High Risk High Reward Trading

[Scataphagos]

I am not trying to be a jerk, but I am trying to understand your approach. You have been trading this live for 18 months roughly, and you say that you did not include any slippage in your backtest because it would just be an estimate.

Yet you have 18 months of real results to calculate actual slippage, right?

I'm just trying to understand your thinking, sorry for putting you on the spot.

Let me pipe in with some theoretical unpleasantness....

1. OP "went live" after 2016 low... arguably THE MOST BULLISH market behavior seen in generations.

2. OP claimed "35%-ish gain for January, -4% loss for February". Good as January was, February sould have been MUCH, MUCH better in any robust trading system. (Think maybe OP had a "long side bias" in January? Nothing wrong with that.. in fact, exactly correct! But you don't want to make the mistake of "confusing brains with a bull market".)

In the long run the market is a marathon, not a sprint. We'll see.

Call me skeptical, but I don't like his chances. Sorry... hope I'm wrong.

 

[SimpleMeLike]

I day trade futures with a fully automated system.

In trading it is generally considered that risking 1% or lower of your account per trade is low risk. 1% to 2% medium risk and anything over 2% high risk.

To grow my account aggressively I will be risking 4% of my account per trade.

My back testing goes back more than 10 years.
But for the purposes of illustration I have selected the lowest performing three back to back calendar years (2013/2014/2015) from the longer period back test.
I have shown the 36 monthly percentage returns for this period in the bar chart below.
Looking at the chart you will see that the largest losing month during the period 2013 to 2015 was -36%. And the largest profitable month was +88%. Remember this is with 4% risked per trade and the period shown is only subset of my full backtesting results.

Yearly returns:
2013: +120%
2014: +204%
2015: +48%

Largest drawdowns in each year:
2013: -55%
2014: -40%
2015: -56%

Yes the drawdowns are deep. But if we are aiming for very high rewards then we will normally have to take very high risks. And it is worth pointing out that If we have a 50% drawdown then we need to make 100% just to get back to even.

I would say that overall the yearly risk/reward (MAR) ratio possible with day trading is very good, day trading beats other types of trading like long term trend following in this regard.
However the disadvantage is that day trading is much less scalable, especially if you want to diversify by trading some of the less liquid markets. So in the long run, when day trading, you can not compound 100+% yearly returns for decades (or even one decade) because sooner rather than later you will hit liquidity limits.

System stats for the period (2013-2015)

Number of trades: 532
%Profitable trades: 36%
%Profitable months : 50%
%Profitable quarters: 75%

Hello Millionaire,

Thanks for detailing your system results. I believe your system stats looks good for a day trading system.

I do not understand when you state : "However the disadvantage is that day trading is much less scalable, especially if you want to diversify by trading some of the less liquid markets." Can you please explain?

Can you just add more contracts to your system once your initial investment doubles or triple? That is what I plan to do. Once my account double, double contracts size. If my account double down, reduce contract size.

 

[Millionaire]

I am not trying to be a jerk, but I am trying to understand your approach. You have been trading this live for 18 months roughly, and you say that you did not include any slippage in your backtest because it would just be an estimate.
Yet you have 18 months of real results to calculate actual slippage, right?

No i do not bother to track exact slippage in my live IB account. tbh, slippage is not a major concern to me. I do less than 200 trades per year. If i was doing 500 or 1000 trades a year it might be more of a concern. I do agree with you that even with less than 200 trades a year it will have some effect on the back testing results. But not enough to concern me.

But you don't want to make the mistake of "confusing brains with a bull market".

No, the best year by far in the full back test was 2008. And there were 3 losing months in 2008, so even in excellent volatile markets the system still has losing months.

I do not understand when you state : "However the disadvantage is that day trading is much less scalable, especially if you want to diversify by trading some of the less liquid markets." Can you please explain?
Can you just add more contracts to your system once your initial investment doubles or triple? That is what I plan to do. Once my account double, double contracts size. If my account double down, reduce contract size.

I was talking about large scaling, with 7+ figure accounts, nothing us retail pikers need to worry about for now. Going from 1 to eventually 100 emini contracts in most markets should be not much problem for you especially if you are scaling into positions.

 

[SimpleMeLike]

I was talking about large scaling, with 7+ figure accounts, nothing us retail pikers need to worry about for now. Going from 1 to eventually 100 emini contracts in most markets should be not much problem for you especially if you are scaling into positions.

Thank you for response.

What platform are using to automated your trades?

Does your system use very large stop losses?

 

[kenten]

Good luck to OP.
if you cannot take 50% drawdown ,you should not be trading anyway

 

[Van_der_Voort_4]

I don't know if mine is the optimum approach, but this is my niche and where i have spent my time doing all my research.
Why so pessimistic? Like i mentioned in the opening post, i have back tested more than 10 years. The graph shown is the worst performing 3 back to back calendar year subset from the full back test. I am very confident that the system has a long term edge.

I like your post,because you made new HWM from those drawdowns levels.
If it did not you wouldn't be writing this.

If you divided money traded between what you do now and enter other half after you made first bad trade or even onto three segments third when your system made 2 bad trades would this smooth things a little bit.You know the details,but since you risk 4 % per trade one way to smooth things out is skip segments.Because the strength of your method is mainly that your system recovered from those drawdowns.And lower same amount at HWM ,this way you gained 4-8% when skipped some trades.Times wise drawdown is longer and more frequent at your win rate.
64% of your trades are unprofitable,would be worth it to address what has highest frequency of occurrence as a way to influence things from what they are now.
I could be completely wrong as not all systems could benefit from doing this,i am only looking at numbers and time spend in draw down


Good Luck !

 

[Handle123]

I day trade futures with a fully automated system.

In trading it is generally considered that risking 1% or lower of your account per trade is low risk. 1% to 2% medium risk and anything over 2% high risk.

To grow my account aggressively I will be risking 4% of my account per trade.

My back testing goes back more than 10 years.
But for the purposes of illustration I have selected the lowest performing three back to back calendar years (2013/2014/2015) from the longer period back test.
I have shown the 36 monthly percentage returns for this period in the bar chart below.
Looking at the chart you will see that the largest losing month during the period 2013 to 2015 was -36%. And the largest profitable month was +88%. Remember this is with 4% risked per trade and the period shown is only subset of my full backtesting results.

Yearly returns:
2013: +120%
2014: +204%
2015: +48%

Largest drawdowns in each year:
2013: -55%
2014: -40%
2015: -56%

Yes the drawdowns are deep. But if we are aiming for very high rewards then we will normally have to take very high risks. And it is worth pointing out that If we have a 50% drawdown then we need to make 100% just to get back to even.

I would say that overall the yearly risk/reward (MAR) ratio possible with day trading is very good, day trading beats other types of trading like long term trend following in this regard. However, the disadvantage is that day trading is much less scalable, especially if you want to diversify by trading some of the less liquid markets. So in the long run, when day trading, you can not compound 100+% yearly returns for decades (or even one decade) because sooner rather than later you will hit liquidity limits.

System stats for the period (2013-2015)

Number of trades: 532
%Profitable trades: 36%
%Profitable months : 50%
%Profitable quarters: 75%

Am sorry, but all the backtesting I have done does not compute high rewards with these drawdowns and not including some kind of slippage, is dangerously making this worst. You might consider working on dropping the losing percentages, cause if you can drop this in half, guess what-your profitable side goes up, and when profitable goes up, you can increase size or in case for you, stay at percentage you are at. For me it be too aggressive as I prefer to stay under 1% at risk in any one instrument, I have all automated, and I find that day trading and scalping offers me the GREATEST risk in all of trading cause it be too expensive to hedge whether it is less than 1% or if I went to 4%, risk is risk, and high drawdowns only mean to me they will get make new highs in drawdowns just like making new equity highs, just don't know when.

As far limits, always ETF options.
I wish you luck.

 

[lawrence-lugar]

To grow my account aggressively I will be risking 4% of my account per trade

Yearly returns:
2013: +120%
2014: +204%
2015: +48%

Largest drawdowns in each year:
2013: -55%
2014: -40%
2015: -56%

4% of your account per trade is tiny. -- Risk way More than that for the potential greater gains and growth, But also refine your game.
For many people, there's basically only one game in town. So the rest of your money or account is just sitting idle and not put to use while you only trade 4% of your account...doesn't seem very efficient to me.

I trade option on the broad market SPY/SPX. that's my only game, and knowledge and experience and expertise. -- What will I do with the other 96% of my account...switch to Apple or a penny stock or a random commodity? All things I don't know and have no interest in trading, and most likely will go bust in those.

Your stats indicate you're just relatively, simply gambling...and have no true edge/skill/market wisdom ,

That should be more of a steady and consistent 3:1 or 4:1 or even 5:1 ratio. even 6:1 ratios and greater are possible, with expert traders who have carved their true niche in the market.

The concept of Risk doesn't have to automatically be an ugly word.
Risk can be an absolutely beautiful thing, in the right hands...because with Risk generally equals Gorgeous Rewards,

2018 ET.

 

[JSOP]

I day trade futures with a fully automated system.

In trading it is generally considered that risking 1% or lower of your account per trade is low risk. 1% to 2% medium risk and anything over 2% high risk.

To grow my account aggressively I will be risking 4% of my account per trade.

My back testing goes back more than 10 years.
But for the purposes of illustration I have selected the lowest performing three back to back calendar years (2013/2014/2015) from the longer period back test.
I have shown the 36 monthly percentage returns for this period in the bar chart below.
Looking at the chart you will see that the largest losing month during the period 2013 to 2015 was -36%. And the largest profitable month was +88%. Remember this is with 4% risked per trade and the period shown is only subset of my full backtesting results.

Yearly returns:
2013: +120%
2014: +204%
2015: +48%

Largest drawdowns in each year:
2013: -55%
2014: -40%
2015: -56%

Yes the drawdowns are deep. But if we are aiming for very high rewards then we will normally have to take very high risks. And it is worth pointing out that If we have a 50% drawdown then we need to make 100% just to get back to even.

I would say that overall the yearly risk/reward (MAR) ratio possible with day trading is very good, day trading beats other types of trading like long term trend following in this regard.
However the disadvantage is that day trading is much less scalable, especially if you want to diversify by trading some of the less liquid markets. So in the long run, when day trading, you can not compound 100+% yearly returns for decades (or even one decade) because sooner rather than later you will hit liquidity limits.

System stats for the period (2013-2015)

Number of trades: 532
%Profitable trades: 36%
%Profitable months : 50%
%Profitable quarters: 75%

Even though you maybe making higher returns than your drawdowns, you need to make sure that it's like this EVERY year. On the years where you have drawdowns larger than your profit, you would have no way of controlling how much you lose and the loss could be larger than all the previous positive returns that you have made and accumulated in your account.

It's not how much you make that counts, it's how much you can keep in your account at the end of the day that counts. People who have made LOT higher returns than you have over LOT longer periods of time only ended up losing them ALL at the end, plenty of examples: Jesse Livermore, Lehman Brothers, Bears & Sterns, most recently that XIV-investing guy who made $millions only end up losing it ALL on ONE day on Feb. 5 just past

 

[Ayn Rand]

I agree with Lawrence-Lugar - "4% is tiny." If you know what you are doing go for it.

I hear all these people - "I only risk 1% of my captial?" Sounds like something my Mother might do.

Truth - not sure why you are telling us about your system and then leaving out all the important information. Are you looking for a job?