50/50 ?

[lcamargo]

momo,

> You should be looking for those trades with high high
> probabilities of success.

The point is that, there is more than one way to achieve a given
return on investment:

EROI = t(RT + T – 1 )

As you said, you can use a system that provides a high probability of success (very high T). The problem is that such systems have a very low t for realistic values of R. This is the case of the system that you describe. If you make the calculations for your system, you’ll see that the EROI per trade is 0.74%.

You can try to maximize t, but in real life you’ll end up with a very low T. This is the case of systems that go for a home run.

Since I know the success rate of my system (T), what I like to do is to try to keep R constant by adjusting t.

I calculate all this after each trade. For example, I’m currently sitting at R=2.67 and T=0.5833. I only trade OEX options and my target EROI is 10%.

Knowing this, t = 0.879. My goal for R is 3, so my stop will be at t/3 or about 3%.

At this point, I only need to be right 27.28% of the time to break even and 55% to achieve my target of 10% per trade. If I achieve 55% and everything stays the same and I invest the same amount of money per trade, I’ll double that amount in 20 trades.

 

[nitro]

Originally posted by lcamargo
momo,

> You should be looking for those trades with high high
> probabilities of success.

The point is that, there is more than one way to achieve a given
return on investment:

EROI = t(RT + T – 1 )

As you said, you can use a system that provides a high probability of success (very high T). The problem is that such systems have a very low t for realistic values of R. This is the case of the system that you describe. If you make the calculations for your system, you’ll see that the EROI per trade is 0.74%.

You can try to maximize t, but in real life you’ll end up with a very low T. This is the case of systems that go for a home run.

Since I know the success rate of my system (T), what I like to do is to try to keep R constant by adjusting t.

I calculate all this after each trade. For example, I’m currently sitting at R=2.67 and T=0.5833. I only trade OEX options and my target EROI is 10%.

Knowing this, t = 0.879. My goal for R is 3, so my stop will be at t/3 or about 3%.

At this point, I only need to be right 27.28% of the time to break even and 55% to achieve my target of 10% per trade. If I achieve 55% and everything stays the same and I invest the same amount of money per trade, I’ll double that amount in 20 trades.

Hehe,

People look for the Holy Grail all the time...

Here it begins. Nicely done once again lcamargo .

nitro

 

[Gordon Gekko]

Originally posted by lcamargo
At this point, I only need to be right 27.28% of the time to break even and 55% to achieve my target of 10% per trade. If I achieve 55% and everything stays the same and I invest the same amount of money per trade, I’ll double that amount in 20 trades.

you've made some good posts. the trouble is finding a system that allows you to get that 55% success rate.

have fun getting 3x your risk 55% of the time! this is the problem everyone has with trading....and this is what no one is willing to talk about.

what system will give you 3x your risk 55% of the time?????

this is the type of stuff in tharp's "trade your way to financial freedom." i love that book..but you still need to apply his principals to a system. you still need an entry, a stop, and a profit taking method. a good combination of the 3 is the hard part. when you get one, then you combine tharp's techniques with discipline. i'm ready to do this......but i hate all my systems..lol

what's so annoying to me is that i've stared at charts for years and i never can come up with a good system.....so i'm thinking that maybe a good method is not visible on a chart.....maybe it's something you can't "see".......but i could be wrong......

this is a good thread..NICE JOB GUYS...

 

[Gordon Gekko]

THIS is the type of thread that needs to get to 30 pages.....with no bs.

 

[darkhorse]

two words:

controlled pyramiding.


i shall say no more.

 

[Publias]

Originally posted by darkhorse
two words:

controlled pyramiding.


i shall say no more.

and therin lies the secret to a high win/loss ratio and there really is no more to say...

 

[Publias]

Originally posted by lcamargo
nitro,

I find that aproaching trading as a statistical exercise helps me keep my emotions in check and to practice good money management.

And therein lies the secret to detaching oneself from the micro-results and the emotions that stem from them... You have to constantly see the forest through the trees... And there realy is no more to say!

Great posts lcamrgo!

PEACE and good trading,
Publias

 

[nitro]

Originally posted by lcamargo
nitro,

Thank you for you comments. I find that aproaching trading as a statistical exercise helps me keep my emotions in check and to practice good money management.
...

lcamargo,

You have one side of the equation - the other side is to learn to trade (it sounds like you position trade.)

With patience and a little luck, I would not be surprised to hear that you will be where you want to be - perhaps not as fast as others, but more certainly...

nitro

 

[lcamargo]

> you've made some good posts. the trouble is finding a system > that allows you to get that 55% success rate.

>have fun getting 3x your risk 55% of the time! this is the >problem everyone has with
>trading....and this is what no one is willing to talk about.

> what system will give you 3x your risk 55% of the time?????

I agree that those are very high numbers … for stocks. That’s why I mentioned the OEX options in my previous post. I think we are talking about the same, but just to clarify: I want R to be 3, my risk is tM/3 where M is the cost of my trade. Currently, my t = 8.79% so my risk is 0.089M/3 or about 0.029M (not 3M).

For example, yesterday the OEXIP calls @ 15.3. The risk would be: (0.029)(15.3) = 0.4539 so I would set my stop at 14.80 and my target would be (0.089)(15.3) = 1.3617, which means that to achieve my goal I would need to exit at 16.7. As as side note: I don’t exit the trade as soon as it reaches my target. Depending on the number of contracts, I sell half or use this as a trailing stop for the complete position.

Can I do it more than 27.28% (with my current R=2.67) to at least break even ? Yes. Can I do it more at least 55% ? Yes, (current T=58.33%).

Can I do it at least once a day while maintaining R and T ? I would be posting this from my private jet if I could .

I don’t want to defend a particular system or trading style and certainly I’m not saying that long options are the way to riches. I just wanted to make the point that maximizing R (which can only be done with proper trade management or a lot of luck) minimizes the need to be correct. As long as you maintain T > 2/(R+1), you’ll make money. How much ? depends on the number of trades, the amount of money you use per trade and how often you can find trades while maintaining that relationship.

 

[Publias]

I never made my money in this game being "right" more than "wrong"... I always made my money by being more "right" than "wrong"...

PEACE and good trading,
Publias