Building in failure to help manage risk

[Visaria]

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.

One problem i see is that your broker might not allow so many contracts to be opened if there was not enough to cover the margin. Indeed you may also be limited by the size of the account in terms of how much leverage you are willing to take.

On another note, may i ask what you would do if you were stopped out somewhere on the trend...but then the market reversed and carried on in the original direction. Would you go back in at some point? Where would that be? Would you start the entire process again from scratch?

TIA

 

[tomorton]

One problem i see is that your broker might not allow so many contracts to be opened if there was not enough to cover the margin. Indeed you may also be limited by the size of the account in terms of how much leverage you are willing to take.

On another note, may i ask what you would do if you were stopped out somewhere on the trend...but then the market reversed and carried on in the original direction. Would you go back in at some point? Where would that be? Would you start the entire process again from scratch?

TIA

The account I use (UK spreadbetting) counts unrealised gain towards total margin available so as each trade runs into profit, the margin is restored for use on additional positions. I don't know if all accounts are run that way, I assumed they were. Am I wrong on that one?

Yes, but the trend would have to re-build its "score", so the new entry and all its subsequent pyramid trades would be entirely unrelated to any previous series.

 

[Handle123]

Been using basic concept since late 1991, system goes against 9 year cycle extremes but has become a most complicated hedge/system in last 18 months as I have added physics to various components to curb risk/drawdowns even further. As Nasdaq made new highs, program waits for certain pattern to go short. System will also find areas where rally/dip against it long term positions exist and will hedge open positions as it did recently before mid February. Often times hedges comes from other instruments so as not to disrupt options in futures. I am now testing on stocks as many have similar personalities as commodities.

I don't recommend to most others as takes abilities to counter-trend trade and years at least for me to get profitable, and for most people it goes against what "seems" right thing to do catching falling boulder. This method has extremely low winning percentages as it might take years to be considered a profitable trade but so is the losing percentages/drawdowns.

As far as scalping/day/swing trading, 95% are against immediate trend. For me breakouts/trade with trend, never made much sense because risk was too high for me to fathom.

I don't even get near to your 40+%, I am usually somewhere in the 5-15% profitable trades range, but I Trade very long term and some trades last years, longest was/is 7 years being short in Eurodollars. But my overall risk is beyond small and drawdown, which means as long as I can hedge, I can trade huge size, and currently near 50% margin using leverage, in other words have much more in account to back up my trades. I have built up quite an array of ways to hedge other than options. But the extra margin is also used during the day for scalping/day trading. Not going to divulge reward to risk as it too complicated with hedges and wouldn't want to give heart attacks, ROFLMAO ​

 

[Visaria]

The account I use (UK spreadbetting) counts unrealised gain towards total margin available so as each trade runs into profit, the margin is restored for use on additional positions. I don't know if all accounts are run that way, I assumed they were. Am I wrong on that one?

You may be right since trades are marked to market at the end of the day. However, you could still be operating with excessive leverage e.g. say 100k acct, but your nominal value of your position, when added up, were now in the millions. Which may infringe your risk management parameters.

 

[tomorton]

You may be right since trades are marked to market at the end of the day. However, you could still be operating with excessive leverage e.g. say 100k acct, but your nominal value of your position, when added up, were now in the millions. Which you may infringe your risk management parameters.

My risk management objective is simply to protect account capital. Only the last trade to be opened incurs a loss from account capital, but the prior trades pay for that.

 

[Visaria]

So you don't look at the nominal value of your positions ?

 

[qxr1011]

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.

ba-lo-ney

 

[tomorton]

So you don't look at the nominal value of your positions ?

No, its unimportant, the only important things are to protect and grow account capital.

I think I'd better burden you with an example and I hope this helps.

Trade 1 is opened at 5000. TA is used to find the SL level, and let's say this is miraculously 100pts below at 4900. Set buy order at 5100 with SL at 5000. If price falls to 4900, T1 is stopped and 100pts-worth of account capital is lost.

Keep setting new buy orders 100pts above the last to open, and moving all stops to last trade's entry price less 100pts.

I will now jump ahead to the situation where price has risen with no significant falls to 5400. At this point, the basket contains 5 trades -
Trade 1 5000: unrealised gain +400
Trade 2 5100: +300
Trade 3 5200: +200
Trade 4 5300: +100
Trade 5 5400: +/-0

Stops for all trades are at 5300 and a buy order for Trade 6 is set at 5500.

Unfortunately, price never reaches 5500, but falls back to hit the stops at 5300 and all trades are stopped out.

So, the realised gains are -
Trade 1 5000: +300
Trade 2 5100: +200
Trade 3 5200: +100
Trade 4 5300: +/-0
Trade 5 5400: -100

Net result is a gain of +500.

At no point does account capital risk exceed 100. Simply opening a similarly sized long trade at 5000 with the same SL would have only netted +300 when it was stopped.

Of course, it would be possible to manually close Trades 1-4 when 5400 was reached for a realised gain of +1000, though this would limit any potential additional pyramids beyond that price. Still, that does represent a double-digit r:r and I can't think of another strategy to achieve that.

Do let me know if this sounds wild or confusing.

 

[maximumpossiblesuffering]

For me, money management is about recognizing where the underlying premise of the trade has been broken and about giving me a time out to help me maintain an even keel physcologically after a string of losses.

I define failure for myself as a trader with a cumulative loss of 20% of account balance. Should I reach this loss level, I will close the account and take some time off of trading before trying again. I choose 20% as the cut off for two reasons. First, in order reach breakeven, I would need a 25% gain. Assuming I immediately started to trade well, it could still take a long time to reach just the breakeven point. Second, and as related to the first reason, if I wanted to raise money based on my trading record, any prospective investors would rightly conclude I not there yet as a trader.

My stop loss thresholds for a day trading account are as follows: No more than 3 net or consecutive losses in a day, no more than three consecutive losing days in a week, no more than 3 consecutive or net losing weeks. Therefore, my per trade loss amount as a percentage of beginning account balance is .20/27 = .75% per trade. On a $100,000 account, I could risk $750 per trade according to my rules.

If my winning percentage is 40% and my overall RR is 2:1, my expectation per trade is 750*2*.4 - (750*(1-.4) = 600 - 450 = 150 per trade. If I average 2 trades oer trading day, my daily expectation is $300 per day. Using, say, 240 days traded in the year, this results in $72,000 annual income from intraday trading on a $100,000 account. Note: some will look at the account as having a return of 72%, which would put this account’s return among the top of Wall Street hedge funds. However, even with this performance, one has living expenses and income taxes. If one could consistently trade this well, they should be able to attact investment capital allowing the trader to earn more money from his trading than just using his own money.

It is important to track one’s performance and review winners and especially losers to find areas for improvement and to consider creating a trading performance record that may interest others.

 

[Visaria]

No, its unimportant, the only important things are to protect and grow account capital.

I think I'd better burden you with an example and I hope this helps.

Trade 1 is opened at 5000. TA is used to find the SL level, and let's say this is miraculously 100pts below at 4900. Set buy order at 5100 with SL at 5000. If price falls to 4900, T1 is stopped and 100pts-worth of account capital is lost.

Keep setting new buy orders 100pts above the last to open, and moving all stops to last trade's entry price less 100pts.

I will now jump ahead to the situation where price has risen with no significant falls to 5400. At this point, the basket contains 5 trades -
Trade 1 5000: unrealised gain +400
Trade 2 5100: +300
Trade 3 5200: +200
Trade 4 5300: +100
Trade 5 5400: +/-0

Stops for all trades are at 5300 and a buy order for Trade 6 is set at 5500.

Unfortunately, price never reaches 5500, but falls back to hit the stops at 5300 and all trades are stopped out.

So, the realised gains are -
Trade 1 5000: +300
Trade 2 5100: +200
Trade 3 5200: +100
Trade 4 5300: +/-0
Trade 5 5400: -100

Net result is a gain of +500.

At no point does account capital risk exceed 100. Simply opening a similarly sized long trade at 5000 with the same SL would have only netted +300 when it was stopped.

Of course, it would be possible to manually close Trades 1-4 when 5400 was reached for a realised gain of +1000, though this would limit any potential additional pyramids beyond that price. Still, that does represent a double-digit r:r and I can't think of another strategy to achieve that.

Do let me know if this sounds wild or confusing.

I understand the way you trade. Indeed one of my trading strategies is similar.

My point was simply the amount of contracts that you might eventually hold. The nominal amount could be v large in relation to your account. In other words the leverage could be huge. For (an extreme) example, a $10k account holding 10 contracts of crude oil has 64x leverage. Would you be ok with such leverage?