Realized Vs Unrealized Losses

[Predictor 11]

It is a big mistake to compare trading to investing because that most traders take realized losses. This has tremendous implications. If one is investing over a long period of time (10-15 years), using best-practices, then the reality is that they have a pretty good chance of breaking even. Meanwhile,a trader who is trading actively and taking stop losses has a very good chance of losing everything. This is why I feel it doesn't make a lot of sense to compare trading returns to investing returns.

 

Once a trader takes a realizes loss then a few things happen. First, they must be right or have a predictive advantage to avoid losing everything. Second, they must keep this advantage. What happens then, especially for systematic traders, is they run through many systems that lose money to try to find a few that make money to cover the losers. Yet, there is no guarantee that one will pick the winners.

 

The question is and the holy grail would be, is there an efficient method that we can use to take advantage of a predictive edge while still limiting our risk ?

Edited December 6, 2012 by Predictor

[SIUYA 11]

I will respond as this is a bug-bear of mine over the years.

 

A realised loss = an unrealised loss = A LOSS!

 

Period. There is no difference.

 

The only difference has to do with accounting practices and weather or not you maintain an exposure to an investment OR trade.

 

If you are looking at a system then you have to take into consdieration other factors such as re-entry, leverage, costs of trading, slippage etc; etc;.

 

The rest of talk about not taking stops etc is a BS smokescreen IMHO, and will depend on those previously mentioned other elements in the system.strategy you use.

eg: if you use leverage and you are a long term trader (INVESTOR), your unrealised loss can easily become a realised loss when you have a margin call from the broker - does that then make you a trader....no.

 

(Maybe you have just used a poor heading for the thread? or you fasting has muddled the brain )

[Predictor 11]

SIUYA,

 

Your sentiment is surely common among traders, and based on my studies I believe it to be wrong. An investor using sound practices (diversification, not over leveraged) who has a reasonably long time horizon (longer then 10 years) has if you look at the history of the stock market a good chance of breaking even. This is why you can't compare trading results to investing results if those trading methods involve taking realized losses.

 

The cost for having a higher probability of breaking even, for the investor, is that his/her money is tied up for longer periods of time and he can't leverage as much because there is greater uncertainty.

 

You see what we're talking about is not a winning game... we're talking about how do we avoid losing anything? How can we play a game where we always break even or win.. or come as close to that as possible in market terms? The trading game is structured to try to get the trader to play a game where he wins or loses.

 

The ability to break even at a high probability is IMO the holy grail because then just the minimum bit of skill, which most traders have, leads to huge profits.

 

Great example is right now the ES is at 1405. I figure a good deal of the shorts from yesterday could cover right now at a better price then they did yesterday.

 

I've tried a technique in the past where I attempt to close out profits from scalping as fast as possible while holding onto my losers. Typically, these losers will mean revert which will turn them from losers into break even or even winning trades. I combine these with the profits from my scalping. The problem with this method is that its not possible to "CAP" the losers and you need the ability to clone the instrument, if possible.

 

I'm thinking of a method that involves either hedging the futures contracts with options at the end of day or even perhaps intra-day. My hunch is that such hedging strategies are required to hit the "holy grail" type returns.

 

Let's consider a scenario.. a trader is down $500. He can close out the position with the losing herd when there is peak demand (i.e highest prices against him) or he can leave the position open -- which can lead to a larger loss. Leaving the position open works most of the time but eventually always leads to taking a catastrophic career ending loss. The preferable scenario in most cases would be to roll this into a risk limited position. To be able to say, cap my risk at $750 and let me wait until tomorrow to see if things have improved. I'd be willing to pay a slight premium for such ability.

Edited December 6, 2012 by Predictor

[SIUYA 11]

  Predictor said:

SIUYA,

 

Your sentiment is surely common among traders, and based on my studies I believe it to be wrong. .

 

my sentiment is based on what i have seen in the markets with real accounts and people running losses.

 

I understand where you are coming from but to cloud the issue with accounting differences is rubbish - a loss is a loss. If you wish to crystallise it then this is a different matter, and then you have other issues of re-ntry (geeting a trade on again) and what your worst case is, when do you decide to stop the loss.....even if you are investor. Too often the problem is just that....people saying "its ok its only a paper loss, I will get out at break even" this is flawed thinking IMHO

 

  Predictor said:

An investor using sound practices (diversification, not over leveraged) who has a reasonably long time horizon (longer then 10 years) has if you look at the history of the stock market a good chance of breaking even. This is why you can't compare trading results to investing results if those trading methods involve taking realized losses.

The cost for having a higher probability of breaking even, for the investor, is that his/her money is tied up for longer periods of time and he can't leverage as much because there is greater uncertainty.

 

I agree investing and trading is different....pointless to compare some aspects....

In your case you are forgetting places like Japan, and the fact you need to be diversified in a portfolio, unleveraged, take into account dividends, splits etc; etc.....You then have the issues of exactly when you purchase your investment!

To consider longer term investors have a higher probability of breaking even AND YET they cant leverage as there is greater uncertainty - WTF?:helloooo:

 

  Predictor said:

The ability to break even at a high probability is IMO the holy grail because then just the minimum bit of skill, which most traders have, leads to huge profits.

 

Not if you then take profits straight away - you will never get away from break even - when do you actually make the huge profits?

It seems you are then better off trying to improve your entries, setups and context of when to trade (i know the things everyone talks about but are irrelevant )

 

  Predictor said:

I'm thinking of a method that involves either hedging the futures contracts with options at the end of day or even perhaps intra-day. My hunch is that such hedging strategies are required to hit the "holy grail" type returns.

 

Let's consider a scenario.. a trader is down $500. He can close out the position with the losing herd when there is peak demand (i.e highest prices against him) or he can leave the position open -- which can lead to a larger loss. Leaving the position open works most of the time but eventually always leads to taking a catastrophic career ending loss. The preferable scenario in most cases would be to roll this into a risk limited position. To be able to say, cap my risk at $750 and let me wait until tomorrow to see if things have improved. I'd be willing to pay a slight premium for such ability.

 

so in other words, you have a larger dollar at risk for the loss and hence you probably should have a smaller size on - whats the difference?

If you can perfectly hedge then great - usually the costs of the hedge are prohibitive.

 

(I used to be an equity option market maker, a lot of the time you made money from a small spread, (your edge) and kept a flat book, occasionally you would get a good move, and ideally you wanted lots of volume = lots of edge. This became eroded, and I found that I spent most of my time, putting on those 'free trades' - the ones whereby you had it at break even - but hen you had to let it ride when the opportunity arose to really make money. Or be long vol all the time and hope someone puts a plane into a building. Its tough work waiting it out - and if thats what you are getting at, remember people do it already, its hard work, and required low costs, lots of leverage etc; and the key is still to let it run)

 

You might have more debate if you want to talk about the differences between mental stops, catastrophic stops and automatic stops......then i would be more inclined to agree. There are so many variables at play depending on how you do things they all need to be considered.

[zdo 20]

  Predictor said:

...

 

Your sentiment is surely common among traders, and based on my studies I believe it to be wrong.

...

 

I've tried a technique in the past where I attempt to close out profits from scalping as fast as possible while holding onto my losers. Typically, these losers will mean revert which will turn them from losers into break even or even winning trades. I combine these with the profits from my scalping. The problem with this method is that its not possible to "CAP" the losers and you need the ability to clone the instrument, if possible.

 

I'm thinking of a method that involves either hedging the futures contracts with options at the end of day or even perhaps intra-day. My hunch is that such hedging strategies are required to hit the "holy grail" type returns.

 

Let's consider a scenario.. a trader is down $500. He can close out the position with the losing herd when there is peak demand (i.e highest prices against him) or he can leave the position open -- which can lead to a larger loss. Leaving the position open works most of the time but eventually always leads to taking a catastrophic career ending loss. The preferable scenario in most cases would be to roll this into a risk limited position. To be able to say, cap my risk at $750 and let me wait until tomorrow to see if things have improved. I'd be willing to pay a slight premium for such ability.

Speaking generally – good luck!

Getting more specific – good luck!

 

It's very system specific.

“such hedging strategies are required” or functional in only a very small set of systems.

In the same vein “pay(ing) a slight premium” instead of getting flat only enhances the net of a very small set of systems.

“Let's consider a scenario.. a trader is down $500”.

Let’s finish the scenario… he’s hosed.

Adding a $250 dollar “cap” or a $2500 “cap” isn’t going to save this trader. … because only a small subset of systems will work going down $500 per car intraday ES.

 

You’re speaking generally about this “hedging” like it could be applied broadly. That is misleading. These tactics work in very limited subsets of systems. Accompany your assertions with one of the few systems it works with then you could generate a legitimate discussion about it ... from what I can garner from your other posts, your methods are not amenable to this 'dream'... I know what you're going through... been there... done that... for your system(s) prdctr, find your best loss points (most likely via live PA in your case) and take them... write us an article about attachment and loss...

 

Omitting everything except

  Quote

Leaving the position open works most of the time but eventually always leads to taking a catastrophic career ending loss.

Now that would have been a good post