Am I using risk management correctly?

[SimpleMeLike]

Hello,

I trade the ES. When I back tested for over 6 months on sim, i used up to 2 pts stop loss with profit target of 4pts, for 2:1 risk vs reward. 2 contracts. Risk $200 to make $400.

Butttt when I went live with real money, something change, where I started taking 2pts on the 1st contract and then taking the other contract off at 4pts. Risk $200 to make $300.

I realize I did not have patience to wait for $400, so taking $100 on first contract calms me. However my risk vs reward is not same as when I back tested.

Is this bad risk management ? The way I see it is atleast I make some money on the trade incase I get breakeven and I slowly build my account.

Thanks for any help

 

[Xela]

Is this bad risk management ?

In order to answer this question confidently, you'd need to compare the outcome of (say) 300 trades doing that compared with the outcome of the same 300 trades doing what you were originally doing, with the same position-sizes. Whichever performs better is better risk-management. An answer derived any other way is just going to be a guess. For what it's worth (if anything) I routinely do something similar to what you mention above, exiting my trades in two (or sometimes three) stages, to minimise risk-exposure. But I'm doing that having tested it and proved that it's better risk management, because what "calms" me is knowing that my risk management parameters are based on evidence rather than on belief.

 

[SimpleMeLike]

In order to answer this question confidently, you'd need to compare the outcome of (say) 300 trades doing that compared with the outcome of the same 300 trades doing what you were originally doing, with the same position-sizes. Whichever performs better is better risk-management. An answer derived any other way is just going to be a guess. For what it's worth (if anything) I routinely do something similar to what you mention above, exiting my trades in two (or sometimes three) stages, to minimise risk-exposure. But I'm doing that having tested it and proved that it's better risk management, because what "calms" me is knowing that my risk management parameters are based on evidence rather than on belief.

Thank you so much Xela,

You gave good advice and you are correct the only way to know which one trademanagement or risk vs reward is better then the other is to test both.

So, for the next 300 or more trades I will compare both outcomes on my spreadsheet. This will be forward testing.

Is there any reason for 300 trades? Is this based on statics or probability?

Thank you

 

[Xela]

Is there any reason for 300 trades? Is this based on statics or probability?

It was just based on my "quick guess" that with the 1:2 R:R you describe, your win-rate is going to be something around 35%+. (It will need to be 33%+ for this to be profitable at all, of course.)

The closer the overall win-rate is to 50% (on either side of it) the smaller is the number of trades (sample-size) which you need to compare, to derive an answer that's "statistically significant", so that after doing it, you can say "I now know within 95%+ certainty that I'm basing this decision on something statistically valid, and not accounted for just by chance".

If anything, my plucked-out-the-air figure of 300 trades is going to be a bit on the high side, rather than the low side, I think. Something like 225 trades might actually be enough, really.

If you have some kind of backtesting facility available, with whatever you're using, even that would be a reasonable approach. But not as good as your plan above, for forward-testing.

 

[Metamega]

Like others said. You'll want to know how your changes worked in backtest. But your also leaving out other factors to consider.

Profit factor or expectancy are important. Risk/reward is really nothing without taking into effect win/loss. Perhaps also the max drawdown looks better with scaling out? Theirs a lot more there than risk/reward.

One doesn know though till they test and compare results.

 

[SimpleMeLike]

It was just based on my "quick guess" that with the 1:2 R:R you describe, your win-rate is going to be something around 35%+. (It will need to be 33%+ for this to be profitable at all, of course.)

The closer the overall win-rate is to 50% (on either side of it) the smaller is the number of trades (sample-size) which you need to compare, to derive an answer that's "statistically significant", so that after doing it, you can say "I now know within 95%+ certainty that I'm basing this decision on something statistically valid, and not accounted for just by chance".

If anything, my plucked-out-the-air figure of 300 trades is going to be a bit on the high side, rather than the low side, I think. Something like 225 trades might actually be enough, really.

If you have some kind of backtesting facility available, with whatever you're using, even that would be a reasonable approach. But not as good as your plan above, for forward-testing.

Thank you Xela,

Good explanation.

No I don't have have a back test facility. I have to do it all myself via forward testing. It will take a few months buts it's the only way I can verify it.

Thanks

 

[Metamega]

If you have performed a forward test before and have perhaps a spreadsheet of the entries that would be the best way. If you don't I'd think you should start recording your entries/exits some way so you can apply changes to your exit strategy easily and record the results.

 

[Handle123]

Long ago I started with 300, but found that was not nearly enough, so I do the June contract of ten years and do 300 of that contract as June is toughest ES contract as far as being profitable. If I was able to have system profitable for June then I felt confident enough the other contract months be good as well. 300 is good enough to see if method might be good enough to do 3,000.

Since you tested it one way then traded it different way, you are covering up the fact that you still lack discipline and trading scared. You come to forum for more experienced traders to pat you on the back and say, ohhh, that's ok you can do that but until you stop lying to yourself and being honest, you never going to become profitable in the way you hope to do. It is your life and you taking time away from the family to do this, so when you going to grow up? Have to put on big boys pants if you want to swim with the sharks. Am not trying to be mean to you, but you coming here to forum shows us you can't follow your own rules. If you were working for me, "You're fired".

 

[SimpleMeLike]

Long ago I started with 300, but found that was not nearly enough, so I do the June contract of ten years and do 300 of that contract as June is toughest ES contract as far as being profitable. If I was able to have system profitable for June then I felt confident enough the other contract months be good as well. 300 is good enough to see if method might be good enough to do 3,000.

Since you tested it one way then traded it different way, you are covering up the fact that you still lack discipline and trading scared. You come to forum for more experienced traders to pat you on the back and say, ohhh, that's ok you can do that but until you stop lying to yourself and being honest, you never going to become profitable in the way you hope to do. It is your life and you taking time away from the family to do this, so when you going to grow up? Have to put on big boys pants if you want to swim with the sharks. Am not trying to be mean to you, but you coming here to forum shows us you can't follow your own rules. If you were working for me, "You're fired".

Thank you so much Handle123,

You are honest, but you are right. You nailed me down pretty good.

I appreciate your honest and but its what I needed to hear to have a profitable trading business going forward.

You right, taking time and money away from family is not the goal, so I better tighten up or as you say get fired.
Thank you,

 

[TD877]

...as June is toughest ES contract as far as being profitable. If I was able to have system profitable for June then I felt confident enough the other contract months be good as well.

Why do you say June is the toughest?