Campaign overview -as understood by dbq, Based on conversations with FL
| cam-paign
(n) [source:
The American Heritage Dictionary of the English Language] 1. A series of military operations undertaken to achieve a large-scale objective during a war. 2. An operation or series of operations energeticaly pursued to accomplish a purpose. |
|
cam-paign (n): [For
this discussion, these more specific definitions all apply:] |
The overriding principle of campaigning is risk control. The other main characteristic of campaigning, profit maximization, is closely linked to risk control because it's a result of increasing trade size without increasing risk. First, let's establish some basic principles, then look at the various components of campaigning and some suggested guidelines for campaiging.
The Math
As with other trades, the math behind campaigning is based on percent wins and
average size of wins and losses. However, in campaigning the math is applied
to a series of trades considered as one unit. How can we know that the math
for the series of trades will function the same as the math for a single trade?
That might seem confusing at first, but it's very simple. Lets compare a hypothetical
trading system made up of individual trades with a system made up of campaigns.
For comparison purposes, we've chosen systems with the same expectancy.
| system of individual trades: | system of campaigns: | ||||||||||
|
30% losing trades, averaging
-3 For an avg series of 100 trades:
|
30% losing campaigns, averaging
-3 For an avg series of 100 campaigns:
|
As you can see, both models represent profitable systems. In fact, the numbers are all the same, only the labels are different! This exercise may seem too obvious, but it's that simple. The point is that no matter what happens within each campaign, if the net results of a series of campaigns conform to the model in this example, the series of campaigns will be profitable (if repeated enough times for the probabilities to work). This same model will be used in planning campaigns.
Let's look at what we can do to get realtime campaign efforts to conform to this mathematical model. Here's what we need to achieve:
We can't predict profits, but we can manage the risk side of the equation to limit the possible outcomes for each campaign to those that we've planned for in the mathematical model: 1. small loss, 2. breakeven, 3. small profit, or 4. large profit.
Here are some guidelines to help
accomplish this:
| Campaign guidelines | |
| Phase_1: put it on |
Start each campaign from a base-trade that backtests like the mathematical model given above. |
|
Use a 3-point stop-loss on every base-trade, and never exceed this initial risk for the duration of the campaign. |
|
| Phase_2: cover risk |
Don't let a profit turn into a loss. If a basetrade moves 5 points into profit, the worst case for the remainder of the campaign should be breakeven. This can be achieved by taking profit on part or all of the position on strength and re-entering on weakness. Each time a trade is re-entered, the stop should be re-calculated so the worst case is no worse than breakeven for remainder of the campaign. |
| Phase_3: press it |
Allow winning trades room to work. In order to obtain an average profit of +9 or better on winning trades the trade must be allowed to run. It doesn't matter if the objective is reached in 1 trade or in several trades, as long as the campaign isn't terminated before reaching the profit target (or being stopped out). If we exit for any reason before the basetrade has gotten stopped out or reached the necessary minimum of 9 points, we must re-enter the trade later. The campaign should be continued either until stopped out or until the trader decides to take profits and look for a new base-trade to start a new campaign. |
| Increase position size only when it can be done with a worst case of breakeven for the campaign or better. |
Phase 1: put on a Base Trade
The math discussed earlier requires that a campaign be based on a trade with
an acceptable probability of moving 9+ points. FL has identified 2 common trades
that meet this requirement:
| dot1 | The ideal base trade is at the beginning of a new trend. By definition, a dot1 starts a new trend, making a dot1 the ideal base trade. Not every dot1 starts a good move, but the biggest moves do start with a dot1. |
| dot2 | The next best base trade is a deeper pullback after a trend has already begun. By definition, that's a dot2. Also by definition, if a dot2 fails decisively that's the end of the trend anyway. |
| Homework: |
|
Phase 2: Cover the risk
Phase 3: Press the trade
Pressing the trade means aggressivelly pushing for more profits by following
the trade until it ends, taking auxilliary trades and increasing size
to squeeze as much profit as can be gotten.
Press the trade: Auxiliary Trades
We've mentioned that if profit is taken before we're ready to end the campaign,
we can't end the campaign there, but need to re-enter to allow the campaign
to continue to work. That's what we mean by auxiliary trades, trades that are
entered in order to continue the base-trade. With each successful auxiliary
trade, the breakeven point for the campaign moves further away. If the stoploss
for the campaign is kept at the breakeven point, the likelihood of getting stopped
out on subsequent auxiliary trades also gets smaller as the breakeven stop gets
further away. It is critical that our average campaign results reflect the numbers
in our mathematical model, but, except for the base trade (which must have an
acceptable probability of reaching 9 points), it doesn't matter what auxiliary
trades we take to achieve those numbers. That may be hard to swallow at first,
but here are some scenarios:
| Re-enter at a better price (also called "trading against the position"): | |
|
This should be a no-brainer, because no matter how or where you do it, it is an improvement on the original position, as you will see from this example:
After the re-entry at 102, the breakeven point for the campaign is at the original stop, 97 (because 5 points profit was taken, and 97 is 5 points below the new entry). If it was worth risking 3 points to enter at 100, certainly it must be worthwhile if we can get back in the trade with the same stoploss but worst case breakeven? It doesn't matter if there's an entry signal or not, the trade is a better deal at the re-entry. Here's a rule-of-thumb: Anywhere you have the opportunity to re-enter a trade at a better price than where you got out, you've decreased the risk in the campaign. |
|
| Re-enter at a worse price: | |
This
is a little harder, because it doesn't improve the position, but sometimes
it's necessary in order to allow the trade to continue to completion (either
9+ or breakeven). In this scenario the stop may have to be moved up in order
to make sure the worst case is breakeven for the campaign. It's a good idea
to wait for some entry signal if you have to enter higher than where you
got out. Here's an example of how it might work out:
|
The point is that as long as we manage the risk so as not to let the trade become a loser, the possible outcomes at this point in the campaign are either breakeven, reach theprofit goal, or exceed the profit goal. Any of those outcomes are acceptable according to the mathematical model. There are many variations of how to manage the auxiliary trades until we decide to end the campaign.
Press the trade: Increase Size
Here is the real power of the campaign principle, which makes the potential
maximum profit of the campaign many times the maximum risk. The only hard and
fast rule is that the worst case for the campaign must be kept to breakeven.
At any point within the campaign position size may be varied, as long as the
stop is adjusted so the worst outcome for the campaign is breakeven (one of
the expected outcomes in the mathematical model). Of course, if you add too
aggressively and too soon, your stop will have to be so close that you'll probably
get stopped out. If you make a habit of being too aggressive you'll reduce the
% wins below an acceptable level, so some judgment is needed. A good general
guideline is to keep your stop 3 points below the last basetrade if possible,
until a powertrade comes along to start a new level. You can be as aggressive
as you want as long as you don't violate the risk management guidelines. If
you get too aggressive, you'll just get stopped out at breakeven.
Ending the Campaign
We've established how we can manage our campaigns to only allow them to result
in one of the acceptable outcomes of our mathematical model (-3, 0, 9+). We've
given a hint of the freedom that exists within the campaign to exit and re-enter
a trade within the campaign. We've only scratched the surface of the subject
of playing with size. At some point the campaign must end, and there's a great
deal of freedom in that too. A successful campaign can continue for weeks, or
can be ended in a day or two. Once a campaign has exceeded the minimum profit
goal, you have the freedom to end it any time, knowing that the math will work.
You can end a campaign whenever you want and wait for the next acceptable base
trade to start a new one. It's preferable to end a campaign on strength rather
than getting stopped out of it, but as long as the numbers remain similar to
the mathematical model or exceed them, you're on solid mathematical ground.
Other than that, you can end a campaign anywhere you want to. If one campaign
has reached phase 2 (worst case breakeven), you can even start another campaign
without ending the first. Be creative, have fun, make money.