About compounding (did I get it right?)

[alphahavoc]

Obviously position-size depends on expectancy.

Expectantcy is hocus pocus! I do not think it is an accurate way determine position size.
Steps for developing expectancy

1. Calculate your win and loss ratio
2. Calculate your reward to risk ratio
3. Combine those two ratios into an expectancy ratio
   The standard deviation for risk reward ratio is simply too wide. At least it is so for my style of trading.
   Let me guess what you are saying. Are we talking about a fix mechanical technical analysis method of trading here? A fix mechanical method will never work. Only a discretional trader with survive in the long run, because they are adaptable.

You’re confusing “margin” with “position-size”.

Isn’t it the same? Utilising a larger margin doesn’t that mean my position-size is obviously larger?

In case i get FLAGGED! again for taking this topic too far off. Anyway, I will get back to the main topic now.

I must admit i didn’t really look at the chart posted, cause i was quite switch off when i see the word compounding. I have just scrutinised it, and the following is what i think.

With compounding,
40% winrate, RR 1, after 60 trades balance $152 or busted (i consider $10 balance as busted).
50% winrate, RR 1, after 60 trades balance $647 or busted (balance $21)
60% winrate, RR 1, after 60 trades balance $2751 or busted (balance $46)

Let me tell you what’s wrong with this chart. It seems quite ordinary and doesn’t seem wrong. What’s wrong my perspective is what is MISSING in the chart. What is the probability that you get all losing trades first. That’s what is missing. How do you compute that.

And poppycock to the bunkum who flagged me. As if i posted something heinous.

[anon25005637]

Are we talking about a fix mechanical technical analysis method of trading here?

I’m not, anyway.

I try to orient my comments in this forum to the typical people the forum seems to be here for: spot forex traders without much experience who are trading against counterparties (often while believing that they’re trading in some kind of “real market”) and depending mostly on the web for their education.

A fix mechanical method will never work. Only a discretional trader with survive in the long run, because they are adaptable.

We found something about which we more or less agree, in principle, in this context at least.

Expectantcy is hocus pocus

The fact that you think that, and the fact that you think margin is the same thing as position-size, are the main reasons why I don’t propose to discuss it with you any more.

I agree with RISKonFX’s comment to you that you should have a little think about what you’re saying, because it’s rather distracting and misleading for newbies who are here to learn.

[anon88459104]

@Quickly

That’s right, but it’s better than the alternative, which is to increase your position-size during a losing run (and that’s what happens, in real terms, if you don’t “compound down” as you’ve put it).

It’s so simple: either you’re risking level stakes, with every risk being proportional to its expectancy (which means you compound after every trade, up or down), or you’re not.

If you are, then you need to do so in both directions.

This is the thought process that took me a long time to evaluate, however if you do have positive expectancy, which is a ‘statistic’ by the way, then you can take the additional risk to only ever compound up and use straight line percentage trading while in a loosing run - it does of course all come down to the risk appetite of the person trading the system and a thorougher understanding of your expected draw-down levels, a balancing act of sorts?

It’s worth mentioning that this approach works far more effectively when using 1:2 risk to reward or higher on all trades (rather than 1:1 as discussed above) - akin to my own trading. For that reason, my own personal choice has always been to only compound up at each month end period and utilize straight line percentage trading during the month in question. You’re also absolutely right in saying that this may mean inflated position sizes during a loosing run, however this has been evaluated in detail from past performance over an extended sample size - as ever with speculating, this is a game of probabilities and not predictions.

I’ve posted this image before, but a real example of how to evaluate the risk of compounding vs expected draw-down levels and the associated probability of occurrence - this is my own workings for my own trading system.

[alphahavoc]

Maybe there’s a misunderstanding. Is it possible you and the rest of us have different ideas of what “compounding” means.

To me it means adding the gain or loss from each trade to the account value, so that although the percentage of account risked per trade, the actual amount risked in money terms is constantly being adjusted.

Do you think compounding means this? Or do you think compounding means adding to a live trade? (though I would call that pyramiding if its in the money and doubling down or averaging down if its a loser)

No, i don’t think compounding means adding to live trade or pyramiding. I know in compounding the actual risked in money terms is constantly being adjusted. In reality, is compounding really executable at all? I tried compounding before, when i get a serie of losses. i snapped. When i look at the ROI after a month. I felt its a waste of my time.

Perhaps, i think my style of trading does not work with compounding well. I forget the fact there may be others who are able to incorporate compounding into their trading well. In short, i do know how to do it. I guess i better leave this thread quickly. What a mess i got myself into.

[anon25005637]

if you do have positive expectancy, which is a ‘statistic’ by the way, then you can take the additional risk to only ever compound up and use straight line percentage trading while in a loosing run

You CAN, of course - but in my opinion it’s a terrible idea.

It’s also something beginner traders tend to do without even realising that they’re actually increasing their risk while losing, and without even realising why that matters so much.

Until they experience their first disaster.

It’s worth mentioning that this approach works far more effectively when using 1:2 risk to reward or higher on all trades (rather than 1:1 as discussed above) - akin to my own trading.

That provides a different context for it and makes it perhaps “less bad”, even though it’s still increasing risk when losing.

Real beginners need a high win rate, don’t they? Otherwise they’ll struggle with losing runs and position-sizing. So they perhaps don’t need your R:R?

[anon88459104]

You CAN, of course - but in my opinion it’s a terrible idea.

I agree with you - from a new traders prospective, and in hindsight it’s not something that I would advocate as ‘correct’. However, when you pass the threshold of newbie to experienced I really think you can start to roll your sleeves up and start to play around with the underlying risk factors - the issue being that you really do need to back this up from a number point of view and work out if it is actually beneficial in the long run and not just for a shot term gain.

[anon25005637]

However, when you pass the threshold of newbie to experienced I really think you can start to roll your sleeves up and start to play around with the underlying risk factors - the issue being that you really do need to back this up from a number point of view and work out if it is actually beneficial in the long run and not just for a shot term gain.

Yes, I agree with you there.

[anon88459104]

It’s ok, that was myself - but all water under the bridge (the post was off topic, and this is a good area to discuss the various degrees of compounding, nothing personal)

Now lets all have a fantastic weekend and enjoy!

[NormanA]

COMPOUNDING CALCULATOR

Hi Everyone,

I found this great Forex Compounding Calculator online. It will compound a winning series and a losing series. To compound a losing series, just put a minus in front of the percentage per month, for example, “-1.” here it is: Forex21 | Forex Compounding Calculator

Have fun,
Norm