Traders Ask: Should I Have a Max Give-Back Rule?

BellaGeneral Comments, Mike Bellafiore's (Bella's) Blogs, Traders Ask8 Comments

Hey Bella,

How is everything?

I have a question for you. I have this one problem (amongst many others) that I am having a tough time overcoming. Whenever I make a few good trades on the open and I have a nice P&L for the day I sit there the rest of the day and force trades and give back a good portion of my day. After I reach a certain P&L I would like to just shut it down for the day and go home but I feel that I need to as you say “trade until the bell”. You never know when the next big trade is around the corner. Can you offer any insight on this?

Bella Responds:

Great job identifying an area to improve. If I had a nickel for every time we had this issue with one of our traders because I have to say that almost never will a trader identify this issue and come to us for help. Almost always we approach the trader about giving back too much after a strong open and working on some rules to keep more of their P&L.

Dr. Steenbarger recommended we institute a give-back rule of 25-30 percent for our traders. This is a common rule employed by big hedge funds (granted on a different trading time frame). What we do internally is ask our traders to talk with our floor manager about their give back rules. The trader and the floor manager agree to risk parameters and then the floor manager must enforce these rules and the trader must accept the enforcement of them.  But the rules are agreed to by the trader and the floor manager prior to any of this.  When a trader hits his give back number he is done for the day. The floor manager shuts him down.

At other firms a risk administrator is in charge of trader risk rules.  I am sure at your firm you have such a person. Go find him/her and craft rules that will help your P&L. Empower the risk administrator to shut you down when you hit a certain give back. Each quarter adjust your rules to make sense for your present trading. BTW you might also adapt rules for how many stocks you can trade intraday, an intraday loss limit, auto demo trading if stopped out three days in a row consecutively, etc.

For those reading at home who do not have the benefit like reader Eric of trading with a top prop firm, then create your own rules. And find a way to stick to them as if there was an enforcer who would not let you trade after you hit your max give back. This will improve your P&L at the end of the month.

I love how you are pushing yourself while you are up. There are days when we see the screens better so I love you trying to make more. I would just sit down with your risk guy and create a trigger to shut it down for the day after a strong open.

Good luck. Please let us know how you decided to handle this issue.

Mike Bellafiore

Author, One Good Trade

8 Comments on “Traders Ask: Should I Have a Max Give-Back Rule?”

  1. from what high water mark do you determine the 30% giveback rule? What if your P & L target has not been reached and how should you go about determining what that target should be?

  2. A rule is not always the answer. Let’s discuss 🙂
    Day 1 a Trader has a good open, and give a good portion back. Day 2 the same. Than in Day 3 too. Ok stop here. Now the trader realize that he has a problem after the open. The result is that his trading is after the open not good enough. So he must stop with trading right after the open to improve his trading in the other phase. Its about the skills in this phase. You must trade until the bell because it could be possible that in the end you will get a big chop. You never know when the next big setup for you will come 😉

    It’s similar for the intraday loss, it’s only a sign for me that i have a bad day. For example i have intraday loss limit of 1k and i made average 50 + trades per day. Ok when i had two losers and hit my intraday loss limit than this is insane. I can’t control the outcome and it is likely to have 5-10 losers in a row. So it’s not a sign that this day i have a bad day. But when i made 30 trades and hit my intraday loss limit, than it show me today, that im not capable for trading today. Nadal, Federer, Kobe Bryant, Messi,,,all they have bad days…it is not unusual…but i need a sign or signal to know ” ok today im not good, i must stop here”. But only to have a parameter how much i can loose today ist not sufficient.

    Regards from Berlin

    PS: I hope you understand me well, because english is not my native language

  3. In Mike’s book he talks about avoiding heavy trading in the middle of the day. Perhaps you could study the time of your trades and if statistically your giving back a big chunk at say 12pm or 2pm for example simply avoid that time of the day rather than stopping altogether?

  4. Please don’t take this the wrong way, but I am kind of baffled that reader Eric’s firm does not enforce these give back rules..This is 1 of the most important rules a trader can have…

  5. Mark, I like how you pointed out the time of day. Not only may the given security trade differently at certain times but I also believe that we personally trade differently. Maybe your mind is wearing down in the afternoon or you’re at the 2:30 hr and realized you haven’t eaten in the last 7 hours. I’ve always believed it to be important that a trader make sure they have a good and somewhat healthy breakfast as well as snack throughout the day with fruit, peanuts, etc. I also like to make sure that I drink water as well as the coffee. Whether this makes a difference for others; I don’t know but it keeps me energized as well as focused throughout the day.

  6. This is my number 1 problem. Over the years, this has cost me problably hundreds of thousand in opportunity costs, losses, trades i wouldn;t enter…… I’ve rarely made a dime after the first 1.5 hours, but have made plenty before that. Where did it all go? No discipline to prevent overtrading.

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