11/25/2011 Portfolio Update


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Yes, yes, I know let your winner run let your winner run, I just couldn’t help taking profit as soon as I have a winner and perhaps this is why I’m still not rich (a successful trader) instead of working very hard here almost 24/7/356.

I’ve discussed the importance of letting a winner run in 11/17 Portfolio Update, because if you don’t, your losses are guaranteed larger than your winner and it’d take lots of winners to beat a few losers which is bad. Anyway, I know the theory, but I simply cannot overcome my fear, the fear of losing a winner, after all, the market is really really stretched, so I closed the most of TZA position today to make sure the profit compensate the loss of TNA and a half DZZ position. I know it’s a bad decision again like I didn’t follow the rule, instead took half on UUP and TMF, and both had incredible run right after I took the profit. Well, I just couldn’t help myself. Guess I’m hopeless…

TNA got stopped out on 11/23. And as I said above, I cashed the most of TZA as well as half DZZ position out today.

The very good thing of this portfolio is investing into theoretically totally different assets, since some asset changes direction faster than the other asset, so during the trend transition period, the portfolio automatically hedges itself therefore allowing a smooth transition. Take this time as an example, I didn’t feel much pain when the market shifted to the downside from upside dramatically. So I’m glad the very basic idea of smooth transition seems not bad. Now we just need time to experiment the 2nd very basic concept which you’d have already guessed: Let the winner run…

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  • d w

    Meh a lot of trading rules are contradictory.  Letting your winners run works great in trending markets, not so much in trading ranges, where you end up with a lot of circle trades where you see a great profit turn to break-evens.  Especially with 3x levered etf’s lol…I wouldn’t hang onto them too long.  Best of luck Cobra!

    • http://www.cobrasmarketview.com/ Cobra

      So true. You don’t take profit, then in most cases, your winner becomes loser and this is why I’m very fearful of losing my winners…

      • Anonymous

        My experience is this:  There are times to hold winners but they are rare.  Espcially if you have a good entry from extreme conditions, the window to hold longer is there.  However giving all positions equal chance to hold is inferior behavior long term.  One must rate each position in terms of risk/reward scale depending on context.  For instance, successfully hitting a good entry at the Oct low on many historic extreme statistics should force to hold longer.  Buying a pullback already well into intermediate time frame uptrend very different risk.  My experience witnessing many traders in the past where I worked, I observe that if the losses are cut quick, taking profits also quick with high frequency of gain always outperform the trader who holds.  Why?  Because many traders who have outsized gains holding also have outsized losses.  Also from psychological point of view, outsized gain cannot occur with tight stop, ie 1-2% stop loss.  The tight stop programs mind into frame of mind of fear plus this market now wipes much wider even tho intermediate trend still intact.

        • http://www.cobrasmarketview.com/ Cobra

          Thanks, I know if I take profit quick I should equally cut loss quick too. Just when is the right time to cut, I still haven’t figured out yet. A trend following system inevitably would have lots of whipsaws, so if I cut loss quick, that’d mean very low winning rate and psychologically even more difficult to let winners run simply because you had too many losers. Let’s forget what books say, we’re after all, humans, we have fear, no matter how disciplined you’re. According to your theory, cut quick then should take profit quick, this sounds a great idea, but this doesn’t work with trend following system because by nature a trend following system replies on a few winners to win money.

          This research project is to draw this kind of discussion here so that we all could benefit from it. I’m glad I see more and more such discussion here. Thanks.

          • Anonymous

            This is accomplished same way by position sizing which is something most books and financial markets academia do not talk about enough.  Although in this quick profit quick loss way, it seems gain and loss the same for each quick exit, actually the net profit is much larger over time if rate of win is high because like August bottom which was primed for a big bounce of October bottom same, position sizing should have been much more aggressive than holding at some other time.  However most traders trade same lot regardless of the trade risk/reward profile.  Paul Tudor Jones spoke about this in Market Wizards.  He rarely hits the entire move of the trend, but he is positioned aggressively at the big turns.  So for instance trader A takes 1000 shares XYZ and gets entire 10 points move over 10 days with alot of pullback and psychological drama and net $10,000.  But Trader B takes 5,000 shares XYZ why because the risk/reward profile and set up is highly in his favor so gets the big move first day of 2 points and covers quick at close of day for net $10,000.  Compare the 2, both have same result net $ amount but very different road to similar end.  Net % returns mean nothing these day in age where funds and traders use leverage correctly.  Sizing incorrectly however can lead to bad drawdown obviously so position sizing is another area trader must concentrate on.  I have found that leaving 25% of the big position on after first big day with stop at original cost of entry then *RIDE* the rest of trend is superior than holding same small size every time and going thorny path.  Hope that make sense.

            • http://www.cobrasmarketview.com/ Cobra

              Thanks, I do have my own algorithm for position sizing, if you paid attention (as some already asked) that the system uses different stop loss in different time. I never use the same lot for every position. A better positioned position could be as twice large as a worse positioned position.

              • Anonymous

                Thanks for clarifying.  However, only 2 levels of size will continue the mind games because it is then small and large only, relative 2-dimensional scale only so the mind still in the hoarding mode and unwilling to continue RISK.  The reason why traders covering too early is psychological.  Trading 1 or 2 lot still cutting half and losing on half position is hurtful.   However, having 4-5 tier or even more (probe, small, medium, large) level of size allows to take an aggressive position and cover fast for big profit and then as I explained above hold onto 25% to possibly ride the larger move with a stop loss at cost.  Why, because you already booked your large gain that smaller position would take much much longer time and agony to net same $.  And in trading TIME is salient is where the devil does his deeds when there is plenty of TIME to sit and overthink.  After cover 75%, now you play with the market’s money in your leftover position so you can eliminate some fear of not participating.  I have seen that traders feel more pain of cutting early out of a profit and not participating in big move later than actually losing. This is a human psychological defect that most experience.  In the end, courage is a very underrated concept, I guess this is why people using more algorithms now since no emotion.  Again thanks for clarifying.

                • http://www.cobrasmarketview.com/ Cobra

                  Thanks, let me think about what you said.

                  • Anonymous

                    Basically your 25% position needs to be your current 100% position which is what you are currently comfortable trading.  The initial position for highly favorable risk/reward trade should be 3-4x your normal size.  After hitting first day or two of big reversal usually HUGE like 5% move these days, cover 3/4 and let the 1/4 ride at cost.  I’m sure these values can be optimized further but purpose of this is to train the mind to trade the risk.  In the end, anyone can make $ in market but highly successful trading is not just being right/wrong.  It is being greedy pig when it counts.  It is how to push it when it counts that differentiate the avg trader with the market wizards.  Also note, 10 years ago, easier market to chase and many bull consolidation when long.  Shakeout is HUGE now as algo’s know open interest and 9 out 10 times avg trader will be shaken.  In the past much easier to buy after confirmation of a bottom and buy in the middle of the short term uptrend as market higher with small pullback and consolidation.  Now market only really reward the man who buys extreme fear to get the entry that will not be shaken.  Too much algo/HFT and retail open interest and sharks who are very hungry to take the stops.  This is the reality of today’s market

  • Monty Mound

    you are not alone.  every time I have a tiny profit, it I don’t grab it  instantly, it becomes a huge loss.

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