As an example of how cutting losses and letting profits run works, below I've described my trading activity for the current month to date to see how my system typically performs. Bear in mind that my system operates slightly differently to many trend following systems, with a clear priority given to limiting drawdowns and losses.
Full details are in my e-book, or available via the 1-2-1 training or via the ongoing support provided with the mentoring that I offer.
Barring the chance of a gap through my stop levels, in theory after a position has been open for more than one full trading session, the only capital I have at risk on any position is the equivalent of the bid/ask spread. Allowing for this, after 24 hours, my stops are moved up to reduce the open risk on the trade.
Therefore, I do not have a significant amount of capital at risk on any given day - indeed, when in a trending phase in the market, more often than not I have NO capital at risk.
So far this month I have opened 11 trades - of those 5 have been closed. One of these was closed on the same day that the trade was initiated, the others within 2 or 3 days of being opened, after they initially moved in my favour before reversing direction. There was no hesitation in closing these positions. As a result, in all those cases small losses were incurred, all less than the equivalent of 0.5R (the majority were in the range of 0.2R to 0.3R).
Against that, I currently have 6 other positions that I have opened in May, including one I opened today - all these are at breakeven or are in profit, totalling the equivalent of 5.2R.
In the background, I have two other positions I have been holding for several weeks - these two positions are in profit to the tune of more than 16R.
A lot of traders will tell you that, when the markets are favourable, you should increase your exposure or add to your existing positions. I am always more concerned with the downside, and principally how much risk do I carry. I have a self imposed 'discretionary' rule that limits the number of positions I can open on any given day. This, allied to the particular set ups and criteria I have when selecting stocks to trade, means I am have little capital at risk.
It is only by controlling what I can control (i.e. limiting the potential downside as best I can) and letting things I cannot control play themselves out (i.e. trends taking off - there are no profit targets used - the trends are left to run until they exhaust themselves), that I can allow the power of a trend following system work its magic.
In this way the big price moves are always in my favour, and never against me, and allows me to end up with my winning trades being much bigger (in terms of R) than my losing positions - go to my detailed performance statistics for more.
If I move stops up too soon I seem to just get taken out by a spike down. For a recent example see https://www.google.co.uk/finance?q=LON%3AERMReplyDelete
This can happen, which is why you only risk a small amount of capital per trade. There is an example of this in the addendum to my e-book. Larry Hite also talked about this in his Market Wizards interview - "It happens, but not enough to be a problem".ReplyDelete