Holding Bag & Not Immediately Cutting Losses

Jan 1, 2018
5
1
3
#1
Hey guys,

I’ve been trading for about a year now. Year one didn’t 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 haven’t set a stop or max loss here. If I’m short, I have a relatively tight level where I switch to long on a resistance break. If I’m initially long and it goes against me, I just hold the bag.

I know we’re 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. I’ve been switching to long as mentioned and holding the bag with an adjusted breakeven price from there). I’m realizing consistent profits, and since I haven’t averaged down, the bags I do have aren’t 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). There’s been a rotation of “get rid of a bag or two at even, gain a new one” going on, but all the while I’ve 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 don’t throw in more to average down and potentially compound the loss, it shouldn’t be devastating. Maybe wipe out a week or two’s worth of profits at worst case (keep in mind 100% of realized p&l has been green).

So I guess my question is, if I’ve avoiding getting stopped out and guaranteeing a quickly realized profit 9 times out of 10, and I’m 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 I’m 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 i’m 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 Devil’s Advocate.
 

Kaeso

Active member
Oct 4, 2015
860
91
38
#2
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" ?
 
Jan 1, 2018
5
1
3
#3
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" ?
That’s a fair assessment, yes. Since I’ve started trading (again, just a year), I’ve always been taught that someone who doesn’t exit a losing day trade and cut his/her losses is a “bagholder” and undisciplined.
 

Kaeso

Active member
Oct 4, 2015
860
91
38
#4
That’s a fair assessment, yes. Since I’ve started trading (again, just a year), I’ve always been taught that someone who doesn’t exit a losing day trade and cut his/her losses is a “bagholder” and undisciplined.
oh i see, ive never heard of the term before :)
 

Kaeso

Active member
Oct 4, 2015
860
91
38
#5
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.
 
Jan 1, 2018
5
1
3
#6
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 I’m entering scalping positions with 5-10% of my brokerage account’s value per position, with the goal of being in & our quickly on a successful trade. Every (hopefully just temporarily) losing trade becomes a “bag” that I’m holding until even or better. This decreases my liquidity a bit at a time, but the idea is that in the meantime I’m increasing my account value with all of the successful realized trades, and I’m 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, that’s 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.
 

Brumby

Well-known member
May 25, 2012
600
136
53
#7
Hey guys,

I’ve been trading for about a year now. Year one didn’t 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 haven’t set a stop or max loss here. If I’m short, I have a relatively tight level where I switch to long on a resistance break. If I’m initially long and it goes against me, I just hold the bag.

I know we’re 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. I’ve been switching to long as mentioned and holding the bag with an adjusted breakeven price from there). I’m realizing consistent profits, and since I haven’t averaged down, the bags I do have aren’t 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). There’s been a rotation of “get rid of a bag or two at even, gain a new one” going on, but all the while I’ve 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 don’t throw in more to average down and potentially compound the loss, it shouldn’t be devastating. Maybe wipe out a week or two’s worth of profits at worst case (keep in mind 100% of realized p&l has been green).

So I guess my question is, if I’ve avoiding getting stopped out and guaranteeing a quickly realized profit 9 times out of 10, and I’m 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 I’m 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 i’m 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 Devil’s 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.
 

barjon

Well-known member
May 6, 2003
9,998
1,448
223
78
#8
That’s a fair assessment, yes. Since I’ve started trading (again, just a year), I’ve always been taught that someone who doesn’t exit a losing day trade and cut his/her losses is a “bagholder” and undisciplined.
The problem with “holding onto the bag” 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 I’d say :)
 
Jan 1, 2018
5
1
3
#9
The problem with “holding onto the bag” 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 I’d say :)
Would certainly agree here to an extent. If I were to continually average down, a couple “bags” could blow up my account. But with the starting positions at such a relatively low fraction of my brokerage account, they could theoretically go to $0.00 (yikes) and while that would be brutal, it would only be responsible for a small percentage of my overall holdings. The hope is the consistent success outside of those few bad eggs will far more than outweigh them.
 

barjon

Well-known member
May 6, 2003
9,998
1,448
223
78
#10
Would certainly agree here to an extent. If I were to continually average down, a couple “bags” could blow up my account. But with the starting positions at such a relatively low fraction of my brokerage account, they could theoretically go to $0.00 (yikes) and while that would be brutal, it would only be responsible for a small percentage of my overall holdings. The hope is the consistent success outside of those few bad eggs will far more than outweigh them.
I know you won't be persuaded, so be very careful. Particularly so when the market turns. Come back on here in a year or two and see if you still think the same.
 

Quantt

Active member
Jul 23, 2017
945
54
38
#13
Very dangerous game, you'll end up holding 10 stocks and no cash for years, it's just a question of when it's going to happen...
 

Kaeso

Active member
Oct 4, 2015
860
91
38
#14
Kenny Glick

.. someone who doesn’t exit a losing day trade and cut his/her losses is a “bagholder” ...
Kenny is a funny guy and has some advice for those tempted to put losing trades in the "bag". An interesting video anyway with a few trading insights - Glick style.. :idea:

 
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