Building in failure to help manage risk

N

Newc2

Finally accepting a low or average win rate (usually though exhaustion), and jumping off the "tweaking carousel" in the search of a holy grail, a major step for traders who are aspiring to be profitable will have been taken.

"I will only win 45% of my trades. It's just the way things are. Now how can I turn this into a positive expectancy"

It means focus can move onto risk management or position sizing, stop placement optimization etc.

Finally there is an acceptance that what will be will be and carefree trading can begin.


These are my thoughts from personal experience.

Discussion would be appreciated. Has anybody been down this path? Is this a necessary path for some or all? To me it felt like enlightenment although I still wouldn't mind 70% 3:1 metrics!
 
Well you are most likely gonna have to cherry pick trades with low risk, high reward, and low probability (possibility). You will most likely have smaller losers than winners and more losers than winners but when you do have winners, if you let them run, they will likely render good r:r

Not my style but some like it.
 
Newc2 said:
Finally accepting a low or average win rate (usually though exhaustion), and jumping off the "tweaking carousel" in the search of a holy grail, a major step for traders who are aspiring to be profitable will have been taken.

"I will only win 45% of my trades. It's just the way things are. Now how can I turn this into a positive expectancy"

It means focus can move onto risk management or position sizing, stop placement optimization etc.

Finally there is an acceptance that what will be will be and carefree trading can begin.


These are my thoughts from personal experience.

Discussion would be appreciated. Has anybody been down this path? Is this a necessary path for some or all? To me it felt like enlightenment although I still wouldn't mind 70% 3:1 metrics!
More...


Well done. Profit is the only metric that really counts. The losing trades arising from following your strategy rules are not bad luck or errors, they are baked in by your strategy so if you followed your own rules just forget them and focus on the winners.

In this regard, profit can be improved by pyramiding your winning trades if they continue to travel with the prevailing trend. Open a new trade as soon as profit equals your initial risk, and move the stop-loss up by the same amount so your capital risk is not increased. Keep adding new trades at the same gap and moving the stop by the same amount until the trend ends.
 
tomorton said:
Well done. Profit is the only metric that really counts. The losing trades arising from following your strategy rules are not bad luck or errors, they are baked in by your strategy so if you followed your own rules just forget them and focus on the winners.

In this regard, profit can be improved by pyramiding your winning trades if they continue to travel with the prevailing trend. Open a new trade as soon as profit equals your initial risk, and move the stop-loss up by the same amount so your capital risk is not increased. Keep adding new trades at the same gap and moving the stop by the same amount until the trend ends.
More...

Thanks. I have read your comments on this previously and am very interested in scaling in while keeping risk constant.

Is there an author or research that I can also have a read of to further my thoughts in addition to your great input on this forum?

One thing that still niggles me is that it is the first entry point which I have tested and have data on so wouldn't each subsequent scaling in point be adding in greater randomness? My question is why not scale in the money into a second position on a completely different trade which matches the initial entry point as per the tested trade plan?
ie only open a second position on another chart or stock or whatever, when the the initial risk of the first trade is not in a position to be exceeded.

Maybe I am not seeing things correctly, but wouldn't this be the best of both world's? ie scaling into only choice first entry point setups as per plan, as well as mitigating risk further by spreading capital over different instruments?

Just brainstorming here. Thanks
 
Newc2 said:
Thanks. I have read your comments on this previously and am very interested in scaling in while keeping risk constant.

Is there an author or research that I can also have a read of to further my thoughts in addition to your great input on this forum?

One thing that still niggles me is that it is the first entry point which I have tested and have data on so wouldn't each subsequent scaling in point be adding in greater randomness? My question is why not scale in the money into a second position on a completely different trade which matches the initial entry point as per the tested trade plan?
ie only open a second position on another chart or stock or whatever, when the the initial risk of the first trade is not in a position to be exceeded.

Maybe I am not seeing things correctly, but wouldn't this be the best of both world's? ie scaling into only choice first entry point setups as per plan, as well as mitigating risk further by spreading capital over different instruments?

Just brainstorming here. Thanks
More...


OK, happy to come back to you on these points.

First off, I don't scale in, I add. The first trade is to the full amount my risk plan allows: for many people this will be 2% of capital. So my first trade has a stop risking 2% of capital: the ones that follow are all of this same size.

The first trade should be the foundation, well based on the TA, with a stop at a level also determined by the TA. So, yes, the subsequent trades are 50% random in terms of TA and so is the new stop-loss at each "rung" therefore. But they're not random in terms of risk or profit potential. Of course, if your stop on the first trade is hit you don't make a second etc. trade. And if the trend weakens seriously, you'd probably manually close everything and stop adding anyway - that's why I say the added trades are only 50% random - because if the trend had ended, you should be in cash and not adding anyway.

I am sure many traders say add a second trade to the first only when you get another valid TA-based entry signal. I take a more aggressive line.

They will also say that the distance to the stop should be decreased as you add each new trade, to protect your profits. I'm not interested in limiting my profits once I'm in a winning trend. But I never increase the account capital risked.

As far as different instruments is concerned, this would not add further capital protection and would diversify your holdings away from success.

I accept quite a few of my trade plans will be stopped out at a loss or at break-even, but as the gains from the winners increase parabolically, these will more than pay the bill.

Cheers mate.
 
tomorton said:
OK, happy to come back to you on these points.

First off, I don't scale in, I add. The first trade is to the full amount my risk plan allows: for many people this will be 2% of capital. So my first trade has a stop risking 2% of capital: the ones that follow are all of this same size.

The first trade should be the foundation, well based on the TA, with a stop at a level also determined by the TA. So, yes, the subsequent trades are 50% random in terms of TA and so is the new stop-loss at each "rung" therefore. But they're not random in terms of risk or profit potential. Of course, if your stop on the first trade is hit you don't make a second etc. trade. And if the trend weakens seriously, you'd probably manually close everything and stop adding anyway - that's why I say the added trades are only 50% random - because if the trend had ended, you should be in cash and not adding anyway.

I am sure many traders say add a second trade to the first only when you get another valid TA-based entry signal. I take a more aggressive line.

They will also say that the distance to the stop should be decreased as you add each new trade, to protect your profits. I'm not interested in limiting my profits once I'm in a winning trend. But I never increase the account capital risked.

As far as different instruments is concerned, this would not add further capital protection and would diversify your holdings away from success.

I accept quite a few of my trade plans will be stopped out at a loss or at break-even, but as the gains from the winners increase parabolically, these will more than pay the bill.

Cheers mate.
More...

Thanks again. Food for more thought for me!
 
I think pyramiding has another very important benefit and maybe it is crucial as to why pyramiding works:

A big problem is cutting a winning trade too early. But when pyramiding is used then the trader mind is reversed and he looks to add where he might have been tempted to sell.
 
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Visaria said:
Is there a limit to how many adds you will do?
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No. I would be happy to have say 20 positions open on one index or forex pair and no other trading on-going, though its unlikely to ever happen. With the stop on all trades set at one "grid" below the last trade's entry, 18 would close in profit, one in a small loss and one break even. The r:r on so many overlaid trades is phenomenal.
 
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