DTB: Trade management when it goes against you
Posted: Tue Aug 11, 2009 11:25 pm
So far I've seen tons of discussion regarding how DTB works, when you take entry, etc., but I didn't find a good thread discussing the existing strategy when the trade does not go as you hope. And I think it's an equally important topic for profitable trading.
TRO mentioned that in trading "anything can happen", and he also made the analogy that trading is like driving a car, you react to what you see on the road instead of predict what will happen. So I wonder for those who trading DTB successfully, how do you manage trades that go against you to stay profitable?
TRO also mentioned that you pretty much have three options: exit the trade, hold on to it, or add position. But how do you choose among these options? Can you explain the thought process when you make a decision on choosing one of these options?
I understand there won't be a "correct" or "incorrect" answer, as it is influenced by many factors like account size, trading style, personality, etc. Let's concentrate on discuss the reasons behind a decision if you choose one of the options, not simply giving a formula to follow. I hope this thread can help each one THINK and CREATE a strategy that suit himself / herself, by learn from the collective wisdoms of the traders on this board.
Here is my thoughts on this:
Adding position eventually will avoid any losing trades and make every trade profitable, if you are able to maintain enough net account balance to avoid a margin call.
Margin call policy differs from broker to broker, and MBTrading's webpage contains some conflicting calculations regarding its margin calls policy. I'll assume that with a 100:1 leverage, one needs to maintain additional 50% of the margin requirement to avoid margin call, so for a USD based currency, a $1000 account will only allow you to have 1000/(100*1.5) = 6 mini lots. This means that you can add 1 position 5 times to your original trade based on the assumptions, and you better be in profit after adding these positions. Apparently this is too risky so one probably can reduce the initial lot size to 0.5 mini lot or even lower so you can add 1 position 10 times or more to lower your average entry cost. - Note that the commission costs for all positions also need to be considered.
It's hard to determine how effective you can lower your average cost by adding positions, as it depends on when you are adding to it. If you add positions at fixed interval (say 1 position every 100 pips down), you basically average down to 50% of the actual draw down compare with not adding positions. So for example, if you are long USD/JPY at 96 and the price keeps dropping, if you add 1 position for every 100 pip of drop, after adding 10 positions, the price is at 87 and your average cost for all the positions is ate 91.5, 450 pips in loss instead of 900 pips in loss if no position is added. This means that the price need to retrace 50% to allow you exit all positions breakeven (not counting commissions).
Alternatively, one can set a fixed S/L whenever the trade goes south. I don't have a good number, but I think 5-10 pip S/L is reasonable, with the scalping P/T at 10pip. I wonder if this is what most of you use? This basically counts on the winning ratio of all trades. But need to watch out as some broker might be stop hunting.
Holding to the position requires a judgemenatal call from the trader. You have to explain to yourself why you think the breakout will retrace back to give you the 10pip profit eventually and we know TRO will say "don't predict the price!". I don't know when this option should be chosen over the others. What is your thoughts?
Let the healthy discussion begin!
TRO mentioned that in trading "anything can happen", and he also made the analogy that trading is like driving a car, you react to what you see on the road instead of predict what will happen. So I wonder for those who trading DTB successfully, how do you manage trades that go against you to stay profitable?
TRO also mentioned that you pretty much have three options: exit the trade, hold on to it, or add position. But how do you choose among these options? Can you explain the thought process when you make a decision on choosing one of these options?
I understand there won't be a "correct" or "incorrect" answer, as it is influenced by many factors like account size, trading style, personality, etc. Let's concentrate on discuss the reasons behind a decision if you choose one of the options, not simply giving a formula to follow. I hope this thread can help each one THINK and CREATE a strategy that suit himself / herself, by learn from the collective wisdoms of the traders on this board.
Here is my thoughts on this:
Adding position eventually will avoid any losing trades and make every trade profitable, if you are able to maintain enough net account balance to avoid a margin call.
Margin call policy differs from broker to broker, and MBTrading's webpage contains some conflicting calculations regarding its margin calls policy. I'll assume that with a 100:1 leverage, one needs to maintain additional 50% of the margin requirement to avoid margin call, so for a USD based currency, a $1000 account will only allow you to have 1000/(100*1.5) = 6 mini lots. This means that you can add 1 position 5 times to your original trade based on the assumptions, and you better be in profit after adding these positions. Apparently this is too risky so one probably can reduce the initial lot size to 0.5 mini lot or even lower so you can add 1 position 10 times or more to lower your average entry cost. - Note that the commission costs for all positions also need to be considered.
It's hard to determine how effective you can lower your average cost by adding positions, as it depends on when you are adding to it. If you add positions at fixed interval (say 1 position every 100 pips down), you basically average down to 50% of the actual draw down compare with not adding positions. So for example, if you are long USD/JPY at 96 and the price keeps dropping, if you add 1 position for every 100 pip of drop, after adding 10 positions, the price is at 87 and your average cost for all the positions is ate 91.5, 450 pips in loss instead of 900 pips in loss if no position is added. This means that the price need to retrace 50% to allow you exit all positions breakeven (not counting commissions).
Alternatively, one can set a fixed S/L whenever the trade goes south. I don't have a good number, but I think 5-10 pip S/L is reasonable, with the scalping P/T at 10pip. I wonder if this is what most of you use? This basically counts on the winning ratio of all trades. But need to watch out as some broker might be stop hunting.
Holding to the position requires a judgemenatal call from the trader. You have to explain to yourself why you think the breakout will retrace back to give you the 10pip profit eventually and we know TRO will say "don't predict the price!". I don't know when this option should be chosen over the others. What is your thoughts?
Let the healthy discussion begin!