Elaborating on an older question:
For me, the difficult decision is when to close a trade.
I'm trying to find a specific algorithm, for when
to do this. I'm leaning towards a "point of maximum acceptable loss".
As yet I have not come up with a method to determine what the "point of
maximum acceptable loss" would be. Perhaps some factor multiplied by
the maximum credit or ?? Any ideas regarding this?
All the best,
There are reasons for exiting any trade. Perhaps:
You changed your mind and no longer have confidence that your trade premise will come true
If you trade without a premise, then it's appropriate to exit when:
Remaining profit potential is small and not worth the risk
The probability of earning money is low
A possible large loss is imminent; prudence says: exit
You lost the most you are willing to lose for this trade
The exit decision is based on the current position and the risk of loss vs. potential gain. You may want to consider the probability of earning cash going forward, but how can the cash collected when you initiated the trade have any possible relevance? The past is history.
I've said this repeatedly, but it seems to me that it's often necessary: You own this position right now at its current price. Do you believe that this is a good position to hold? That should be all that matters. If it's a position that you honestly (with no emotions getting involved in the decision) believe is worthwhile to own and that it still fits within your comfort zone, then hold (with or without an adjustment).
If you cannot make such decisions without emotions, then be certain you have a trade plan for each trade, with pre-determined exit points. Stick to the non-emotional plan until such time as you are able to trade efficiently under stressful conditions. The plan is far more likely to have a good solution to the problem than you – trading under duress.
I'm in agreement that establishing a maximum loss for each trade is a sensible thing to do. Thus, the one exception to my rule above is to exit when that maximum loss is reached. Obviously this assumes that your rules for establishing such a maximum are reasonable, but for this discussion, let's assume they are.
When trading a 10-point iron condor, if you collect a $0.25 credit (this is a horrible trade for many reasons), are you going to exit as soon as the trade reaches $0.50? Is that $0.50 bid or offer? If it's the bid, you will not be able to pay that price to exit. If it's the offer, you may be exiting very early. The point is, how are you going to determine that when loss equals your original credit (or any multiple thereof)? Please don't use this idea.
I suggest trading by the evaluating what you own. Do you want to own all, or any part of the position(s)? If 'yes continue to hold. If 'no,' exit. Th only condition is to make rational and non-emotional decisions.
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