Risk of Ruin Discussion

[BlowFish 10]

A quick note on trend following. If you have a feel for RoR you will see that having a low number of % winners has a large effect on draw down and RoR. This means you need a large account to size properly. This is one of the main reasons it is not suitable for many. Oh, that and the fact that many trend followers will want to trade multiple instruments (with varying bet sizes in each) to help smooth the week to week equity curve.

[russellhq 10]

Hi BlowFish, I demonstrated this effect on the chart I posted earlier.

 

Over 100 trades, and a RoR of 1 in 10,000, a break even trader who's trades win only 1 time out of 5 would have to account for 89 losses. Whereas a break even trader who's trades win 4 times out of 5 would only need to account for 20 losses.

 

This is wholly down to the variance a few wins have vs what lots of wins have.

[BlowFish 10]

Right, coin toss is a too simplified and useless model to make reference to.

A more useful model could be the GBM with mean reversion, and then one could just start making some sense,...

 

No one is using a 'coin toss' as a 'model'. The original poster was simply working through some ideas. To do this he decided to hold a couple of variables constant... outcome (50%) win (1 unit) loss (1 unit). At some stage of course he will need to untether those variables. There are only a handful of variable in a RoR calculation and it is quite valid to hold those constant while you worth things out from the start.

 

Why don't you start a thread 'GBM for modelling risk'? So far in this thread we have not talked about modelling risk which is a different game. As an aside, the last time I sat in a room with a bunch of quants and asked 'forgive my naivety but isn't Monte Carlo simulation good enough?' The short answer was unequivocal, 'yes, it is'. Incidentally just looking at that GBM page you linked and it seemed flawed to me (though it's at about the edge of my maths ability).

 

For anyone that is not so easily seduced by tecnobabble here is a good site that explains basic RoR principle in a clear and straightforward manner. TradersCALM - risk of ruin menu

[russellhq 10]

Thanks BlowFish, that is exactly what I am doing. The coin toss example helped me move from a "string of losses" based approach of risk management (which severely underestimates risk) to a "drunkards walk" based approach.

 

I read your link and I believe (and have shown) that the series of losses argument is flawed.

 

The article you posted suggest that with a bank of $100, and betting $10 on a coin flip, there is 1 in 1000 change of going broke due to 10 losses in a row. I have show that if you started with $100 and bet $10, the chances of you going broke after 100 bets is 1 in 44! Which is far more likely that 1 in 1000 (we can discuss this further if you wish).

 

I have tried to move the discussion forward from the coin toss example to closer to reality here:

 

http://www.traderslaboratory.com/forums/money-management/10553-risk-ruin-discussion-2.html#post125713

 

I asked for real world examples to run in monte carlo but I've so far not had any takers.

 

I intend to add to the simulation the effect of a varying win value e.g. some systems have a tight grouping of your win amount whereas some systems have quite a wide spread e.g. many small wins and a few big wins. But before I did that, I wanted to start with a simple example before moving to the more complex stuff.

[nvr735i 10]

A quick note on trend following. If you have a feel for RoR you will see that having a low number of % winners has a large effect on draw down and RoR. This means you need a large account to size properly. This is one of the main reasons it is not suitable for many. Oh, that and the fact that many trend followers will want to trade multiple instruments (with varying bet sizes in each) to help smooth the week to week equity curve.

 

Hi BlowFish,

It's true that having a low number of% winners effects drawdown and RoR.However,it doesn't necessarily mean you need a large account to size properly,nor does it mean you have to trade multiple instruments,although preferable for non correlation purposes.The drawdown will be contingent on what percentage risk per position you use.If i risk .1% on a position and lose 89 times in a row, i would only have a single digit drawdown!As far as having a large account,

that depends on what instruments you are trading.If you trading futures,I agree.if you're trading equities or options(properly!) you don't have to have a very large account.I read your link and agreed with all but the argument of perceived risk with the 2 systems.A person should be trading mechanically for the exact purpose of avoiding emotions and being disciplined in their trading.Why the heck would i trade a lower expectancy system if i'm aware of the fact that

i will have significantly more strings of losses?The trader in the article is looking at the maximum end of position risk to make his argument.Why would i accept a reward to risk ratio of.50 vs. 1.1? Couldn't I bet $1 instead of $3 so that my drawdown will be much lower and i still get the higher expectancy over time.What if my system generates 3 times the amount of trades than system A does over the same time frame?That would be the equivalent of trading the maximum of 3 dollars to get the highest return with a much lower RoR.If the statement is that emotionally

it would be very hard for a trader to keep trading the system when in a drawdown,then he shouldn't trade it ,regardless of the expectancy.But if that system could be traded as i stated above where the drawdown would be comfortable with a much greater expectancy,then you should trade it.I agree with the overall premise of finding a trading system that fits you as a person.But the 1 critical factor being left out of that interview is what am I looking for as an acceptable rate of return?Why is it always assumed that we want to trade at the absolute limit

to get the gigantic return?If a system at the max makes 50% a year with a max drawdown of60%,can i trade it at a risk size that makes me 12% a year with a 14.5% drawdown?When building a system,it is critical to consider risk of ruin.But remember that RoR is subjective and

the first thing to consider is what i am looking for as an acceptable rate of return.My risk of ruin

could be i don't want to lose more than 20% of my account value versus yours being you don't want to lose more than 50% of your account.Just food for thought.

[russellhq 10]

Hi nvr735i, I agree with limiting losses to only a fraction of your bank. To do this, you don't need to tinker with the parameters of the system. But simply set set your bank to be 20% of your account. So you would still make your 50% a year, but it would be 50% against 20% of your account, not your full account.

 

Could you expand your thoughts on why you would need a large account to trade futures?

[nvr735i 10]

Hi nvr735i, I agree with limiting losses to only a fraction of your bank. To do this, you don't need to tinker with the parameters of the system. But simply set set your bank to be 20% of your account. So you would still make your 50% a year, but it would be 50% against 20% of your account, not your full account.

 

Could you expand your thoughts on why you would need a large account to trade futures?

 

Yes.THe first reason is that the margin requirements on some futures contracts can be substantial so it may exceed the amount of capital you have available,so you would not be able to trade certain markets.Or when sizing for risk ,you might not even be able to trade 1 contract if you size for volatility.These factors would prohibit you from having the diversification and non correlation that you should have when trading futures contracts using a trend following methodology.

[rdhtci 10]

...why you would need a large account to trade futures?

 

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.

[gosu 10]

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.

 

Amigo, these little math problems have little connection to actually trading the index futures which is something I know just a bit about as they are the only things I trade.

 

$20,000 is more than enough to trade a contract of ES. Of course not in the way you describe. Only an idiot would trade that way. Just like only an idiot would trade one contract on a $300,000 account.

 

Do you understand that the index futures are a leveraged market? The current overnight initial margin on the ES is $5000. Most brokers allow intraday initial at half of that, some even much lower.

 

Can you understand that people with skill want to use leverage?

 

Can you see the possibility that there are people out there beyond your limited experience who do not trade the ES according to these silly math problems you invent?

 

Until this thread, I had no idea there was such a thing as a risk of ruin calculation in trading. LOL... Would I have made my first million faster knowing it? I doubt it.

 

I would be interested to know who was the first yahoo who applied it to trading? Sounds like some guy who failed at it and then went to invent something to sell to others to get his money back.

[nvr735i 10]

Amigo, these little math problems have little connection to actually trading the index futures which is something I know just a bit about as they are the only things I trade.

 

$20,000 is more than enough to trade a contract of ES. Of course not in the way you describe. Only an idiot would trade that way. Just like only an idiot would trade one contract on a $300,000 account.

 

Do you understand that the index futures are a leveraged market? The current overnight initial margin on the ES is $5000. Most brokers allow intraday initial at half of that, some even much lower.

 

Can you understand that people with skill want to use leverage?

 

Can you see the possibility that there are people out there beyond your limited experience who do not trade the ES according to these silly math problems you invent?

 

Until this thread, I had no idea there was such a thing as a risk of ruin calculation in trading. LOL... Would I have made my first million faster knowing it? I doubt it.

 

I would be interested to know who was the first yahoo who applied it to trading? Sounds like some guy who failed at it and then went to invent something to sell to others to get his money back.

 

Amigo,

I understand the futures markets very well,as I am a licensed futures trader as well as securities trader of many financial instruments for a major institution.That silly little math problem you referred to has been used by Ed Seykota,William Eckhart,Richard Dennis,paul Tudor Jones,Michael Marcus,JohnHenry and Louis to name a few.When you can show me

your documented records that rival their returns,then i'll be happy to listen to you.As to my experience,i have been trading over 30 years and am still around so I think i might have some idea of how the whole thing works.Your example,unfortunately fails significantly at making your case.No,according to someone who trades their system properly,you CAN'T trade ES

because 1% of $20,000 is $200.The $3000 loss exceeds his parameters for risk so he is

PROHIBITED from trading it,if he's true to his system.You should have stopped there.Many people with SIGNIFICANT accounts have securites that are eliminated from their basket

for that very reason.It DOESN'T mean they can't trade at all.Who says I have to trade ES

to trade successfully?I could pick something else to trade that would fit my parameters

easily.I guess I and all the traders I mentioned above are idiots according to you,because that's how they trade!You must have over 10 Billion Dollars to call Ed Seykota or Louis Bacon an idiot.That silly math problem has kept them still trading as well.Who says that anyone would trade only 1 contract in an account as stated above.My statement was that you can trade a smaller account using trend following depending on what you trade.Who are you to say what or how a person should trade?I gave a simplified example of how someone could trade to avoid RoR.When did I say that this was the optimal way to trade?As to your comment about skill and not using silly little formulas ,that tells me that you have an ego and that you're probably trading aggressively.Us silly little quants don't say we have skill,we just were fortunate to have had a favorable probability outcome on our trade.You keep trading according to your skill and i'll keep trading according to my silly little formula.I never said my way was great and yours idiotic.I suggest you have the courtesy to do the same for me and anyone else who tries to help others have enough knowledge to make an informed decision

on how they want to trade.Lastly, I suggest you read the book "Market Wizards" by Jack Schwager and focus on the chapter about Larry Hite,the "IDIOT" who NEVER RISKS MORE

THAN 1% ON ANY TRADE,and has averaged 30% A YEAR,had annual returns of a WORST +13% to a BEST +60%,whose largest loss in any 6 month period was ONLY 15%, and UNDER 1% in ANY12 MONTH PERIOD.(NOT JUST CALENDER YEARS!) and then come back and try make your argument about"SILLY LITTLE FORMULAS" again! If you can do better than that with your SKILL,let me know........

[nvr735i 10]

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.

 

By the way,If you think your examples are extremely conservative by risk standards,I wish you well but you may want to think again...............:crap:

[nvr735i 10]

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.

 

Bt the way rdhtci,my comment about trading conservatively was not directed at you.It was directed at Gosu.In fact,my whole response earlier was to his comments on trading ES in response to you.Sorry if I indicated otherwise.

Edited August 22, 2011 by nvr735i

[gosu 10]

Amigo,

I understand the futures markets very well,as I am a licensed futures trader as well as securities trader of many financial instruments for a major institution.That silly little math problem you referred to has been used by Ed Seykota,William Eckhart,Richard Dennis,paul Tudor Jones,Michael Marcus,JohnHenry and Louis to name a few.When you can show me

your documented records that rival their returns,then i'll be happy to listen to you.As to my experience,i have been trading over 30 years and am still around so I think i might have some idea of how the whole thing works.Your example,unfortunately fails significantly at making your case.No,according to someone who trades their system properly,you CAN'T trade ES

because 1% of $20,000 is $200.The $3000 loss exceeds his parameters for risk so he is

PROHIBITED from trading it,if he's true to his system.You should have stopped there.Many people with SIGNIFICANT accounts have securites that are eliminated from their basket

for that very reason.It DOESN'T mean they can't trade at all.Who says I have to trade ES

to trade successfully?I could pick something else to trade that would fit my parameters

easily.I guess I and all the traders I mentioned above are idiots according to you,because that's how they trade!You must have over 10 Billion Dollars to call Ed Seykota or Louis Bacon an idiot.That silly math problem has kept them still trading as well.Who says that anyone would trade only 1 contract in an account as stated above.My statement was that you can trade a smaller account using trend following depending on what you trade.Who are you to say what or how a person should trade?I gave a simplified example of how someone could trade to avoid RoR.When did I say that this was the optimal way to trade?As to your comment about skill and not using silly little formulas ,that tells me that you have an ego and that you're probably trading aggressively.Us silly little quants don't say we have skill,we just were fortunate to have had a favorable probability outcome on our trade.You keep trading according to your skill and i'll keep trading according to my silly little formula.I never said my way was great and yours idiotic.I suggest you have the courtesy to do the same for me and anyone else who tries to help others have enough knowledge to make an informed decision

on how they want to trade.Lastly, I suggest you read the book "Market Wizards" by Jack Schwager and focus on the chapter about Larry Hite,the "IDIOT" who NEVER RISKS MORE

THAN 1% ON ANY TRADE,and has averaged 30% A YEAR,had annual returns of a WORST +13% to a BEST +60%,whose largest loss in any 6 month period was ONLY 15%, and UNDER 1% in ANY12 MONTH PERIOD.(NOT JUST CALENDER YEARS!) and then come back and try make your argument about"SILLY LITTLE FORMULAS" again! If you can do better than that with your SKILL,let me know........

 

I could not get through your post after the first part. I get that you disagree with my comments, so let's leave it at that.

 

I stand by what I said.

 

Cheers.

[rdhtci 10]

Bt the way rdhtci,my comment about trading conservatively was not directed at you.It was directed at Gosu.In fact,my whole response earlier was to his comments on trading ES in response to you.Sorry if I indicated otherwise.

 

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

Edited August 22, 2011 by MadMarketScientist
no personal attacks please

[rdhtci 10]

Amigo, these little math problems have little connection to actually trading the index futures which is something I know just a bit about as they are the only things I trade.

 

$20,000 is more than enough to trade a contract of ES. Of course not in the way you describe. Only an idiot would trade that way. Just like only an idiot would trade one contract on a $300,000 account.

 

Do you understand that the index futures are a leveraged market? The current overnight initial margin on the ES is $5000. Most brokers allow intraday initial at half of that, some even much lower.

 

Can you understand that people with skill want to use leverage?

 

Can you see the possibility that there are people out there beyond your limited experience who do not trade the ES according to these silly math problems you invent?

 

Until this thread, I had no idea there was such a thing as a risk of ruin calculation in trading. LOL... Would I have made my first million faster knowing it? I doubt it.

 

I would be interested to know who was the first yahoo who applied it to trading? Sounds like some guy who failed at it and then went to invent something to sell to others to get his money back.

 

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.

[Do Or Die 10]

Hi Nvr735i,

 

I read few recent pages and also the controversy. I had a similar article where newbies startes accusing me of being losing trader.

 

The problem is that media, brokers, tip sellers and trading system sellers (now that's most of the financial services industry ) propagate illusions for 'get rich quick'. Most people are simple not able to get hold of the risk involved.

[MightyMouse 12]

I have made many posts regarding risk, trading results, and expectations and the responses have been similar to the responses you would get if you told a gathering of followers that there is no god.

 

Some of the names that have been mentioned on this thread are masters at promoting themselves and have attracted large sums of money on which they made their fortunes.

 

When you look closely they engage in gamesmanship to ensure that they have a fund that still has a high rate of return. Gamesmanship means splitting a fund into good assets and bad assets and making excuses about the fund with the bad assets.

 

They have survived so long not because they remain as the best traders, but because they know how to promote themselves.

 

It is all about the fees.

[nvr735i 10]

Hey, nvr, thanks for clarifying, but no problem -- I got it. You were replying to the one with the big mouth.

 

glad you understood! stay well..

[nvr735i 10]

I have made many posts regarding risk, trading results, and expectations and the responses have been similar to the responses you would get if you told a gathering of followers that there is no god.

 

Some of the names that have been mentioned on this thread are masters at promoting themselves and have attracted large sums of money on which they made their fortunes.

 

When you look closely they engage in gamesmanship to ensure that they have a fund that still has a high rate of return. Gamesmanship means splitting a fund into good assets and bad assets and making excuses about the fund with the bad assets.

 

They have survived so long not because they remain as the best traders, but because they know how to promote themselves.

 

It is all about the fees.

 

Actually that's not the case.Only 1 or 2 managers did that in 2008 for liquidity purposes.Paul Tudor Jones was flat in 2008 as the market fell apart,but investors had to draw on his fund because it was the only source of liquidity that wasn't destroyed.In order not to be forced into selling illiquid assets at a ridiculous price,He separated a small piece of his fund into a separate account to keep the investment intact.If you look at his performance before 2008 and after,his numbers are stellar.It's sad that people who can't accept the fact that someone does a great job, must make negative comments with no evidence to support them in order to make themselves feel better.These are people to learn and improve from.I highly doubt that any of the people i mentioned need fees to survive since they are all centimillionaires or billionaires!

[russellhq 10]

Right, coin toss is a too simplified and useless model to make reference to.

A more useful model could be the GBM with mean reversion, and then one could just start making some sense, at least with the precaution to test the strat with **different volatility** levels (as mkt as a non-costant volatility obviously):

 

ModelAssist for ModelRisk

 

Algorithmic trading stretches much beyond a naive immagination can reach. There are ways to "overlay" different strategies (for instance a trender against a countertrender) in such a way that one strategy "protects" the other one, and both run without stops. There is also the concept of "artificial option", a conceptual device created using the folio instruments. No need to say that this is much better, and can be proved experimentally, than attempting to use stops at single trade level, which is an absolutely sure way to leave all the money in the mkt, in the long run (i am talking of algorithms). As said, smart traders can still trade with stops and survive a little longer (sometimes more than their lifetime), due to a better choice of high probability "trades" (news processing, past experience, instinct, understanding of international economy, local high/low perception, etc.).

 

Tom

 

Tom, I've been reading the link you posted and found it very interesting but I don't know what makes you think it relates to money management. GBM with mean reversion is a strategy for predicting the price movement of a stock. And if you used it to predict the evolution of your bank, I think you would be disappointed with the results!

 

I started this thread hoping to see well laid out plans for money management, for instance a system with properties x, y & z has a Risk of Ruin, R based on M% of your bank risked per trade.

 

Instead I got a little bit of insight overwhelmed with squabbling, waffling and bragging.

[gosu 10]

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.

 

Thanks for the rewrite. I read it through and enjoyed it. Obviously I pushed a button not only with you because I got a PM from the owner referencing my post to you to be nicer.

 

So let me try.

 

If you've gotten rich off trading futures, that's great for you. It was a long journey for me with a lot of heartaches and setbacks. I had made a bundle with stocks at a daytrading firm I traded from but the tech crash and going to penny increments pretty much killed that golden goose.

 

I transitioned to index futures and thought it wouldn't be all that different. But trading futures was something else. I blew through 2 accounts, the first one pretty sizable. I funded the last account with $10,000 and started with 1 contract.

 

I had a goal of getting to a million with futures and thought that would be the moment when I would never look back. In actuality, it was much sooner than that. It was when I got to 5 contracts ES and dwelled there for a long while. That was over 8 years ago and I've only been taking money out since.

 

Now, you might be so far ahead of me that you sneeze at a million. For me, it's a great year. I've reached it only twice trading futures, including this year. And to be honest, I feel pretty good about it. You might accuse me of bragging again, and maybe I am. My main point is that I've never had to set up math problems and figure risk or return or whatever else to get there. But I'm always looking to improve. So if you're as good as you imply in your post, I'll be sure to watch out for your posts going forward. Maybe I'll learn something and have a 10 million dollar year some day.

 

Cheers.

[Ingot54 13]

Maybe I'll learn something and have a 10 million dollar year some day.

 

Cheers.

Incredible post!

Absolutely revealing.

[nvr735i 10]

Thanks for the rewrite. I read it through and enjoyed it. Obviously I pushed a button not only with you because I got a PM from the owner referencing my post to you to be nicer.

 

So let me try.

 

If you've gotten rich off trading futures, that's great for you. It was a long journey for me with a lot of heartaches and setbacks. I had made a bundle with stocks at a daytrading firm I traded from but the tech crash and going to penny increments pretty much killed that golden goose.

 

I transitioned to index futures and thought it wouldn't be all that different. But trading futures was something else. I blew through 2 accounts, the first one pretty sizable. I funded the last account with $10,000 and started with 1 contract.

 

I had a goal of getting to a million with futures and thought that would be the moment when I would never look back. In actuality, it was much sooner than that. It was when I got to 5 contracts ES and dwelled there for a long while. That was over 8 years ago and I've only been taking money out since.

 

Now, you might be so far ahead of me that you sneeze at a million. For me, it's a great year. I've reached it only twice trading futures, including this year. And to be honest, I feel pretty good about it. You might accuse me of bragging again, and maybe I am. My main point is that I've never had to set up math problems and figure risk or return or whatever else to get there. But I'm always looking to improve. So if you're as good as you imply in your post, I'll be sure to watch out for your posts going forward. Maybe I'll learn something and have a 10 million dollar year some day.

 

Cheers.

 

MUCH BETTER post!Just remember that no one here is saying the road thay took to

do well as a trader is the ONLY road to take.There are many ways to get to the same goal.All we try to do is be open-minded because everytime I thought I knew all I needed

to know about trading,I learned something more that helped open my eyes to greater possibilities.Then,I would look back at what i thought I knew ,and realized I knew almost nothing in comparison to what I had just learned.I'm sure my learning isn't over by any means!I'm sure there's much more to know.That's why although I may not agree with someone's opinions on trading,i still respect what they have to say.It's not about being

better than you or anyone else.i KNOW there are people who are vastly superior to me financially and in their trading record.It's about being the best that I can be and sharing information that might help somebody else along.That's why we're all here,in my opinion.

Good Luck to you!

[nvr735i 10]

Hi Nvr735i,

 

I read few recent pages and also the controversy. I had a similar article where newbies startes accusing me of being losing trader.

 

The problem is that media, brokers, tip sellers and trading system sellers (now that's most of the financial services industry ) propagate illusions for 'get rich quick'. Most people are simple not able to get hold of the risk involved.

 

Unfortunately,that's very true.You have to keep the seats filled in the casino to make money.It's sad that in reality the average investor doesn't really have a shot by following the buy and hold mantra being regurgitated constantly by the industry.I understand the skepticism and disgust that i read in many of these postsThat's why forums like this are needed more than ever.

[rdhtci 10]

Thanks for the rewrite. I read it through and enjoyed it. Obviously I pushed a button not only with you because I got a PM from the owner referencing my post to you to be nicer.

 

So let me try.

 

If you've gotten rich off trading futures, that's great for you. It was a long journey for me with a lot of heartaches and setbacks. I had made a bundle with stocks at a daytrading firm I traded from but the tech crash and going to penny increments pretty much killed that golden goose.

 

I transitioned to index futures and thought it wouldn't be all that different. But trading futures was something else. I blew through 2 accounts, the first one pretty sizable. I funded the last account with $10,000 and started with 1 contract.

 

I had a goal of getting to a million with futures and thought that would be the moment when I would never look back. In actuality, it was much sooner than that. It was when I got to 5 contracts ES and dwelled there for a long while. That was over 8 years ago and I've only been taking money out since.

 

Now, you might be so far ahead of me that you sneeze at a million. For me, it's a great year. I've reached it only twice trading futures, including this year. And to be honest, I feel pretty good about it. You might accuse me of bragging again, and maybe I am. My main point is that I've never had to set up math problems and figure risk or return or whatever else to get there. But I'm always looking to improve. So if you're as good as you imply in your post, I'll be sure to watch out for your posts going forward. Maybe I'll learn something and have a 10 million dollar year some day.

 

Cheers.

 

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...