Paper Losses

This article elaborates on the one dated August 7, 2006 entitled “The Ideal Trading System”.

Today’s article is about the maximum adverse excursion feature. That concerns holding through adverse movement.

Adverse excursion occurs when prices move in a way that results in you having a paper loss in your open position but your system says that the position should be held.

How much are you willing to lose on paper before exiting the trade with a loss that actually reduces the cash balance in your account?

How much pain can you tolerate? Are you willing to tolerate very little pain? Then you’ll want to exit when a very small adverse excursion occurs. That usually results in a very low accuracy rate in your trading system.

Are you willing to tolerate a huge amount of pain? Then you’ll like a system that uses a very large adverse excursion feature. That usually results in a very high accuracy rate in your trading system because many of your trades that initially show a loss are given time to turn into winning trades.

With a large adverse excursion feature, you’ll get an occasional BIG loser. Some people prefer getting a huge amount of pain all on one occasion instead of getting nicked a little bit everyday.

When designing your ideal trading system, you get to create whatever you want. The series of articles in this blog about The Ideal Trading System talk about the decisions you need to make when designing your ideal trading system. Maximum Adverse Excursion is one of those decisions.

We'll chat again soon ...

Copyright 2006 Raymond T. Lee. All rights reserved.
Leisurely e-Mini Futures Trading
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