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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: dpl who wrote (5216)	11/5/1999 8:32:00 PM
From: Cormac	Read Replies (1) \| Respond to of 18137

dpl - "The amount of money put into a trade should be proportional to how good the trade is.How high the probability that the trade will work. In this way the trades that tend to go against you over time will be smaller than those that go in your favor. You are losing less money when you are wrong even with the same amount of points." How is one to know how good a trade shall be and in what time frame, if I knew that I would be wealthy enough to quit trading and play golf all day. :) I understand that you said your exposure should be commensurate with your expected probability of success. I agree to a point. Before entry I try to look at every trade the same way, apply the same *rules of engagement* ---specifically do I have a minimum expectation of 3/8 - 1/2 a point - my own personal thought process behind this is - at my minimum trade size of 300 shares, if I exit at 3/8, I make $112.50 before transaction fees, at a maximum average per trade (both sides) of $50 I have paid for my trade and the next one, if I lose 1/8 of a point to slippage I still make $75 thus more than covering my transaction - this is probably only logical in my own mind... Back to the subject...before every entry I have the same minimum expectation...after entry expectations change and every trade has to be looked at and judged individually, but within the same fundamental trade rules. Because of this I will trade the amount of shares that I believe can be executed efficiently (both entry and exit, IMO a very important point, sometimes you can enter with 1000 shares with ease and have difficulty exiting with the same share size), thus attempting to maximize my expected profit of 3/8, after all 1000 shares at 3/8 is a whole lot better than 300 shares. Granted if the trade goes against me than my executed stop(I keep disciplined tight stops)the cost is greater if larger share size...but that is why I keep tight stops and am committed to keeping my win/lose percentage above 60%. "My problem with this is that stocks don't act perfectly in the real world. For instance...a stock goes to 40 and you buy it. The next buy point is 37. If it goes lower after you buy it were do you sell?There is nothing that says if the stock breaks 40 it HAS to go to 37. It might go to 39 and then rocket to the moon.To me a trader can use stops or something else like averaging down. The two don't mix." The whole premise of the strategy is to keep my stops and the further a stock continues to decline increases my belief that the price action will turn off selling and bring in value buyers and bring said stock back up to "fair value" or above where price action will turn off buying, etc, etc. The farther the distance the higher the probability of reversal...I did not say that I agreed with this premise...actually for my taste it is a too risky...what I did or at least tried to say is why not enter, keep stops, increase share size commensurate with distance from "fair value" and conviction that stock will reverse...this strategy is also a little too risky for my blood and money though not as risky as averaging down IMHO I am sorry I don't quite understand your example... sometimes I can be a little dense...but I hope what I reiterated in preceding paragraph helps. Given your scenario and the premise if I had bought 500 shares at 40, stock drops, sell @ 39 3/4, buy 1000 shares at the pause @ 39, if the stock only gets back to 39 1/2 I net $275 (allowing for max avg. fee of $50 per trade), if it returns to 40 I net $775 For the sake of argument let's say it continues decline...I sell my 1000 shares @ 38 3/4, re-enter 1500 shares @ 38, sell @ 37 3/4, re-enter 2000 shares @ 37 - at this point my loss including fees is $1450...and my net flat point is only about 37 3/4 and if it even gets close to 40 again I have netted a tidy profit...in comparison if I had averaged down at the same buy points and share size when I arrived at 37 I would be in the red $3200 and my net flat point would be about 38 9/16...whew I hope my math is correct Let me again reiterate...I am not placing any respective value on this strategy other than to say it seems to have more value than averaging down - even if you were to factor in slippage etc. Respectfully, Cormac