from mschey:

1. What is the optimal frequency and/or strategy for
adding to winning positions?

2. What is the best overall stop strategy once you are in
the position?

Ultimately, optimum position sizing needs to be tailored to a specific strategy.

 

[achilles28]

Quote from acrary:

The basic rule for adding to a position is to only add when the addition doesn't increase your initial risk.

Now that he's here, acrary and Steve46 posted a goldmine of information in regards to the importance of runs or 'streakiness of wins'.

My reason for highlighting their contribution is high dependency between winners (runs) offers the most reliable foundation for which to pyramid, IMO; as pyramiding is essential to keeping dd low and total wins high.

So thank you acrary and Steve46!

 

[achilles28]

People are pretty tight lipped on this site, aren't they?