How do you address losing trades? Are there any tutorials or other guidance on how and when to exit losing trades?

How do you address losing trades? Are there any tutorials or other guidance on how and when to exit losing trades?

Managing losing trades is the most important aspect of any trading system, in our opinion.  A loss as defined on our backtesting is any trade that had a negative PnL result when closed.

With stock pair trading, we focus on the following as our protection from risk of ruin and excessive drawdown:

1. SMALL POSITION SIZE:  for any decent sized account (say $50k-$100k), our internal guidelines if for MAX 2% account equity risk per trade.  Any account $100k+ we cut that to 1%.  Let's walk that through, though the User Manual covers this in detail as well.  Let's say in your Watchlist your pair with the largest Max DD in backtesting had a -15% Max DD.  An accepted rule of thumb is to anticipate a worst Max DD in real trading of 2x in-sample back test (Tushar Chande). So let's take -30% as a worst case on a single pair.  So let's say one has a $50k account and wants to size that trade for max 2% equity risk.  2% of $50k = $1000.  That means one would trade the pair at $3333/leg.  A 30% loss on the $3,333/leg pair is $1,000.  One might set a Max Loss Alert here.  Then again, one might not, as some pair trading research has shown that Max Loss stop losses reduce pair trading profitability (SaxoBank 2014).  Up to the trader and their mental makeup.

2. TIME STOP:  Best trades usually come good in the first 20 market days using 50 day lookbacks.  Tying up capital in losers is not productive, especially if one is capital constrained based on your existing pairs portfolio.  We chose 50 days for the FAST 50, we suggest new traders have a look and see what suits them best.  They can run some backtests on various settings.

3. TRADE MANAGEMENT: Rules for moving stop to breakeven, trading to target etc.  Critical in our opinion.  We have two videos new traders can watch that take them through
our thoughts:




    • Related Articles

    • Trading on PTF PRO with Forex, CFDs, Futures and Options

      Traders interested to trade FX, CFDS, futures or options will want data on currencies (forex), futures, CFDs or options for which they will require an IQfeed data subscription or an integration to their Interactive Brokers' Trader Workstation, as per ...
    • Day trading with PTF

      PTF is not designed for intraday trading. It is designed for swing trading pairs and a holding between 1 to 3 weeks minimum.
    • Viewing trading signals in PTF

      Trading signals only show up during the times when you have PTF open, so as to avoid getting unactionable historic signals every time one opens PTF. It is a live trading tool. If one wants to review historic signals then these are in the history ...
    • Getting Started with PairTrade Finder PRO

      Welcome! You can download the latest release version of PairTrade Finder PRO from www.pairtradefinder.com/downloadprov12.html  That is our Members Center and where you can find links to all of the educational materials we provide, as well as trading ...
    • Can you use this strategy with a small account, and what's the minimum account size that is recommended?

      The ability to use the strategy effectively depends on two critical things: a. conservative position sizing and b. very low commissions.  While you can use a small DMA CFD account of say $2,000 to try out a few trades at $1000/leg, unless your ...