Holding Bag & Not Immediately Cutting Losses

This is a discussion on Holding Bag & Not Immediately Cutting Losses within the Trading Systems forums, part of the Methods category; Hey guys, Iíve been trading for about a year now. Year one didnít go so hot. Pretty sure I lost ...

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Old Jan 1, 2018, 9:41pm   #1
 
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Holding Bag & Not Immediately Cutting Losses

Hey guys,

Iíve been trading for about a year now. Year one didnít go so hot. Pretty sure I lost money in every undisciplined (and sure, sometimes unlucky) way imaginable. For the most part, my own fault for making less-than-ideal entries and then aggressively averaging up/down, switching back & forth from long to short, etc. I then tried setting hard and mental stops, and would often get frustrated by those getting taken out only to see the price recover, whether it be a couple minutes, days, or weeks later.

Towards the end of the year, I decided to implore a strategy of reasonably safe scalps. My initial PT would be about 2% or so, at which point I would have a limit sell set up for 25-50% of my position, with more shares left over to take any additional profits in the chance that it ran further (or dropped lower if shorting). I havenít set a stop or max loss here. If Iím short, I have a relatively tight level where I switch to long on a resistance break. If Iím initially long and it goes against me, I just hold the bag.

I know weíre taught to cut losses quickly, that holding a bag exposes you to a much greater potential loss, lack of liquidity, etc etc. I know this is the opposite of what everyone has told me to do. But my success rate on hitting my initial PT in this time been roughly 90%. Yes, there have been some bags accumulated (never short bags. Iíve been switching to long as mentioned and holding the bag with an adjusted breakeven price from there). Iím realizing consistent profits, and since I havenít averaged down, the bags I do have arenít considerable losses. They all have potential upcoming catalysts/reasons for a spike at some point to get me out at my even price (down an average of 10%-25% on the few bags I have). Thereís been a rotation of ďget rid of a bag or two at even, gain a new oneĒ going on, but all the while Iíve been making consistent realized profits.

Surely some of these or future bags may never come back to where I need them to be, and I may need to take a loss on them. But again, as long as I donít throw in more to average down and potentially compound the loss, it shouldnít be devastating. Maybe wipe out a week or twoís worth of profits at worst case (keep in mind 100% of realized p&l has been green).

So I guess my question is, if Iíve avoiding getting stopped out and guaranteeing a quickly realized profit 9 times out of 10, and Iím remaining liquid long enough to continue imploring this strategy while waiting for inevitable pops & spikes to get me out of most of these bags I do accumulate (not like Iím playing HOD breaks on something up 200% and getting stuck holding from the top on a P&D that is now 75% down from my entry), what is my major downside, as long as iím careful with my entries?

Talk me out of this. Feel free to unleash. On the surface this may be a flawed, unsustainable strategy. But it has certainly worked for me thus far and it seems promising for the future. Coming here to hear the Devilís Advocate.
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Old Jan 1, 2018, 10:50pm   #2
Joined Oct 2015
I think you are saying you want to turn losing (long) trades into investments with no stop loss, instead of realizing the losses. Why do you use the term "bag" ?
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Old Jan 1, 2018, 10:55pm   #3
 
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Originally Posted by Kaeso View Post
I think you are saying you want to turn losing (long) trades into investments with no stop loss, instead of realizing the losses. Why do you use the term "bag" ?
Thatís a fair assessment, yes. Since Iíve started trading (again, just a year), Iíve always been taught that someone who doesnít exit a losing day trade and cut his/her losses is a ďbagholderĒ and undisciplined.
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Old Jan 1, 2018, 10:57pm   #4
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Originally Posted by MiniBagTrading View Post
Thatís a fair assessment, yes. Since Iíve started trading (again, just a year), Iíve always been taught that someone who doesnít exit a losing day trade and cut his/her losses is a ďbagholderĒ and undisciplined.
oh i see, ive never heard of the term before
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Old Jan 1, 2018, 11:04pm   #5
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I think the main thing is that you know your risk and accept it. Trades without stop losses change your open risk and you have to be aware of what that is, and how this "bag" risk fits in with your overall strategy.
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Old Jan 1, 2018, 11:20pm   #6
 
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I think the main thing is that you know your risk and accept it. Trades without stop losses change your open risk and you have to be aware of what that is.
100%. Currently Iím entering scalping positions with 5-10% of my brokerage accountís value per position, with the goal of being in & our quickly on a successful trade. Every (hopefully just temporarily) losing trade becomes a ďbagĒ that Iím holding until even or better. This decreases my liquidity a bit at a time, but the idea is that in the meantime Iím increasing my account value with all of the successful realized trades, and Iím always a positive PR or two away from gaining that liquidity back from breaking even on any of the outstanding bags. At this point it seems to make sense. If my account drops below 40-50% excess liquidity, thatís when I may need to consider realizing some losses.

The thought is that while I open myself up to further losses, I also give it more time to come back on further news, a technical squeeze, etc. At least at this early stage of my trading, I prefer this to instantly realizing small losses on temporary shake outs, or medium-sized losses if I use a loose stop loss.
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Old Jan 1, 2018, 11:29pm   #7
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Originally Posted by MiniBagTrading View Post
Hey guys,

Iíve been trading for about a year now. Year one didnít go so hot. Pretty sure I lost money in every undisciplined (and sure, sometimes unlucky) way imaginable. For the most part, my own fault for making less-than-ideal entries and then aggressively averaging up/down, switching back & forth from long to short, etc. I then tried setting hard and mental stops, and would often get frustrated by those getting taken out only to see the price recover, whether it be a couple minutes, days, or weeks later.

Towards the end of the year, I decided to implore a strategy of reasonably safe scalps. My initial PT would be about 2% or so, at which point I would have a limit sell set up for 25-50% of my position, with more shares left over to take any additional profits in the chance that it ran further (or dropped lower if shorting). I havenít set a stop or max loss here. If Iím short, I have a relatively tight level where I switch to long on a resistance break. If Iím initially long and it goes against me, I just hold the bag.

I know weíre taught to cut losses quickly, that holding a bag exposes you to a much greater potential loss, lack of liquidity, etc etc. I know this is the opposite of what everyone has told me to do. But my success rate on hitting my initial PT in this time been roughly 90%. Yes, there have been some bags accumulated (never short bags. Iíve been switching to long as mentioned and holding the bag with an adjusted breakeven price from there). Iím realizing consistent profits, and since I havenít averaged down, the bags I do have arenít considerable losses. They all have potential upcoming catalysts/reasons for a spike at some point to get me out at my even price (down an average of 10%-25% on the few bags I have). Thereís been a rotation of ďget rid of a bag or two at even, gain a new oneĒ going on, but all the while Iíve been making consistent realized profits.

Surely some of these or future bags may never come back to where I need them to be, and I may need to take a loss on them. But again, as long as I donít throw in more to average down and potentially compound the loss, it shouldnít be devastating. Maybe wipe out a week or twoís worth of profits at worst case (keep in mind 100% of realized p&l has been green).

So I guess my question is, if Iíve avoiding getting stopped out and guaranteeing a quickly realized profit 9 times out of 10, and Iím remaining liquid long enough to continue imploring this strategy while waiting for inevitable pops & spikes to get me out of most of these bags I do accumulate (not like Iím playing HOD breaks on something up 200% and getting stuck holding from the top on a P&D that is now 75% down from my entry), what is my major downside, as long as iím careful with my entries?

Talk me out of this. Feel free to unleash. On the surface this may be a flawed, unsustainable strategy. But it has certainly worked for me thus far and it seems promising for the future. Coming here to hear the Devilís Advocate.
Your eventual outcome is in the maths of expectancy and the market conditions associated with the maths.

Say 90 % of your trades are profitable and you make $1 per trade. Your expected winning trades = 90%X$1 = $9
As long as your 10% loosing trades (open trades) do not go below $9 in loss you still have positive expectancy. Since you have no stop loss that situation fluctuates.

I presume you are trading US stocks because of your location. There is a saying that a rising tide raises all boats. As the US market has been bullish, the market pullbacks had been limited and then continues on to make new highs. The market condition is probably favourable to your open loosing trades. The problem is when the market condition turns and your strategy might become more problematic.
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Old Jan 2, 2018, 12:35am   #8
 
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Originally Posted by MiniBagTrading View Post
Thatís a fair assessment, yes. Since Iíve started trading (again, just a year), Iíve always been taught that someone who doesnít exit a losing day trade and cut his/her losses is a ďbagholderĒ and undisciplined.
The problem with ďholding onto the bagĒ is that it often works out just fine, particularly if you have been trading in a bull market (as you have been doing). The trouble with that is that it only takes one or two not to work out and the losses build up until they have undone many months of carefully husbanded gains.

Brumby is being very kind when he says your strategy might become more problematic. An account killer Iíd say
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