russellhq

Hi gosu, I have to disagree with you here. Trading is not a game of skill. If it were, there would be no need for money management because you could just put all your money into every trade and come out a winner. That's not how it works, I know that and you know that. Trading is a game of skill PLUS LUCK (good and bad). And it is the luck element I am discussing here. Coin tossing can be very similar to trading. You start with an unknown outcome, but an idea of probability, you set your wager size/trade size relative to your bankroll, and off you go. There are only 2 outcomes in a coin toss, and I would argue that most trades only have 2 outcomes. I.e. you have a stop loss and a profit target, letting your trade run to either one results in only 2 outcomes. Win or lose. Finally, you talk about the market flipping up and down. This is completely irrelevant. What is relevant is this: you enter at one price and exit at a second. The second can either be higher or lower (we can ignore the price being the same as for reasons previously discussed). What happens in between is analogous to the coin spinning in the air or rolling on the floor. At one point heads is facing up, the next it's tails. But eventually you are going to have to take a decision and call it. What's been an eye opener for me is the difference between consecutive losses and accumulated losses. I would never have thought that difference would be so far apart!

Hi Tradewinds, I feel that only focusing on consecutive losses is misleading. Going back to the coin flip game, if you started with $10, and flipped the coin 100 times, gaining a dollar for every head and losing a dollar for every tail. Then focusing only on consecutive losses, you would assume the probability of losing all your money would be 0.5^10 or roughly 1 in a 1000 chance. The reality is your probability is approx. 1 in 3!

Hi jyork, I've ended up using a monte carlo simulation to approximate the probable outcome (see attached spreadsheet). Hopefully I can explain any questions you might have. TraderSim.xls

Thanks for sharing tommaso but what you are saying comes across as contradicting itself. A stop by its very nature sets a lower bound on your loss, ergo losses are bounded using stops. Not using stops allows a trade to move to any price and is therefore unbounded.

I've been doing a bit more research as this puzzle has been a real head scratcher, but I think I've made more progress. Let's look at the following problem: A trader has a win rate of 55% and on average his losing traders lose $1000 and his wining traders win $1200. Over the next year he expects to execute 100 trades. What would the size of his bank need to be such that he would only be ruined once in 10,000 years. My calculations say he would need $23,000 to cover the risk...

bobc, if there are no buyers or sellers, there is no market. Only when we have buyers and sellers, we have a market and boundless volatility.

That's exactly why we assume they can do anything. Starting very simply, if I complete 100 trades in a year then each trade can either win me money or lose me money. This is analogous to flipping a coin 100 times, it'll either land heads or tails, and I'll either win or lose. What you are talking about are strategies to improve our chances, I'm starting from a conservative approach where we have no edge over the probabilities.

Hi bob, I've not mentioned wager size/risk value yet so I'm not sure where you are coming from. What I am discussing here is probabilities. Once the probability is defined, we can move onto risk amounts/stops to keep us in the game.

Hi tommaso, i can't really agree with what you are saying unless you can expand further. Markets, like any other risk based activity, must follow the laws of probability. Flipping a coin and it landing heads or tails is analogous to entering a trade and it going up or down. Discussing probabilities and risk is essential to maintaining a healthy account and that is what I am attempting to do here.

Thanks MM. It is my intention to look at that aspect later on, but for now I am keeping things simple and trying to get the foundations correct before building on top of them.

Hi Blowfish. Account size and bet size would be the outcome of this exercise. For example, in the first method we used an arbitrary RoR of 1 in 10,000 then calculated that 13 tails in a row would be about a 1 in 10,000 chance. Therefore, we assumed we would be ruined only after 13 straight tails. So to bankroll ourselves to cover the 9,999 other events where we don't hit 13 tails, we would need a bank of 13 times our bet size. Normally though we start with a bank size, and would divide it by 13 to work out our bet size.

I'd like to start a disscussion on the maths behind risk of ruin as from what I've read previously, it leaves me a little uncomfortable. I'll start by discussing the way it's usually presented. Usually when calculating RoR, you normally start with the the answer and work backwards, so lets do that. I'll use the coin flipping analogy as the game. So say we play a game where I flip a coin and if it lands on heads then you win and if it's tails you lose. Normally, before the start, you would decided on what level of risk you will accept before going broke, say it's 1 in 10,000. This works out at roughly 13 tails in a row or 0.5^13. Nice and easy, we can play the game for as long as we want but if there is a run of 13 tails, then you're out. But, what if, at the start of the game you have a run of 12 tails, then a head, then 2 tails. You are still out! This thought led me to the following: This time, instead of ruin meaning you can no longer play, lets set ruin to be true only at then end of a set number of games. If during the course of play you pass the ruin line, you are still allowed to play to try and recover but you must stop after the set number of games. Lets start out by saying we will play 27 times, what will be the chance of you being ruined? To work this out, lets start with how many different permutations of the game there is (how many difference ways we can flip the coin 27 times). 2^27 is the answer Now lets work out how combinations there are that can ruin you by the end of play. If you get 0 heads during the 27 flips, then all agreed, you would be well and truly ruined. There is only 1 combination of this. If you get 1 head during the 27 flips, you would still be ruined. There are 27 combinations where you can get only 1 head from 27 flips. If you get 2 heads during the 27 flips, again you'll be ruined. To calculate the combinations, we use factorials: 27!/(27-2)! = Number of ways you can be ruined. We keep doing this until we get to 7 heads, after 7 heads, you would always be able to recover by the end. So when we add up all the combinations from 0 heads, to 7 heads: 0 heads = 1 1 heads = 27 2 heads = 27!/(27-2)! 3 heads = 27!/(27-3)! 4 heads = 27!/(27-4)! 5 heads = 27!/(27-5)! 6 heads = 27!/(27-6)! 7 heads = 27!/(27-7)! And divide by the total number of permutations (2^27) we end up with our answer. In this case it's 1 in 100! This is a lot higher than our initial assesment of 1 in 10,000! This is just the basics and i've not considered Risk/Reward ratios etc (that can be added later). I just wanted to start with the basics. Thoughts?

Live cattle looks tradeable tomorrow but risk might be a little too high; approx $1600 due to todays jump.

Avarice, I'm not sure I am in complete agreement with that particular method to calculate RoR. I've been pondering the notion that if, in your 13 losses and out example, one were to have 12 losses, 1 win and then 2 losses, Ruin will also occur. This led me to the following (after much head scratching!). Take again, for example, the coin flipping game, where if we sustain 13 losses we're out. Now if we were to flip the coin 27 times, what is the probability we would be Ruined? To work this out, I did the following: Counted how many permutations there were in the game, this turns out to be 2^27. Next I counted how many combinations of the permutations would result in my Ruin. To do this I started by saying I had to have at least 13 losers, and once I had at least 13 losers I would need 1 additional loser for every winner. This then led me to count all the combinations from 0 winners out of 27 flips, to 7 winners out of 27 flips (after 7 winners there are no combinations that will Ruin me). Adding all the combinations that would ruin me and dividing by all the permutations in the game led to a Risk of Ruin of 1 in 100. 2 orders of magnitude higher than our initial 1 in 10,000!

Hi paulrico, I had been looking at Silver but the risk was far too high for my account. I read the chart as showing approximately a 2.5 point risk for both Silver and Mini-Silver, and at $5000 and $1000 a point respectively, this was too high for me! I have been looking at other instruments to trade and noticed "Canola". It has an ATR of 10 points (spikes of 20) and a contract value of $20 per point. This looks a good candidate for small accounts using this system. Thoughts anyone?

Hi PWP, I've been using Mirus Futures for my Futures demo account (it's only valid for 30 days though) and execute trades through Ninja Trader.

Hi Neo, I've been trying to discipline myself to check the charts at the end of the day (5pm EST/EDT). What rules/strategy are you using for chart checking?

Nice pun :rofl: .

Thats SIUYA and OT, I think I just needed to hear things reinforced like that to get comfortable with the strategy Slightly changing the subject, I've read Kroll and I've read OT/others taking about building positions (I think Kroll calls it pyramiding). I wonder if it would be possible during the course of this thread if someone could demonstrate on a chart how they have built up a position using the system/strategy. I'm assuming it may be some time away but maybe it's something to keep in the back of your mind. Thanks again guys!

Thanks for the advice guys. I'm paper trading at the moment but approaching it exactly the same way as I would if it were real money (we'll as close as I can as fear and greed won't be at the same levels). So in that respect, I've started with a $25k demo account and am following optiontimer's suggested levels of risk for swing or position trading. This is something I can't get my head around through. Both terms have the same entry strategy as defined previously but as the exits are undefined I'm unsure how to know if I will take short term risk or long term risk. Therefore, the trades were OK short them but not long term. OT is it possible to describe a short term exit strategy? Finally, on market news I might have been taking Kroll a bit too literal after reading his book. The theme I got from him was to ignore market news and just stick with the charts/system/strategy (which is what I've done).

Entered 2 trades today, GBP Future and USD Index. The GBP entry point was BUY after price breaks 1.6394. Market opened with a gap above this and I entered at 1.6440. Stop Loss set at slightly below 1.6222. Risk $1362. The USD Index entry point was SELL after price breaks 74.670. Market opened with a gap below this and I entered at 74.305. Stop Loss set at slightly above 75.645. Risk $1340. For both these trades, the market opened higher than my entry point, this resulted in the risk being higher than initially assessed (Moving from $1000 to $1350). Given this movement, would you still go ahead with the trade and chalk it up to slippage, or stay out the market?

To be honest, I have not developed a complete exit strategy yet. The first 2 trades I made were Feeder Cattle and Aussie Dollar. I entered the cattle trade before I really understood the system or the method to assess risk. So my exit on that one was because I got a little scared about how far it had gone against me. That was the same for the Aussie Dollar but I was scared the other way (not wanting to lose profit). The next trade was the mini Dow and it was much the same story. My Oats trade was closed because I wasn't comfortable with the low level of liquidity during the time of day when I was able to trade so I closed it when it made a small profit. Finally, my last trade was bean oil. Now it's not really closed, I have just switched contracts from Sept to Dec where there is more volume. Both contracts gave the same signals so I figured it made no difference switching (apart from transaction fees). So, here I am. I have 2 open positions, 10yr Note and bean oil. My exit for these are my initial money stop (nearest significant Hi/Lo) but will eventually become the 65EMA if they make it that far.

I've attached my progress for the last 3 weeks paper trading, I've been getting lucky with only one losing trade!

I stayed out of Cotton, the risk looked too high. What did you take as the risk for that trade? I've still got the 10yr Note open too

Thanks Neo, but what I am after is the "Average Win" for this type of trading. To quote OT from earlier: What I am asking is: If the average money loss per trade must be $961 ($653 preferred), then what is the expected average money win. With that info I can then go on and calculate the average win per trade.