How to test a Risk/Money Management

SimpleMeLike

SimpleMeLike

Hello,

I want to make sure I am on the right track.

Please let me know if my testing method for what I want do for my system is how you would test.

I am an ES trader still trying to test my strategy for the profitability I want. So far so good, but lately I kind of struggle with how to adjust my stop regarding when to breaking even, trailing a winner, all in and all out/ etc.

So I decided rather to guess at one method, test them all using how I trade and see which one provides the most money. I added in my spreadsheet to record profit for each different scenarios I want to try for every trade I take. I am paper trading. It will be tedious work, but at least I will know the stats.

My scenarios are:
how many pts when trail by 2pts
adjust my stop loss BE when up by 2pts
no stop adjustment, all in and all out (win or lose)
manually adjust stop loss based on price action at the moment
etc,

Your opinion is well appreciated.
 
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I'd say ... Just don't overthink Risk Management.
Risk Management is about diminishing Ruin @ the limit.
Once you've found an advantage, you stress test it then see.
Always ask, test, if something provides you an advantage or not.
Does the trailing stop problem is a real problem ? Will it make or break it ?
Not sure ... For me at least ... Trailing Stops add more problems than they solve.
But if you incorporate it. Maybe you should also adjust it according to volatility.
 
K-Pia said:
Once you've found an advantage, you stress test it then see.
More...

Thank you K-Pia for responding, "you stress test it then see"?

What do you mean by "

You are great contribute to ET. You simple logic thinking has really helped me.

You make alot of sense "Always ask, test, if something provides you an advantage or not."
 
I would backtest EACH scenario using the same trades. It sounds like what you are trying to do is trade the same setup in each scenario by maximize profit and of course protect profits and minimize losses. If you have the same setup document/backtest each exit and in Excel should be easy to see results. I have found that if you are trading a trend trading strategy you generally have to allow for more retracement to maximize profit in the end and look to add on retracements. If you trade channels and buy at the low and sell at the high of the channel then getting out at the high point should be noted by price action in my opinion. If you are not sure on the way the trade is maturing and concerned with turning a win into a loss then try to at least set your Stop at some amount that gives say $25 win to allow for slippage and round trip fees. You can always get back in the trade if you exit right as its about to take off again. I find that some multiple of ATR works well for setting stops for me. What that multiple is is up to back testing. Start with 3x ATR and move up and down with testing. This ATR is basically a measure of volatility so that you should not exit a position when it just trades within that ATR which is essentially market noise for that instrument. There are also chandelier stops and Parabolic SAR that I have used with good success for protecting profits when trades go heavily in my direction. If you don't know what they are google them but essentially they are methods that allow for stops to move up but never down.

As a trend trader I Start with a multiple of ATR as my stop loss at start of trade and then move to just above BE as the trade moves in my favor. Then as it approaches the upper end of the channel I decide if it's a volatile rapid moving trade or slower moving one. The faster it moves the more likely I am to take profit (most or all) at the upper end and the slower it moves the more I am willing to allow for retracement because I don't think it will collapse and reverse as easily on me for a loss. If I see a rare instance when a trade skyrockets and goes beyond the trade channel upper end I am likely to use a chandelier stop or some special settings on PAR I have developed to always move the stop up and protect those open profits. When I do that I tend to exit entire position because I expect a retracement back into the channel where I can buy back in and resume the trend trade.

So bottom line you should test all these methods but I have outlined what I think works best based on my observations. I tested these based on looking at charts and determining my profit in each scenario based on Excel spreadsheet. I tested in trends up , down trends and in side ways markets. Several hundred trades at least in each scenario should be sufficient but thousands would be better if you can program. Don't forget to allow for fees when scaling in or out of a position. Some of it is based on logic to maximize profit in strongest trades. You don't want to make a 10 X win turn into a 3X win. But you might be willing to risk turning a 2 X trade into BE + fees for the chance of getting that trade to a 10X trade. Some of it boils down to how you would feel if you "lost" that open profit and what you are willing to tolerate on retracements and if your wanting to take small bites and be happy. Last thing I will say is that the higher your win rate the more likely you will be to take small bites/wins. The lower the win rate the more you need those 10x wins to make up for the several 1X losses so you need to give more room for those trades to mature.

My 0.02. Hope it helps.
 
Risk control and money management are very important in trading Forex. Whenever I have a losing position and I am uncomfortable, I simply Get out, until another convenient time.
 
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