Sorry, what is jaded sir?. I do not know it.
A person is ājadedā when they stop caring, when they become bored. They are worn out and no longer enthused. I think he was jaded when it came to discussion in the forum.
-Adrian
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In my opinion, one thing that is over looked here is, %risk vs %gain. One may lose 20 trades in a row risking 1%, making it 20% loss but could achieve break even if for every winner, the trader grabs 2%ā¦ This means in just 10 winners, the account is even, furthermore a trader could even get to break even if his reward is 3% or 4% winner per tradeā¦ It all depends on your Loss vs Winner ratio
And that is certainly understood. Long term trend following does exactly that: it cuts losses at small percentages and allows winners to ride to big percentages. And that is what I was getting at when I was saying that we do not know what the winners will look like. We can get past data, but the future can be very different. So if we bring some assumption about the future winners into the equation we will most likely either underestimate the winners and risk too little or overestimate the winners and risk too much. So the question then is what to do. Obviously we want to err on the safe side (risk too little rather than too much). But how do we go about this exactly?
-Adrian
[QUOTE/ So the question then is what to do. Obviously we want to err on the safe side (risk too little rather than too much). But how do we go about this exactly? -Adrian
In my opinion the aspect of risk/reward is more of a science than art as you can calculate the percentage of risk you want to take and corresponding percentage of reward you require to grow your account in line with your assumptions.
However, the question āwhat to do?ā relates to the strategy to execute your trades and that in my opinion is more of an art than science. Not every winner is going to achieve your preset targets of risk/reward ratios of say 1:3 or 1:5 etc. What if your preset target is 1:4 and the trade goes in your favour to reach 1:3 and then starts to turn around. What do you do at this time? Let the trade play out itās course and turn around to hit your Stop Loss or take your profits short of your preset target of 1:4?
This is where it becomes important to be flexible and treat your trading execution strategy like an art, where you make decisions based on current situation to achieve maximum benefits. I personally use few strategies to maximize my gains by either setting a trailing StopLoss and let the trade run itās course or follow the fibs levels to set my StopLoss manually from level to level when the trade is going in my favour.
The best thing to do is get comfortable in executing your trade strategies so that you can compare it to your driving skills where you make decisions based on situations being presented to you while driving to your destination (comparable to achieving your TakeProfit) and at the same time you try and stay away from getting into accidents by staying a safe distance from other vehicles (comparable to your StopLoss). Also at the same time you follow all the rules of the road (comparable to following your Business Plan).
If you can be comfortable in executing your trade strategies like driving a car then surely you can be on the path to success in trading. Just think of how many times you got into accidents while driving versus how many times you reached your destination safely - while driving through all the traffic chaos, rush hour traffic, road conditions, weather conditions, road blockages that make you change your route etc.
Happy Trading to all.
What are your position sizing rules?
-Adrian
Personally, I risk 0.5 to 1.2% per trade as against 1-3% profitā¦but like pilot clearly stated, most times I Mk just 1% bcos as soon as I hit 1%, I ensure I manually stop losses to trail my profits especially when am going an important support or resistance
And how big is your pip distance on average?
-Adrian
On average, my pip distance is about 50-70 Pips
So, on the high end of your range, if you risk 1.2% with a 50 pip stop in say EUR/USD at around 1.0800 then you win/lose 1.2% on a 46 basis point move in the pair. A fifty pip move from 1.0800 is 46 basis points (50/10800=0.00462962). In other words, your position size causes you to win/lose more percent on your account than the pair moves. If a sudden SNB-like crisis struck the pair and it lost 20% (USD/CHF moved 19% on Jan 15) you would lose 52% of your account on that ONE trade.
On the low end of your range, if you risk 50 basis points (0.50%) with a 70 pip stop in EUR/USD at around 1.0800 then you win/lose 50 basis points on a 65 basis point move in the pair. A seventy pip move from 1.0800 is 65 basis points (70/10800=0.00648148). In other words, your position size will win/lose less percent on your account than the pair moves. If a sudden SNB-like crisis struck the pair and it lost 20% you would lose 15.43% of your account.
I am thinking that we should never put on a position big enough to lose our account more percent than one pair moves. Suppose I was long EUR/USD with a 50 pip stop risking 1.2% and news came out that caused the euro to go 40% down to 43.2 cents (0.4320). My account would be negative.
I am thinking we should not risk a position big enough for us to lose a greater percentage of our account than the move against us in a single pair or currency. You see?
-Adrian
lolā¦lolā¦:60:ā¦dis is rocket science bro, dunno about that, though my risk reward ratio and my always ensuring my good trades are better than bad trades is working out for meā¦ However, I will try and ponder on your analysisā¦ Thank you:59: and TGIF
Events like 40% drop in an instant are extremely rare but never the less they do happen. However, comparing to the driving analogy, fatal road accidents do happen more frequently than the 40% drop in a currency, and yet we all continue to drive on a daily basis. The world will come to a stand still if we all feared the extremely rare events while doing our day to day activities.
So is the case with trading. No doubt that extreme events can and will happen, but we still need to continue with our trading plans accounting for the normal events and managing our risks to a level that makes us feel comfortable. The comfort level will vary from person to person and thatās what is referred to your personal trading business plan.
Happy Trading to all.
Exactly. And I think the way to do it is to spread risk across currencies rather than bundle it up into one. A person with a 10,000 unit account trading 100,000 units in AUD/JPY will avoid a sudden 40% black swan in the euro or the franc but will be destroyed if one should arise it the aussie or the yen.
Someone trading that size would only be leveraged 10 to 1. Currently a 40% move in AUD/JPY would be 3600 pips, 100,000 units would lose over $30,000 on a 3600 pip move. It would only take a 13% move in the AUD/JPY to wipe that trader out completely.
That same trader could put on:
EUR/USD 10,000
USD/CAD 10,000
NZD/AUD 10,000
CHF/JPY 10,000
EUR/GBP 10,000
CAD/CHF 10,000
AUD/JPY 10,000
GBP/NZD 10,000
USD/CNH 10,000
EUR/JPY 10,000
That would leverage him 10 to 1 and he could earn just as much that way as he could with a 100,000 position in AUD/JPY, perhaps more. But a 13% move in the euro, dollar, or yen (the three that has the most exposure to) would be severe, as much as 40% of his account but he could survive it. Even with this level of diversification he could be wiped out by a 40% move in the dollar. But a 40% move in the Yuan would put his account down less than 50% (bad, but survivable). A 20% move in the loonie or the aussie would put his account down 45%.
Even with that level of diversification a black swan could kill him. So I think diversification and limited deposits on account with dealers are BOTH necessary to prevent total destruction.
-Adrian
I have a question for anyone who would love to share their thoughts. Say a person,based on their money management says that he or she will not risk more then 2% of their account. (By risking I am referring to the funds which they are using of their balance to have a position open). Now say the account grows 10 fold or by what ever amount, or say that the trader gains a client via PAMM. Should the person then decrease their risk because the account has grown? I am really looking to have a debate on this because the answer which I have been giving on other sites appear to be beyond stupid.
Wouldnāt managing RISK be not being exposed to the market ? In other words, the more time you have a trade open, the higher are the chances in which you would be affected by the black swan.
A fixed fractional position sizing algo would have you risk 2% of the then current balance with each trade. So if a trader risks $20 on a $2000 account, he would risk $40 on a $4000 account. And he would do so regardless of whether the balance rose from $2000 to $4000 because of trading earnings or deposits from investors.
If you use a pattern that lowers your percentage risk with an increase in your balance that is essentially a martingale pattern. That is, it is a martingale pattern if it also increases your risk percentage with a decline in the account balance. Sure, a trader that has amassed millions may want to lower his risk to 1% or lower and target lower returns, but he wonāt be going back up to 2% if he goes into drawdown. In that case, he has not adopted a martingale pattern, he has simply adopted a less aggressive anti-martingale pattern. The question is whether the trader intends to raise his percentage risk as he goes deeper into drawdown or not. If he does, he has a martingale algo, if he does not then he has an anti-martingale algo.
The anti-martingale pattern will preserve capital and help to propel the account toward new highs. The martingale pattern will limit gains and cause a string of losses to exponentially move the account toward ZERO. So for this mathematical reason, many traders choose an anti-martingale pattern (which is either a fixed fractional position sizing pattern or one that decreases percentage risk in drawdown).
-Adrian
Trying to push heavy trades through windows in time can be more profitable as long as the trader is in and out before the window closes. But if the window closes on him, he is toast. For this reason, most of the traders who trade that way eventually get closed out in one nasty CHOMP.
-Adrian
Thank you so much for explaining the anti martingale, but i simply wanted to know if you would adjust your risk level based on the account size? The reality is āfearā seems to be cause of people lowering their exposer, as the system they are trading would not change one bit based on the size of their account. Iāve been told that the psychology of the trader changes as the account grows, but should we allow it to. I mean of course it is subjective, but the reality is adjusting the % you risk per pip or the lot you use in proportion to the lot size seems to be more like a casino method of trading more then anything.
I am not sure what you are asking. If you are risking 2% every time then your percentage risk is fixed, but your dollar risk increases with your account size. I would not decrease my percentage risk with new highs and increase it with drawdown because of the effect it will have as a martingale pattern.
-Adrian
You answered the question with your last sentence. You would not ādecreaseā your risk % based on your account value. You will continue to risk the same amount of funds no matter the lot size. I Adrian risk .01% of my account PER PIP. So 10 pip loss is a .1% drawdown. 100 pip loss is 1% drawdown and so on and so forth. So I simply wanted to know if all of a sudden I am in control of a 250,000 account would it be wise to decrease the .01% per pip P/Lā¦