here is an example. you have $100k, $50k to short, and $50k to long. both positions now have 10% profit now. Now you have $45k short and $55k long with $10k reinvestable profit. What do you do? Your short/long ration is changed from 10/10 to 9/11. Should you add 5k to short then sell 5k long positions, to make 1/1 ration again? or add $10k to short, and does not change long? or add 5k to short and add 5k to long? Old position: $50k short, $50k long, $0 useable margin Current positoon: $45k short, $55k long, $10k useable margin. What to do?
Good question. I would add to the position that generated the profit until some indicators reverse direction. Ron
using your method, if you keep adding by the same % to profitable positions, the short positions will get smaller and smaller and the long positions will get bigger and bigger.
that means, i will only add to the short positions. 50long/50short->55long/45short->55long/55short it is unhealthy. i think add by the same % is the best choice. or just think to have two initial 50k accounts. one for short and one for long. than 60long/50short will be better balanced.
Very good question! This is the key to a profitable outcome in trading: (1) So what do you do if the net P/L is negative both the long and short are down by (a)same amount? (b) different amount...how much in % of shares/no. of contracts do you scale in on winning side, how much on losing side? (2) if net P/L is positive, when/at how much %gain do you scale in (a) equal amounts on both sides, as suggested by you or more on the losing side and less on the winning side- is there a better way to scale in? (b) how do you apply this concept to hedging spreads with spreads: http://www.elitetrader.com/vb/showthread.php?threadid=109200
here is my final conclusion: just think as you short 50k of the same stock and long 50k of the same stock, then you have a zero total. and no matter how it moves, you have a zero system risk. So here is answer to my question. You will increase and decrease by the same amount % of INITIAL investment. So 50/50 -> 55/45 -> 60/50 is the FINAL answer.