Q: I have played your Secrets of the Masters software multiple times. In level 7, you note that you can let your profits run because you are using a system where probabilities go in your favor with a winning trade. How are you testing systems to see if they have this characteristic? I understand these are trend following systems. Do you consider an initial winning trade any trade in which the stop is moved to lock in profits and lets you reinvest them in the same trade (i.e., pyramid)?
A: Thank you for your business and for your question— it’s one that we hear often. Keep in mind that this game is an exercise in position sizing, not entering trades. In level 7 of the game, a winning trade indicates the start of a price run—or a trend. Your job is to determine how much risk you want to leave in the trade. Do you risk the entire amount of your gains and let it ride, or do you take some off of the table in case the run (trend) ends?
You can relate this to using a trailing stop or tightening up your stop as the trade continues to move in your direction. If you left the original stop where it was and the price moved up, you’d be leaving more and more profits at risk as the price went up. By leaving your stop at its original level, you increase the open risk as the stock price goes up and you actually decrease your risk to reward ratio for the trade as the price continues to move. If, however, your stop trailed the rising price or you even tightened up the stop as the price rose, you would be protecting more of your profits—even while you let it run. In the current game, you do not have the ability to scale in or pyramid your initial position. In the new version of the game (coming out soon), you will be able to allow for trading mistakes, trade commissions and taxes.
Have fun playing and good luck.
