OK gentlemen (Alan, Gary, DanG), you have my attention. Minority opinions may not always be wrong, but he who holds them would be a fool not to welcome the opportunity to be enlightened by considering the alternative.
I have made money with more losers than winners. The concept of cutting your losses and letting your profits run is based on it.
It was never my intent to argue against cutting losses, nor would I argue against letting profits run, although I will readily concede that is not the strongest point in my own trading. But up to this point, we are speaking in generalities, and perhaps the devil is in the details. So I will stick my neck out a bit further and make some suppositions that seem implicit in your point of view. (I use "you(r)" collectively, though I recognize you may have different reasons to support your conclusion, and that I may not be covering all the bases in this post.) If you care to respond by pointing out the flaws in my thinking, then perhaps I and a few lurkers (maybe hundreds if all the data about how many are losing money is true) may be the wiser.
Gary kindly posted his April gains at Message 9275467
with an update and correction, along with some commentary at Message 9275934
Now 35 trades per day times 20 days (21 in the list, but no matter) is 700 trades. Let's assume Gary purchases 500 shares on the average, so we are talking about roughly 350,000 shares traded to clear $6,700. Add on the $21,000 he paid to Fido, and we have a trading gain (before expenses) of $27,700, or on the average $.079 per share, or just a bit over 1/16 gain per trade. Gary also said he tries hard to limit his losses to 1/16, or to get out flat (I'll ask/say more about that in a second). Let me guess that his losers (including flats) outnumber his winners 2:1, and that on the average his loss is 1/16. Then the average winner must be about 5/16: (-2*1/16 + 5/16)/3 = 1/16. Of course I am making some assumptions, but a 5/16 average of the gainers of a self described scalper who does a round trip on the average every 2 to 3 minutes is I think quite reasonable.
Now about the losers. I'm wondering about the exit decision process from the following viewpoint. if I trade a stock with a spread of 1/16, unless I manage to limit into the position across the spread (buy at the bid or sell at the ask), I am immediately down 1/16 (plus the ticket costs, of course) and in jepoardy of dropping another 1/16 on the next tick. So what is it that makes you decide to get out with your 1/16 loss, when that loss is staring you in the face from the outset? Do you get out everytime a trade moves one tick against you, or before when you see the bid/ask size ratio going the wrong way? Do you get out if it doesn't move your way within some predetermined time? Do you manage to get out flat, or with a small loss on a lot of trades where you could have taken a 1/16 or 1/8 profit but did not because you want to ride your winners and find the risk of slipping back acceptable?
I actually went through a phase where I committed to limiting my losses the way Gary does, with lots of flats and minus teenies. At the end of the day, I was usually behind, not by a huge amount, but certainly never much ahead. As I look at Gary's numbers I find them to be quite similar to my own, with one very important difference. Where I was trading the average round trip cost was about $55. (Of course it was a "direct access" system that gives you the advantage of flexible order routing and reliability (well, sometimes) so it was supposed to be worth it; but still, my performance was quite comparable.) As Gary noted in his post, the price of commissions makes a big difference in this flavor of the game. With $55x700 = $38,500, doing what Gary does, but paying the costs I incurred would turn that $6,700 gain into an $10,800 loss!! ($27,700-$38,500) That tends to color ones thinking about the ratio of winners to losers one needs to achieve in order to turn a profit. I simply stopped pouring money into that sink hole until I find a better way.
Well that's as far down this road I'm going until I get some feedback. |
