Dr. Steenbarger helped me recognize one of the improvements we could make at SMB awhile ago. The partners and Senior Traders must be responsible for a great deal of teaching and mentoring. But if traders are not leveraging the talent of all firm members then that firm is not offering the best learning environment. Traders learn from other traders and not just partners and senior traders.
The SMB Blog should not just be everything that Steve or GMan or Adam or I have learned. It should advocate a learning community so much more than just us. We are just four guys with four sets of learning experiences, granted some of us have been trading for a long time. But our daily community is so much larger. In the past I have asked for input from our readers. Today for this new series to our blog where we ask for help from our trading community. We ask for your input and ideas.
Reader Abu asked the following:
I always come across traders on my desk including myself who will constantly make great trades and sometimes hit new personal best targets , only to give it all back to the market. When is your PNL enough and how much should you be giving back. No matter how good ones strategy is, improper money management can lead to ruin, can you comment about how you manage your risk/money intraday, weekly and so forth to build great months
I was asked a similar question during my presentation at the LA Trader Expo in Pasadena. I have been asked this question often of late. Let me frame the questions.
1) Should a trader have a rule for giving back profits intraday?
2) What should this rule be?
We would love to hear your thoughts!
24 Comments on “A ?4 the Trading Community- A Rule for Giving Back Profits?”
1) yes
2) never give back more than 60% of peak unrealized gain in any trade
If you give back more than 20% off the top, you should be done for the day IMO. Do not make exceptions, as 20% can become 50% in a blink, which can become 100% in another blink. This is my personal rule
If you give back more than 20% off the top, you should be done for the day IMO. Do not make exceptions, as 20% can become 50% in a blink, which can become 100% in another blink. This is my personal rule
I use GMan’s rules which he shared with us on stocktwits.tv.
I use GMan’s rules which he shared with us on stocktwits.tv.
Come on JCaldwell you can do better than that! 🙂 What rules from GMan make sense to you?
Bella
Come on JCaldwell you can do better than that! 🙂 What rules from GMan make sense to you?
Bella
Dave B,
And even worse than that 🙂 !
Great input. Thxs for sharing.
Bella
Dave B,
And even worse than that 🙂 !
Great input. Thxs for sharing.
Bella
There should be no rules set about stopping yourself for the day if you give a certain percentage of your day back. You trade because you have found plays with edge that work for you and you should trade to the extent that you feel confident with the trades that the market is presenting to you. If you loose confidence from giving back part of your day then you should feel free to reduce size but to sit on laurels because you gave back some percentage of your day is ridiculous IMO. You play to win the game. When you are in front of the screen you should be engaged always and be ready to pounce on a great trade regardless of what your P&L is for the day. The most important thing is that you learn from any money you give back and make the appropriate adjustments. Getting feedback from the market and learning from it is far more important than ripping up part of your day.
Most of the ‘rules’ I hear regarding giving back the profits are around 25% (+/- 5%). But I continue to experience days were I rip out all of my profits.
So, I guess the problem here is not only how much do you give back but how much is enough so you can have a balance between the time and the research involved in trading and the money you make. Bella says ‘your job is not to make money but to do the right thing’. And I think the statement is not that simple and only regarding the trading setups but also the money management rules. And in this regard I raise a question: your rules imply a 30% giveback and from (I believe GMan used these $ amounts when speaking about giving back the profits) $500 you have left only $350. You see a good setup where you think you have a good probability to win. What is the ‘right thing to do’? To respect the 30% rule or to take the trade? If you take the trade and it works won’t you be tempted the next time to make the same thing? And what if at the end of the month you see that your win rate in cases were you lost 30% from the top is 40%? What is the right thing to do? I suppose the answer is a function of risk/reward but also to identify if that ‘top’ is according to your daily objectives.
And coming back to the first paragraph I rip positive days because of two reasons:
1) the amount I make is not enough to balance the work and stress involved;
2) in order to step up with more size and more $$$ in p&l I have to cope with more risk, hence my profits can be erased from a couple of negative trades with a bigger size. But if I don’t lose how can I understand the risk involved in trading larger positions?
My 2 cents response to the topic question?
– 30% but make sure you identify the ‘top’.
p.s. if I have a $400 daily target but in the middle of the day I am ably to make only $250 do I apply the 30%
rule to the future profits? I guess is like in TA were you have a setup and then other 15 sub-setups to cope with (as Bella points out).
Most of the ‘rules’ I hear regarding giving back the profits are around 25% (+/- 5%). But I continue to experience days were I rip out all of my profits.
So, I guess the problem here is not only how much do you give back but how much is enough so you can have a balance between the time and the research involved in trading and the money you make. Bella says ‘your job is not to make money but to do the right thing’. And I think the statement is not that simple and only regarding the trading setups but also the money management rules. And in this regard I raise a question: your rules imply a 30% giveback and from (I believe GMan used these $ amounts when speaking about giving back the profits) $500 you have left only $350. You see a good setup where you think you have a good probability to win. What is the ‘right thing to do’? To respect the 30% rule or to take the trade? If you take the trade and it works won’t you be tempted the next time to make the same thing? And what if at the end of the month you see that your win rate in cases were you lost 30% from the top is 40%? What is the right thing to do? I suppose the answer is a function of risk/reward but also to identify if that ‘top’ is according to your daily objectives.
And coming back to the first paragraph I rip positive days because of two reasons:
1) the amount I make is not enough to balance the work and stress involved;
2) in order to step up with more size and more $$$ in p&l I have to cope with more risk, hence my profits can be erased from a couple of negative trades with a bigger size. But if I don’t lose how can I understand the risk involved in trading larger positions?
My 2 cents response to the topic question?
– 30% but make sure you identify the ‘top’.
p.s. if I have a $400 daily target but in the middle of the day I am ably to make only $250 do I apply the 30%
rule to the future profits? I guess is like in TA were you have a setup and then other 15 sub-setups to cope with (as Bella points out).
I read the topic and thought, “nice, giving back to the community” so I sort of misinterpreted it somewhat..
My “give back” rule is that I give back to the community, local and farther abroad, through otherwise unfunded chartitable donations. I set an initial target of 1 average trading day for the month and I leave the distribution to my wife, she loves doing this. Last month we topped off an African mission’s needs to enable them to proceed with the orphanage work they were planning. We know the lead individual well enough to know this one is legit.
As far as trading give back, I trade options and end up with one or two that expire worthless so that is my give back each month. Seldom do I have a down day but this does not really apply to your topic for daytrading as I also use average targets that are based on the current month performance. So giving back in trading is not a heavy mental burden and does not affect future trading therefore I have no real “day” rule.
Jeff.
I read the topic and thought, “nice, giving back to the community” so I sort of misinterpreted it somewhat..
My “give back” rule is that I give back to the community, local and farther abroad, through otherwise unfunded chartitable donations. I set an initial target of 1 average trading day for the month and I leave the distribution to my wife, she loves doing this. Last month we topped off an African mission’s needs to enable them to proceed with the orphanage work they were planning. We know the lead individual well enough to know this one is legit.
As far as trading give back, I trade options and end up with one or two that expire worthless so that is my give back each month. Seldom do I have a down day but this does not really apply to your topic for daytrading as I also use average targets that are based on the current month performance. So giving back in trading is not a heavy mental burden and does not affect future trading therefore I have no real “day” rule.
Jeff.
My only hard and fast rule is that if I’m having a “good day” as I define it P&L-wise, I won’t let myself go negative. However, I tend to have some of my best trades when the market makes a resolution move in the final 90 minutes or so, so I don’t want to miss those moves by prematurely deciding I’m done. Frequently, I’ll make money in the morning, then give a decent portion back (50%) trying to catch the afternoon move, then make double or more of what I lost when I actually catch the move (if it happens). I would say to base whether to keep trading on how well you think you’re feeling the market on that day. If you think you’ve been trading well and it just isn’t working out, keep trading. If you think you’ve been trading poorly (i.e. making dumb trades and not judging the market well), stop and at least take a 30 minute break.
30% just seems awfully tight. It will make you trade too cautiously after you are up to avoid triggering that stop and so you can’t risk as much as you may need to and will get stopped out on random swings because of the ultratight stop (or you have to size your trades down so much that you can’t make much money when you are right). Then again, I’m usually risking between $0.30 and $0.60 on trades and playing for a couple of points (when I’m not trading futures). If you are one of those traders who likes to try and risk $0.05 or whatever, the 30% rule might make more sense.
Jesse
My only hard and fast rule is that if I’m having a “good day” as I define it P&L-wise, I won’t let myself go negative. However, I tend to have some of my best trades when the market makes a resolution move in the final 90 minutes or so, so I don’t want to miss those moves by prematurely deciding I’m done. Frequently, I’ll make money in the morning, then give a decent portion back (50%) trying to catch the afternoon move, then make double or more of what I lost when I actually catch the move (if it happens). I would say to base whether to keep trading on how well you think you’re feeling the market on that day. If you think you’ve been trading well and it just isn’t working out, keep trading. If you think you’ve been trading poorly (i.e. making dumb trades and not judging the market well), stop and at least take a 30 minute break.
30% just seems awfully tight. It will make you trade too cautiously after you are up to avoid triggering that stop and so you can’t risk as much as you may need to and will get stopped out on random swings because of the ultratight stop (or you have to size your trades down so much that you can’t make much money when you are right). Then again, I’m usually risking between $0.30 and $0.60 on trades and playing for a couple of points (when I’m not trading futures). If you are one of those traders who likes to try and risk $0.05 or whatever, the 30% rule might make more sense.
Jesse
One other thing to say on a more philosophical note. The ideal trading system is one with no rules, where everything is subjective and decisions are based on your very refined judgement about each individual situation. Rules are there to protect us from our own bad judgement in the heat of the moment. That means as you gain more experience, rules should become less hard and fast, and more guidelines to help your decision making process. For example, if I’m up a good amount and some crazy news event happens (short ban, terrorist attack, unexpected fed action, etc) and I give it all back in a hurry, I’m not going to stop trading. The market will be too good after that to not take full advantage of it. Of course, that requires you to completely trust your own judgement and it takes years of trading to get to that point.
Jesse
One other thing to say on a more philosophical note. The ideal trading system is one with no rules, where everything is subjective and decisions are based on your very refined judgement about each individual situation. Rules are there to protect us from our own bad judgement in the heat of the moment. That means as you gain more experience, rules should become less hard and fast, and more guidelines to help your decision making process. For example, if I’m up a good amount and some crazy news event happens (short ban, terrorist attack, unexpected fed action, etc) and I give it all back in a hurry, I’m not going to stop trading. The market will be too good after that to not take full advantage of it. Of course, that requires you to completely trust your own judgement and it takes years of trading to get to that point.
Jesse
I hate giving back profits after i have made a daily profit that i am satisfied with. For example, i was up 1100 after an hour and a half today. I traded some more and gave back 500 to be up 600 for the day. I stopped because i am now going to sleep and not because of any give back rule. But i feel really bad about giving back the 500. This feels worse than having a day where i just flat out made a loss (without ever being profitable).
I hate giving back profits after i have made a daily profit that i am satisfied with. For example, i was up 1100 after an hour and a half today. I traded some more and gave back 500 to be up 600 for the day. I stopped because i am now going to sleep and not because of any give back rule. But i feel really bad about giving back the 500. This feels worse than having a day where i just flat out made a loss (without ever being profitable).
Rule adapted from Gman to fit my trading:
1.If your daily journal shows that in your afternoon trading you lose most of what you gained in the morning, implement the rule that you quit trading if you lose more than 25% of your optimum morning trading period, as shown in your journal or order book.
Rule adapted from Gman to fit my trading:
1.If your daily journal shows that in your afternoon trading you lose most of what you gained in the morning, implement the rule that you quit trading if you lose more than 25% of your optimum morning trading period, as shown in your journal or order book.
Thxs for all the awesome comments. I received this thank you from Reader Abu:
Mike,
Thanks so much. Your blog and your team have always fascinated me and I appreciate you acknowledging and sharing my question.
I will send a response tomorrow and thank all the respondents, I am amazed at the feedback. Thanks once again, you and your team continue to amaze me.
Abu
Having read all your entries its reassuring for me to see that many of us follow similar rules. From all I have read, heard and experienced I will continue to use the plan of having an objective PNL for a day and then applying 25% loss from top rule on that. Thanks for everyones input…appreciate the help.
Abu