rdhtci

Gosu, your trading methodology sounds very like mine. Actually, I don't trade OPM. Having the freedom to record my results any way I like, I have simply started with the date of first trade I placed using my current system, and organized the trades into 12-month periods from that start date, rather than having an orphan period of something less than a year at the beginning. As far as risk-aversion, it's just that I am not so young and a lot of work has gone into building my trading capital, which I would not care to attempt to repeat. I agree with your view of risk. The only circumstance under which I would view it is a rising regression line is in relation to position sizing where, clearly, one is taking on proportionately more risk with larger size. UNLESS... you create your position by scaling in -- which is another matter altogether, and which is also at the heart of my methodology... I also look to identify and isolate those moments when risk is statistically minimal although, in my case, I wouldn't call it discretionary because I have reduced everything to rules. Couldn't agree more. I also use scaling in, and I don't use set stops either. I am more discretionary on exits. Although I do have a system indication for an exit point, I am aware that this is designed to catch a certain move and is not something which is guaranteed to unfold according to the numbers. Consequently, if it appears to me that the move has occurred without quite getting to the calculated exit point, I will watch and weigh the diminishing risk:reward and act accordingly. I have been able to 'beat' the results from the system exits fairly consistently as I get better at this. So, perhaps we trade in a more similar fashion than it seemed initially! Good luck for the future...

Gosu, your post did indeed push some buttons, I found it dismissive and insulting and replied in kind. I don't feel good about that. Never mind, I appreciate the way you have responded. I don't make any claim to be good. I have been successful, and I have made some fairly significant sums but, like you, it has not been a smooth road, and I am only too aware of my trading weaknesses, which I have to pay constant attention to. I certainly don't sneeze at making a million, I think it is a tremendous achievement, I'm also proud of having done it. I just didn't like the apparent assumption that you could beat me round the head with it. I think we all need to be proud of our achievements -- there has to some reward other than just monetary. I had a great year in my last 12-month accounting period July-to-July -- 65%+ return on a fairly significant account with less than 6% drawdown, 11 winning months and the one losing month closed at less than one tenth of one percent down, trading daily charts. I'm proud of that, but already in my new 12-month period I am down with a nasty streak of losing trades. The markets have a way of humbling us and reminding us of reality. I don't know the future, but I do have a clearly-defined set of rules to deal with the present, and the only thing I know is that the current and recent performance of my system is still within the parameters of normality, so my job is to trade through the drawdown. We all have to find a way to trade that allows us to sleep at night -- to suit our trading personality, as they say. For me, the only way is to focus on risk. To find the appropriate balance between risk and return within my system, and to know exactly the point where my system has undergone abnormal loss -- and know in advance what I will do about that. That alone is not an insignificant task and, for me, may well be the most important one. At that point, I have a plan which covers both the expected and the unexpected, and I have done everything I know to understand and manage my risk. You're obviously trading in a completely different way -- and you're obviously doing great with that. You're prepared to risk blowing out an account in exchange for whatever your expected return is. I can't do that. I would however disagree with this: your previous post said that you wouldn't have made your first million any quicker if you employed risk management. I think perhaps you would -- because your most recent post says that you blew out two futures accounts, one fairly sizeable. Some appropriate form of risk management would almost certainly have helped you avoid the pain of a blown out account and therefore may well have helped you to make your first million quicker... Congratulations on great performance, and good luck...

Well, "Amigo", congratulations on the most egotistical, arrogant and insulting post I have seen in a long while. I would guess the whole purpose was to find a way to slip in a reference to 'my first million' and impress us hick beginners with the 'limited experience'. I guess you feel that your ridiculous post can only gain credibility by hinting at how much money you have made. But, we all learn at some point that it's really very foolish to make ignorant assumptions about people you know nothing about. And it's just plain, downright stupid to come on like a bragging schoolkid when you have no idea of the true experience of those you seek to impress. See, unfortunately for you, I could also talk about 'my first million' -- but I'm not a crass braggart. And, you see, I know full well that there are many people out there who are vastly more successful and experienced than me. Unlike you, I have respect for that. So I don't come out of the gate blowing air about how great I am. Do you understand that? Can you understand that there are people out there who are not beneath you? Can you see the possibility that there are people out there beyond YOUR limited experience who laugh at your idea that your 'first million' is impressive? You make several references to 'only an idiot...' -- here's one you missed: only an idiot would attempt to post a reply which demonstrates that he is incapable of understanding that which he replies to. You're seriously asking me "Do you understand that the index futures are a leveraged market?" Huh? Yes I think I do understand that index futures is a leveraged market The whole post is about leverage. Best you don't post replies if you have zero reading comprehension skills. You embarrass yourself. Anyway, look on the bright side -- your post has probably given a few people a good laugh.

Hey, nvr, thanks for clarifying, but no problem -- I got it. You were replying to gosu

It's all about the minimum position size. Let's say a trader has a $20,000 account and is conservative, trading at 1% risk. Let's take the SPY ETF as an example. He trades the SPY on a daily chart with a stop based on average true range. Let's say the ATR for the SPY (excluding the recent massive volatility increases) is 1.70 -- not far off the mark for the last couple of months. Say the stop is 3 x ATR -- or 3 x 1.7 = 5.1. At 1% account risk, this trader's loss to the stop needs to be $200. He can easily accommodate this by position sizing -- SPY is at $120, he would trade 39 shares of SPY at 120 - for a position size of $4,680. His stop would be at 120 - 5.1 = 114.9. If his stop is hit, he sells 39 shares at 114.9 for a total of $4,481. Purchase price $4,680 minus selling price $4,481 represents a loss of $199. As close as we can get to the desired 1% of account size. Theoretically, at least, we are within our desired risk parameters. Now shift the whole thing to the ES. Say the ES is at 1200. The value of one contract is $60,000 ($50 x current price, ie 50 x 1200in this example). You might see the problem already, before we go any further. The trader was able to trade the SPY at a precisely determined size of $4,680, set by his desired risk level. With a $20,000 account, he can trade several contracts of ES according to margin requirements (not sure exactly what ES margin is right now - I never get ANYWHERE CLOSE to minimum margin), BUT each contract of ES is worth 60,000, his minimum position size is $60,000. Let's say he takes the trade at one lot, because margin requirements allow him to. He might even feel 'safe' because he is trading less than the maximum allowed on his account (after all the brokers must know, musn't they? They wouldn't allow this if it wasn't OK?..). So he purchases his one contract of ES at 1200. Stop is the same 3 x ATR. ATR on the daily chart is running at around 20 (again pretty close to where it was the last few months before the volatility spike). So his stop is 60 points. One point on the ES is worth $50. So the loss if the stop is hit is $3,000. With the trader's $20,000 capital, this is 15% of his account size. And he cannot trade any smaller -- this is the minimum size -- one contract. The size of the contract is defining the risk rather then the trader himself -- because he is under-capitalised for that market. So, to take the same daily chart trade on the ES as he did on the SPY, and to maintain his desired 1% account risk, our trader would need an account size of not $20,000, but $300,000. Conversely, trading at one lot with his $20,000 account, he only needs 7 losses in a row to be ruined. And this is for one contract in one futures market. To achieve diversification and trade multiple markets, and also maintain a low risk factor, you can see how a larger account is required. Also, there is the issue of 'granularity' when increasing your position size to match a growing account value (or decreasing lot size to match a smaller account after losses). Assuming you have sufficient capital to trade one contract within your own designated risk parameters, you will need to double your account size before you can add a second contract. Trading the SPY, on the other hand, allows you to increase your position size one share at a time -- you would be able to increase your position size and still maintain your risk profile just about after every winning trade -- ie your account grows much faster because compounding occurs straight away and continuously, as opposed to not starting to compound until you double your account size. Trading 10 lots to start means you could add a further contract when your account is 10% up, rather yhan 100% up -- much better. But, you can do the sums as above -- how much capital do you need to stay within your own risk parameter and trade 10 lots of the ES? Some will say that this example is extremely conservative -- and, yes, it is -- many trade the futures markets at much higher risk levels than this. Some will also probably point out that you could trade futures on a smaller timeframe and thus have a much smaller stop. Equally true. But the principles outlined above hold. You should choose your risk parameters accrding to your personality, according to how much pressure you can withstand (and it's always less in practice than you think it will be, so you are well-advised to be conservative here). You shouldn't be forced into higher risk due to the minimum position size possible in a given market. Nor should you be forced into a shorter timeframe because of account size. So, choose a market the allows you to remain within the risk profile you want, in the timeframe you want to trade, with the capital you have available.

russellhq -- we're going round in circles here. I responded to your post which said 'I don't think that's true...' by explaining exactly why what I said is true. Now you say it's true but irrelevant. Maybe you should make up your mind if you think it's true or not. Given that we're talking about the law of large numbers, that much is pretty simple - it's unequivocally true. If you think it's irrelevant, that's your prerogative, but I would caution you to think again. And I haven't skipped over what you term 'accumulation of results' - quite the reverse, it's exactly what I have been talking about. My posts have made several references to 'distribution of returns' and 'variance of returns'. In this context, 'distribution of returns' means how your wins and losses are grouped, 'variance of returns' refers to how far away from the average your returns are at any one time. Seems to me that these concepts are exactly what you are discussing. I am trying to point out to you that no amount of mathematical calculation will stand you in any stead when your 'distribution' or 'variance' are suddenly a mile away from anything you have previously encountered, or anything you were able to predict, or anything your math calcs suggested... Or anything you were prepared for. If you don't work out how to prepare for that, you're out of the game. Ruin. If you think that's irrelevant to what you are discussing, I can only wish you luck. As for your question about the results of 1,000,000 coin tosses under specified conditions -- I don't know. There's no point in calculating that because THAT is irrelevant. Why is it irrelevant? Because of everything I have been saying -- you have absolutely no way to determine your future returns -- not their average, not their distribution, not their variance. There is no correlation between real-world trading and anything concerning a coin toss EXCEPT that there will be variance in both. Which, in future trading, can only be unknown until after the event. That is precisely why approaching this problem from the angle of calculating the largest position size which will not cause ruin is fundamentally flawed... I think I'll leave it there - I've tried to clarify, I don't think I can do any better -- if you think it's irrelevant, best of luck -- sincerely.

Ha ha - no, tommaso, I know it wasn't you -- I was quoting the mouse quoting you and actually responding to the mouse

Both statements are completely true. The law of large numbers states that actual results become closer to the expected as the number of instances increases. In other words a coin-flip produces closer to 50-50 the more times you flip. This has absolutely nothing to do with breakeven. The concept of breakeven introduces another factor, the size of a bet, which allows the distribution of returns to affect the result. If you introduce beakeven, your subject is no longer the number of heads or tails produced, it has become how much money has been made or lost. Conversely, over a small number of coin tosses, a string of consecutive heads or tails can be far larger than the expected outcome would suggest -- leading to a short-term result further away from 50-50 than you might expect. I have witnessed a small experiment where a number of series of 100 coin flips was performed and recorded. The strings of consecutive heads and tails were eye-opening. I have also traded long enough to see such strings in my own results. Sooner or later, everybody will experience this. Anyone who hasn't seen it has probably not consistently traded the same method for long enough. This latter phenomeneon, the larger-than-expected string of losses, is precisely what connects the coin-toss to concepts of risk management. That and the position size element are precisely what combine to produce ruin. Put simply, a position size which is too large can combine with a larger-than-expected string of losses and wipe you out. There really is no argument about this, and it embodies the precise problem faced by those trying to calculate the largest possible position size. The black swan is a much used phrase which has come to be incorrectly used as an analogy for a bad day in the market. It's not that at all - it refers to an event which has not previously happened in our experience. In other words, not just a larger-than-expected string of losses, but a string of losses which is so large that it has never been known to occur before. That event is out there, it's in your future. Any calculations related to risk need to acknowledge this. Again, it's importance is related to your personal circumstances -- specifically, it's related to account size. Without being in any way flippant <g>, it's a different matter trading an account that was funded with $500 from an extra job flipping burgers than it is trading a much larger account that represents 20 or 30 years of carefully accumulated capital. Or a large amount of capital representing other people's money. One is much more easily replaced than the other, and you might be happy accepting larger risk. Which is precisely why professional traders trade at low risk levels. Inexperienced traders tend to push out the boat because they are unaware of these factors. They also tend to blow out their account. One of the beautiful things about trading is that you create your own circumstances. But it's a double-edged sword. I am simply suggesting that anyone considering risk management should be aware of these simple elements.

...but people are constantly taking results derived from coin-toss examples and using those results to make decisions about their trading. Which is attempting to correlate it with reality. The coin-toss is useful for demonstrating the variance of returns. Whilst we all know that over a high enough number of coin tosses the result is going to come out very close to 50-50, it is truly surprising how far away from 50-50 the experience can be over small numbers -- in other words, strings of consecutives wins -- or more importantly, losses -- can be far, far bigger than you would intuitively expect. Somebody else in this thread referred to the same phenomenon on a Vegas roulette table -- something like 16 straight wins/losses. It is simple enough to calculate the probability of a given number of consecutive results for any win rate percentage, but you had better not put your hard-earned cash on it. For example, the probabilty of 10 consecutive wins or losses on a 50-50 proposition (a coin-toss) is 0.98% -- less than 1% probability. Personally, nothing would induce me to use that figure for anything related to my trading capital.

Nakachalet -- glad you agree, thanks for commenting. nvr -- absolutely correct, completely relevant -- but incomplete... 1) the 35% win-rate thing is usually related to trend-following systems. A well-trodden road -- considered by some/many to be the only valid strategy-type. Proven to work out but with certain caveats, including time and capital -- coming up... 2) trend-following has certain characteristics which can make it difficult, or not a good choice for many: (i) It works best as a fairly long-term system. Which means you can/will be in drawdown for long periods. I personally had an 8-month drawdown in such a system, which wasn't even particulary long-term Other, longer-term trend following systems I have tested have shown past drawdown periods measured in years. That doesn't mean months or years of countinuous loss, it means taking that long to reach a new equity high after a drawdown occurs. Not everybody (not many?) can live with this. I have discovered that I can't... (ii) the low win rate means that you spend most of the time 'underwater' -- psychologically difficult for most but, more significantly, a single trade might provide your profit for the whole year. Miss that trade and you're in trouble. Utter consistency required, complete and utter faith in your system, and no vacations... (iii) Perhaps most significant of all, the guys you mention are all managing huge amounts of trading capital. They are thus able to benefit from the diversification inherent in trading many different markets simultaneously. With a small account you will probably be under-capitalised and reduced to trading a single market -- now your equity curve is really up and down. 3) there are other trading models, which have a completely different profile -- larger percentage of wins, usually accompanied by a lower win/loss ratio. Smaller trades but more of them. Shorter timeframes. Less dependency on any one trade. Smaller trades means you might be able to trade more markets simultaneously on a given amount of capital. Shorter timeframes (I am not talking about daytrading) have the reputation of being more difficult to trade, which may be true, but they also have benefits -- including shorter times in drawdown or, put another way, quicker to recover from losses, and quicker compounding of your capital. IOW, (a) it can be misleading to quote certain statistics out of context -- a trading system needs to be considered in full context and in relation to all of its inter-related properties and (b) there's more than one way to skin a cat. The way that suits you best may not be the one that suited Richard Dennis.

There's no need to revert to being a child just because the truth is hard to face. The guy is telling it like it is, you should be appreciative, not revert to sucking your thumb. The problem with this whole discussion is that it has no connection with trading in the real world. Trading at a level where 7 trades would ruin you, or where your wins and losses are circa $1,000 on a $23,000 account is absolutely ridiculously risky. No real-world professional trader would get within a mile of these risk levels. It seems that the smaller the account size, the higher the risk a trader takes. Conversely, find me a trader who trades a 7-figure account at a level where 7 trades would ruin him, and I'll eat my hat. Trading is not a get-rich-next-week game. Somebody who doubled/tripled their account size last week/month has traded at huge risk levels and been lucky, nothing else. It can't hold up over time. Continuing to trade at that level really does bring ruin, with absolute inevitability. And, shouting down the guy who trades without stops is equally stupid. He, too, has information you could benefit from if you took the time to understand rather than dismissing him because the concept is so foreign to a limited perceived knowledge. It's not as cut-and-dried as people obviously think it is. The focus should be on how to minimise risk, not how to calculate the maximum risk you can take before blowing out your account. Even if this were not an impossible calculation (which it is because you cannot know the distribution of your wins and losses in the future), you would encounter levels of drawdown which would likely be beyond your endurance level. Especially as your account size became larger. This is a factor which cannot be underestimated. However pretty the outcome looks on paper, you have to travel the whole road to get there, including trading through the drawdowns. However much it is the ideal that we eliminate emotion, the sight of what is to you a truly large sum of money evaporating as you watch is to say the least disturbing.

I agree with Bakrob99 -- there is no poll result I can take which freflects my view. Which is that it Reminiscences is a great read with some wisdom to be gleaned, and JL's failures, in life or in trading, do not diminish that for me. I was aware of his later life downtrend, but that wouldn't stop me reading the book, assigning the same value to it as if he had fewer problems, nor recommending it to anyone elase on that basis. I think you need to extend your poll options to account for those who don't agree that the whole experience is negative.