Managing Winners (Part 1)

One direction I may or may not choose to explore at some point is that of managing winners. I have trouble wrapping my brain around this concept and today I will explain why.

Managing winners is a frequently discussed concept by the Tasty Trade (TT) folks but it certainly is not a new idea. In the past this has been described as a “yield grab” or “profit target.” Just like I might manage losers with a stop-loss order, I can manage winners based on a variety of criteria.

The TT philosophy is to manage winners, adjust (or not) losing trades if tested, and trade small. If a trade goes to max loss then I don’t get hurt because my position size is small. Some trades get down significant percentages but then recover to win, which is why they don’t advocate managing losses.

One of the problems I have with this approach is doubt over whether I can “trade small” and still make enough to pay the monthly bills. I could certainly do this with a multi-million dollar trading account. Few retail traders have this luxury, though. I see this as a big problem for anyone looking to trade full-time as a business but it probably doesn’t affect TT viewers very much if my lack of success in finding other full-time traders is any indication. “Trading small” suits part-time/hobby traders who don’t rely on trading profits to cover living expenses.

According to TT “research” (I use that term loosely for reasons discussed here), managing winners increases win rate, number of trades, and profit per day while decreasing standard deviation of returns. They generally conduct studies by comparing trades held to expiration with trades closed at a profit target. In both cases, a new trade is placed after the old trade is closed.

I have tailored my backtesting methods to avoid the pitfall of insufficient sample size by entering new trades every trading day. At some point I realized that as a perpetual scaling technique, this might be a viable approach to live trading. As long as I keep my daily position size small, the total position size may remain reasonable. This has been at the core of my NP research.

I believe it is through this looking glass that I get confused when contemplating management of winners. Managing winners allows for more frequent trade placement but I am already placing trades every day as part of my scaling effort. My number of positions is, in other words, already maxed out. Opening multiple new trades on a favorable market day that sees a number of winners managed (e.g. a big up day for NPs) would compromise my time diversification, which is not something I will pursue.

I will continue this discussion next time.