Risk of Ruin Discussion

[russellhq 10]

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.

[MightyMouse 12]

Stops make the loss unbounded. It's bounded only if taken a stop you quit trading forever.

All scammers and brokers push hard on stop because this way your loss is unbounded.

 

If one does some serious reasearch (and i mean "serious", not te coin toss) and simulations, it is easily seen that strategies which use stop at trade level are sistematically unprofitable.

 

If you see seemingly good backtested results, it's just curve fitting.

 

I have been trading live for years showing and publishing live results of the order of 10% monthly, and all my traders have good returns. I never used stops.

 

Clearly, it requires capital. But anyway small traders are wiped out in any case. Just matter of time.

 

Tom

 

see for instance:

Forums - Robotrading: CT + Trending Strategy on folios of futures

 

I don't remember asking what you make monthly. No individual has enough capital to trade forex without stops.

[russellhq 10]

Can you post your calculations on that?

 

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

[Tradewinds 12]

Volatility is obviously bounded,

 

I would think so. Otherwise it would be unbounded, which would mean that it could go to infinity? What would infinite volatility on the open of the next bar be like? On the open of the next bar the universe would explode and we would all be instantly vaporized? :rofl:

[Tradewinds 12]

I found these links:

 

Risk Of Ruin Definition

 

Risk of ruin - Traderpedia

 

Ruin theory: Definition from Answers.com

 

Gambler's ruin - Wikipedia, the free encyclopedia

[Tradewinds 12]

The key issue seems to be many, unbroken, multiple losses in a row. This is my starting point for dealing with the issue of Risk of Ruin. So, I would backtest, forward test, whatever test how many losses my system took in a row. Let's say that 7 bad trades would ruin you. If your system had lots of occurrences of 4 or 5 bad trades in a row, I'd be a little nervous. If my system seemed to only have 2 or 3 bad trades in a row, then I'd feel safer.

 

I know that you want to focus on the math for the RoR calculation, but won't the equity curve of your backtest basically give you all the information you really need? The equity curve will be calculated in part by how small or big the trades were, and it will show what the overall profit was. From that, you could work backwards to determine what beginning investment seemed reasonable to you. The beginning investment seems to be one of your major concerns.

[russellhq 10]

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!

[gosu 10]

* * *

Going back to the coin flip game * * *

 

More than a couple of attempts have been made to set you free from the fallacy that flipping a coin is analogous to trading. Yet you cling on to it, for whatever reason.

 

Did you pay to learn that "fact" and don't want to waste your investment? Did you think it up yourself and it's become your pet notion?

 

You need to start thinking about trading as a game of SKILL.

 

 

But let me play along with the coin flipping game a bit.

 

In coin flipping, there are but two outcomes - heads or tails. In trading, there not two but three outcomes - profit, loss, or breakeven. Now, the smart yahoos reading this are thinking, "Well if commissions are counted, there is no breakeven." Like the market gives a shit about their commissions. Would the coin give a shit if you had to pay a small fee for every toss? The number of outcomes and the odds are the same.

 

Speaking of odds, what are the odds in trading for the 3 outcomes? Intuitively you know it's not 1/3, 1/3, 1/3. If that was intuitive, you would not have assumed trading has only two outcomes.

 

It turns out that the answer is very problematic. To be able to calculate odds, you have to be sure of the occurrence of actual outcomes.

 

In coin flipping, you flip and wait for the coin to settle on the ground and call heads or tails. The coin does not change from heads to tails a few seconds after you call it heads. In contrast, the market may flip back and forth, sometimes back again, before you call anything. Moreover, just because you "call" it, doesn't mean the market has stopped flipping; it continues to flip without you.

 

In other words, the "call" has no definitive meaning to the market. Thus, calculating trading outcomes based on calls is arbitrary.

 

The practical consequence is that for a lot of people they get to see that they're not the flipper but the flippee after their account is drained.

Edited August 16, 2011 by gosu

[Tradewinds 12]

Hi Tradewinds, I feel that only focusing on consecutive losses is misleading.

 

Yes, you are right. There is more to it than that.

 

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!

 

I just did an experiment. Flipped a coin a hundred times.

 

1 T 9

2 T 8

3 H 9

4 T 8

5 T 7

6 H 8

7 T 7

8 H 8

9 H 9

10 H 10

11 T 9

12 H 10

13 H 11

14 T 10

15 H 11

16 T 10

17 T 9

18 T 8

19 H 9

20 H 10

21 H 11

22 T 10

23 T 9

24 H 10

25 T 9

26 T 8

27 T 7

28 H 8

29 T 7

30 T 6

31 H 7

32 T 6

33 T 5

34 H 6

35 T 5

36 H 6

37 H 7

38 T 6

39 T 5

40 H 6

41 T 5

42 H 6

43 H 7

44 H 8

45 T 7

46 T 6

47 T 5

48 T 4

49 T 3

50 T 2

51 H 3

52 T 2

53 H 3

54 T 2

55 T 1

56 H 2

57 T 1

58 T 0

59 T -1

60 T -2

61 H -1

62 H 0

63 H 1

64 T 0

65 T -1

66 H 0

67 T -1

68 H 0

69 T -1

70 T -2

71 H -1

72 T -2

73 T -3

74 H -2

75 T -3

76 T -4

77 H -3

78 H -2

79 T -3

80 H -2

81 T -3

82 T -4

83 T -5

84 H -4

85 H -3

86 T -4

87 H -3

88 T -4

89 H -3

90 T -4

91 H -3

92 T -4

93 T -5

94 T -6

95 H -5

96 T -6

97 T -7

98 H -6

99 T -7

100 H -6

 

 

58 Tails out of 100 flips

42 Heads out of 100 flips

 

6 Tails in a row

3 Heads consecutively

 

 

At the 58th flip of the coin, you would have lost all your money. Starting with 10 dollars, your account never goes above 11 dollars. So, the actual experiment resulted in blowing out the account on the 58th trade.

 

So, after doing this experiment in my living room, I could easily see that your odds of making money based on "Coin Flip", 50/50 odds, and a 1 to 1 win/loss ratio, would probably result in a trader never making any money.

 

With a 2 to 1 Win/Loss ratio, the results were dramatically different.

 

1 T 9

2 T 8

3 H 10

4 T 9

5 T 8

6 H 10

7 T 9

8 H 11

9 H 13

10 H 15

11 T 14

12 H 16

13 H 18

14 T 17

15 H 19

16 T 18

17 T 17

18 T 16

19 H 18

20 H 20

21 H 22

22 T 21

23 T 20

24 H 22

25 T 21

26 T 20

27 T 19

28 H 21

29 T 20

30 T 19

31 H 21

32 T 20

33 T 19

34 H 21

35 T 20

36 H 22

37 H 24

38 T 23

39 T 22

40 H 24

41 T 23

42 H 25

43 H 27

44 H 29

45 T 28

46 T 27

47 T 26

48 T 25

49 T 24

50 T 23

51 H 25

52 T 24

53 H 26

54 T 25

55 T 24

56 H 26

57 T 25

58 T 24

59 T 23

60 T 22

61 H 24

62 H 26

63 H 28

64 T 27

65 T 26

66 H 28

67 T 27

68 H 29

69 T 28

70 T 27

71 H 29

72 T 28

73 T 27

74 H 29

75 T 28

76 T 27

77 H 29

78 H 31

79 T 30

80 H 32

81 T 31

82 T 30

83 T 29

84 H 31

85 H 33

86 T 32

87 H 34

88 T 33

89 H 35

90 T 34

91 H 36

92 T 35

93 T 34

94 T 33

95 H 35

96 T 34

97 T 33

98 H 35

99 T 34

100 H 36

 

10 dollar initial investment ends up with a 26 dollar gain.

Heads_Tails.xls

[Tradewinds 12]

More than a couple of attempts have been made to set you free from the fallacy that flipping a coin is analogous to trading. Yet you cling on to it, for whatever reason.

 

Did you pay to learn that "fact" and don't want to waste your investment? Did you think it up yourself and it's become your pet notion?

 

You need to start thinking about trading as a game of SKILL.

 

 

But let me play along with the coin flipping game a bit.

 

Your soooooo mean. I guess you are one of the people who didn't learn any social skills in Kindergarten. Okay, I'll explain some basic social skills that a gradeschooler should understand. If your playing with your toys and someone else is playing with their toys, then you don't need to go over and hit the other child over the head with your toys because you don't like how they are playing with their toys. If you still don't understand, go home and ask your mother to explain.

[gosu 10]

Your soooooo mean. I guess you are one of the people who didn't learn any social skills in Kindergarten. Okay, I'll explain some basic social skills that a gradeschooler should understand. If your playing with your toys and someone else is playing with their toys, then you don't need to go over and hit the other child over the head with your toys because you don't like how they are playing with their toys. If you still don't understand, go home and ask your mother to explain.

 

Awww...did I hurt your sensibilities? Me sowee. I didn't go to Kindergarten so that could explain it from your perspective. Or it could be that you can't look past the mean messenger at the message. Hurry, go tell Teacher!

 

But seriously, you're reading too much into it. Everyone who knows me knows I'm a sweetheart.

 

Friends, okay?

Edited August 16, 2011 by MadMarketScientist
language

[russellhq 10]

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!

[equtrader 10]

Just risk no more than 0.5% of your capital on each and every trade and be well capitalized to execete a trading system with positive expectancy and all this talk is not really necessary.

[rdhtci 10]

Your soooooo mean. I guess you are one of the people who didn't learn any social skills in Kindergarten. Okay, I'll explain some basic social skills that a gradeschooler should understand. If your playing with your toys and someone else is playing with their toys, then you don't need to go over and hit the other child over the head with your toys because you don't like how they are playing with their toys. If you still don't understand, go home and ask your mother to explain.

 

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.

[nakachalet 10]

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?

 

RUSSELLHQ

 

permutations?

 

are you absolutely serious?

 

i'll bet 100 to 1 that less than 0.05% of the population inherited in tl, would have some understandable idea of what permutations are....!

 

shall we just begin by the answer to permutations of :haha: 1 to 3.... :helloooo:

 

alright, you smarty.... how about permutations of 1 to 4.... :crap:

 

most traders just love it simple.... or simpler...., or even better yet-simplest.... whatever anyone has to offer around here.... :missy:

 

seriously, i am afraid only a handful of traders on board would have any working idea as to what permutations are in terms of statistics, applications and implications to superior trading strategy and r/r management.... 3 cheers for your thought....

[russellhq 10]

Thanks rdhtci, I agree with a lot of what you say but I think you have misread my intention. I don't think anywhere in the thread I advocated/or anyone advocated trading profit/losses circa $1,000 with a $23,000 account.

 

The intention was to try and gauge the risk using a model I understand and can therefore accept, instead of blindly following someone that say's "Risk only 0.5% of your capital on an trade" or "You should consider losing X number of times in a row" to evaluate risk.

 

What I have found so far has genuinely interested me and I will continue my pursuit while taking all valid points on board.

 

 

Good trading!

[bobcollett 10]

Well, there you have it!

I have read all sorts of strange things on this thread.

From stops to no stops.

From controlled risk to unbounded risk.

And best of all , the low skill required in trading.Its mostly luck and money management.

Whether I have learnt anything remains to be seen.

But what I will say is there are a lot of traders working out how long they will stay in business , rather than looking for a nice entry , or better still, a lucky rabbits foot.

bobc

[nakachalet 10]

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.

 

it is easy to give a concrete example in roulette....

 

to lose 13 times in a row is not uncommon....

 

in any given night in reno or vegas, according to my aged memory, there were about 5 or 6 times or sometimes more.... that i would lose 13 times in a row, betting either with or against red/black, odds/evens, 0/00, or just any single number or multiple combination of numbers like most do.... et cetera.... :frustrated:

 

realistically, gamblers do not bet 1 unit, 1 unit and more 1 unit.... as example you used to illustrate your point to cover the bankroll of (MAXIMUM?) 13 possible losses.... there had also been many gamblers who sat down with 500 dollars betting 10 dollars minimum per hand.... and walked off the table within 30 minutes with zero sums.... however, i was luckier, i never stayed more than 30 minutes at any given table.... LOL

 

also as a trader, i stand a much better chance.... i can boldly and proudly boast to everyone that.... i never lose more then 4 trades consecutively.... and that is the fact, my friend.... on my fourth and last trade, if and when the market is not giving.... i just simply record that day as a statistical aberation and take my family out to PICNIC.... with the like of kim novak .... :o :shocked:

 

in my humble opinion, statistical analyses and applications are great and absolutely imperative to any serious traders.... however, i would also be very cautious when applying it to trading....!

 

there are several trading setups used for different products and market conditions, however, i would never consider mortgaging my rental unit when that same most favorable and profitable setup appears about twice or thrice a day.... NO, it is not that i do not have absolute confidence in my most profitable setup.... but rather.... i do not have the absolute confident that the similar market conditions would recur and present themselves in the exact same vengeance, volume and velocity et al again.... EVEN THOUGH STATISTICALLY IT CONFIRMS TO THE 99.99 LEVEL OF CONFIDENCE....! :doh:

 

many trading guru would encourage subscribers to add on to their profitable positions.... do it only if that adding on strategy in already personally researched out and well written out in your trading plan.... otherwise, just better stick to your humble but profitable trading plan and strategy.... is my one man opinion and experience.... thx for your time traders.... :missy:

Edited August 16, 2011 by nakachalet
too many typo.... it is sickening really....

[nakachalet 10]

Russel,

 

Trading is negative sum when you add in all costs. As a trader you have to to do significantly better than 1 to 1 in order to overcome the costs and the obstacles that you are pointing out to make it worth one's while. It is very difficult and leads many hedge fund managers to lying, cheating, and stealing to post quarterly returns that are better than returns that would be earned by the randomly chosen hedge fund.

 

MM

 

you are stating the facts.... as they are.... and i love that....

 

but most funds managers would unequivocally deny such obvious facts....

 

try to google.... prop traders.... :helloooo:

[nakachalet 10]

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.

 

Flipping a coin and it landing heads or tails is analogous to entering a trade and it going up or down.

 

may i beg to disagree, pls. this is where your brilliant mind errs enormously.... sorry....

 

for an experienced trader, to go long or short is NOT and IS NEVER.... a 50/50 chance occurrence.... like coin tossing which is always a 50/50, unless of course the coin is loaded....

 

for a profitable trader, before pulling the trigger, he/she already picks out the trade before the price is even getting to that point....

 

his/her selected trade does not occur at random, not at all.... the selected trade therefore is never a 50/50 chance occurrence.... do you see what i mean, russell?

whenever the profitable traders choose to trigger.... he/she choose the trade and price according to his/her pre-tested, pre-proven and pre-determined trading plan, statistics, strategy and r/r management.... which already constitutes tremendous trading edge....

 

imho, experienced traders' trigger is much more than a 50/50 chance occurrence.... rebutt if you like....

[nakachalet 10]

I don't remember asking what you make monthly. No individual has enough capital to trade forex without stops.

 

but mightymouse....

 

many supposedly trade forex without stops....

 

at least that is what they claim....

 

perhaps, most are brokers advising their acct holders that it is better to trade without stop.... so they can make more money, quicker and easier.... :crap:

 

really, in terms of reality, i do not really know who is right or who is wrong....

 

and not that i care much if anyone is trading any product with or without stops....

 

i can only say that i trade with only 9 tics stop and sometimes try to scale down to a 6 tics stop too.... lol YES, I USE STOP TO LIMIT MY RISK EXPOSURE FOR EACH AND EVERY TRADE.... AND I AM STILL HERE TRADING.... HAPPILY, PROFITABLY AND CONTINUOUSLY.... hopefully for many more years to come....

 

i guess it must be mighty exciting to go into any biz without knowing what the limit is going to be and what or how much you are personally responsible for.... yes, that is exciting.... for many.... :missy:

[nakachalet 10]

More than a couple of attempts have been made to set you free from the fallacy that flipping a coin is analogous to trading. Yet you cling on to it, for whatever reason.

 

Did you pay to learn that "fact" and don't want to waste your investment? Did you think it up yourself and it's become your pet notion?

 

You need to start thinking about trading as a game of SKILL.

 

 

But let me play along with the coin flipping game a bit.

 

In coin flipping, there are but two outcomes - heads or tails. In trading, there not two but three outcomes - profit, loss, or breakeven. Now, the smart yahoos reading this are thinking, "Well if commissions are counted, there is no breakeven." Like the market gives a shit about their commissions. Would the coin give a shit if you had to pay a small fee for every toss? The number of outcomes and the odds are the same.

 

Speaking of odds, what are the odds in trading for the 3 outcomes? Intuitively you know it's not 1/3, 1/3, 1/3. If that was intuitive, you would not have assumed trading has only two outcomes.

 

It turns out that the answer is very problematic. To be able to calculate odds, you have to be sure of the occurrence of actual outcomes.

 

In coin flipping, you flip and wait for the coin to settle on the ground and call heads or tails. The coin does not change from heads to tails a few seconds after you call it heads. In contrast, the market may flip back and forth, sometimes back again, before you call anything. Moreover, just because you "call" it, doesn't mean the market has stopped flipping; it continues to flip without you.

 

In other words, the "call" has no definitive meaning to the market. Thus, calculating trading outcomes based on calls is arbitrary.

 

The practical consequence is that for a lot of people they get to see that they're not the flipper but the flippee after their account is drained.

 

:haha: you deserve more than 3 cheers, but 3 is sufficiently statistical....

[nvr735i 10]

Guys,

All I can say is that trading without stops is almost a sure way of guaranteeing you will be wiped out at some point.I've done alot of research on this topic.In this thread i see the Gambler's Fallacy,prediction bias,confirmation bias etc...,.The big points you're missing in all this are that: 1) In real trading ,you can lose way more than $1 when making a trade(gap down,gap up,etc) and 2)it's not how many times you win or lose,it's how much you make when you win vs how much you lose.If your wins are multiple sizes larger than your losses, you will still make money even when your win percentage is substantially below your loss plercentage.If you look at guys like William Eckhart,Richard dennis,ed seykota,Jim simmons,Louis Bacon,Paul Tudor Jones,they've stated publicly that they are only right about 35% of the time.However,if you look at their track record(really long ones!)

they have never remotely come close to ruin.They have all attributed this to risk management.(Trading with predetermined exits)Just build a system that over the long term has a positive expectation and risk amounts per trade that will make you money but

always keep you alive to trade the next day.This is only my humble opinion.i hope it helps.

[nakachalet 10]

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.

 

It seems that the smaller the account size, the higher the risk a trader takes.

 

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.

 

The focus should be on how to minimise risk,

 

However pretty the outcome looks on paper, you have to travel the whole road to get there, including trading through the drawdowns.

 

i'll drink a glass of oj to what you said above.... you are apparently another noted trader to be reckoned with.... :applaud: :applaud: :applaud:

[rdhtci 10]

Nakachalet -- glad you agree, thanks for commenting.

 

Guys,

...If you look at guys like William Eckhart,Richard dennis,ed seykota,Jim simmons,Louis Bacon,Paul Tudor Jones,they've stated publicly that they are only right about 35% of the time.However,if you look at their track record(really long ones!) they have never remotely come close to ruin.They have all attributed this to risk management.(Trading with predetermined exits)

 

...Just build a system that over the long term has a positive expectation and risk amounts per trade that will make you money but always keep you alive to trade the next day.This is only my humble opinion.i hope it helps.

 

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.