Below are a few Factor Member questions from this past weekend’s report I thought you might enjoy.
Peter, how do you protect against large open trade profits from disappearing? – Factor Member
No trader likes it when market reversals erase large open profits. The hardest trades to deal with for a discretionary
trader who uses price targets are profitable trades that have yet to run their course. I know exactly what to do with a
losing trade. I know exactly what to do with a trade that closely approaches its target. But trades in the middle are the
most difficult. Let me address four aspects of how I view this subject.
1. I make every attempt to prevent a large profit from turning into a net loss by taking some money off the table
on half of a position (when appropriate) even if the exit is premature. While it can be emotionally challenging to
exit a trade prematurely only to watch the market keep running, it is far more emotionally challenging for most
traders to exit after a market makes a sharp V-turn (see points #3 and #4).
2. Through a technique I call the 3-day trailing stop rule (3DTSR), I jam my protective stops on trades that travel
70% of their expected distance.
3. I pay very little attention to open trade equity except when filing year-end tax forms (the U.S. IRS taxes open
equity). Open trade profits do not belong to me. The only profits that matter are from closed trades. I plot my
trading capital based on sequential closed trade outcomes. This is the most important metric I maintain.
4. Here is a hypothetical question for you relating to point #3 above. Assume you have an open trade profit in a
futures contract of $3,000. Then the market reverses suddenly and sharply and you exit the trade after a $1,500
per contract correction. Question – in your mind did you just lose $1,500 or make $1,500? BE HONEST. It is my
observation that most traders believe they lost $1,500. In my mind I just made $1,500 and very possibly my
career closed trade NAV registered a new all-time high in the process. How can I possibly be bummed out about
You often make reference to “nominal” trading capital. Can you explain what that means? Is that different than the
amount of actual capital in your account? – Factor Member
Many traders consider the amount of money in their futures/forex or stock account to be the total of their capital. I
dropped this concept years ago. Usually at the beginning of each year I declare a level of capital I will trade for the
purpose of sizing and calculating risk – this is what I define as my “nominal” capitalization. There are several features of the nominal capitalization of most prop trading accounts (including mine) that are different from how retail traders view
1. The total amount of actual capital in my various prop accounts (Interactive Brokers, ADM, Forex.com, TD
Ameritrade) plus Factor LLC’s bank money market account is often substantially greater than what I have
declared as my nominal capitalization – and at times may be less than my nominal capitalization.
2. Closed trade profits and losses do not add or subtract from my nominal capitalization. The level of nominal
capitalization remains the same until I declare it to be a different amount (usually the following Jan 1).
3. I calculate the ROR of a closed trade in relationship to my nominal capital, not the total actual capital held in
This approach to dealing with my level of capitalization has not always been true. In the early days my goal was to grow the actual capital of my trading accounts – and my ROR in those years was calculated against actual capitalization.
Peter, I do not want to sound belittling, but it sometimes seems as if you just throw mud on the wall hoping that
something sticks. Am I missing something? – Factor Member
Thank God! Someone is paying attention (you). Perhaps I should use this simple phrasing to describe how I trade. This is
exactly what I do. Trading is a game of working through many losers (mud that falls to the floor) to find a few clumps
that stick to the wall. The challenge is to quickly remove bets from mud that starts to slide while staying with bets on
mud that is sticking. Thank you … thank you … thank you for asking this question. Why have I never thought to explain my trading in such simple terms? From my stand point successful trading over the long term is less about being “right” than it is about be persistent in effort and protective of capital.
Peter Brandt is a 40+ year veteran of trading. Through his Factor Service, members receive:
View your Factor Member options here. You could consider your membership in the Factor Service as just one more trade. If the Factor Service is not of value to you, well, it is just one more trade that did not work. Through the Factor Service I endeavor to alert novice and aspiring traders to the many pitfalls you will face – and to offer advice on overcoming those pitfalls. My goal is to shoot straight on what trading is all about. For more information watch my 30 minute webinar where we cover the Factor service in depth.
I hope you will consider joining the Factor community.