Increasing risk after a loss

[ParisJOM]

Quote from TenTwenty:

Shouldn't your next trade have nothing to do with your previous trade, whether it was a gain or a loss?

Shouldn't you increase your risk only if the situation demands it rather than trying to compensate for previous losses which are independent of the future?

In order to be profitable, gains must outwiegh losses. Therefore, preceding losses must be taken into consideration. Consideration of preceeding P/L is very important.

Furthermore, gains should also be accumulated at a faster rate than losses. In this regard, because we can not control the speed of market movement, we have to adjust size of trade to determine speed of P/L. In order to off-set a loss faster, larger risk must be taken on. Of course, the key here is to not initialy take on too much risk, and when increasig risk, increase it at a reasonable rate.

 

[Lon Eagle]

Quote from ParisJOM:

In order to be profitable, gains must outwiegh losses. Therefore, preceding losses must be taken into consideration. Consideration of preceeding P/L is very important.

Furthermore, gains should also be accumulated at a faster rate than losses. In this regard, because we can not control the speed of market movement, we have to adjust size of trade to determine speed of P/L. In order to off-set a loss faster, larger risk must be taken on. Of course, the key here is to not initialy take on too much risk, and when increasig risk, increase it at a reasonable rate.

In this example aren't you letting emotion cloud a trade?

I believe you should trade the set up not your current P/L.

 

[ParisJOM]

Quote from Lon Eagle:

In this example aren't you letting emotion cloud a trade?

I believe you should trade the set up not your current P/L.

Emotion has nothing to do with it. Your P/L is just an objective figure.

If you do not get slightly more agressive after a loss, you will take longer and longer to get back to your highwatermark after each loss.

 

[ParisJOM]

Quote from Lon Eagle:

In this example aren't you letting emotion cloud a trade?

I believe you should trade the set up not your current P/L.

Also, "trade the set up" if you may .. that has nothing to do with your risk. Don't confuse technical set up or direction with measurable risk. The only measurable risk you have is what a given trade can lose.

 

[TenTwenty]

Quote from ParisJOM:

If you do not get slightly more agressive after a loss, you will take longer and longer to get back to your highwatermark after each loss.

If you get slightly more aggressive after a loss then you are not varying your bet size according to the market situation but rather according to your own personal P/L. How can you justify this? The market doesn't care how much you lost on your last trade.

 

[ParisJOM]

Quote from TenTwenty:

If you get slightly more aggressive after a loss then you are not varying your bet size according to the market situation but rather according to your own personal P/L. How can you justify this? The market doesn't care how much you lost on your last trade.

Increasing risk does not necessarily imply increasing size. There are 2 ways to increase absolute risk, and risk can also be analysed in % terms compared to capital.

1) absolute risk can be increased either by larger size of trade and/or distance of stop.

2) when analysing risk in % terms of capital, the same % will result in different absolute terms depending on fluctuation in capital (1% risk of 10 000 is not the same as 1% risk of 11 000).

The distance of the stop (a risk element) should definitely be set depending on market conditions ... notably volatility. Higher volatility merrits further out stops, and to off-set the further out stop, a smaller trade should be placed as to maintain desired risk ... vice versa for lower volatiltiy conditions.

 

[TenTwenty]

I agree with what you posted regarding HOW to increase your risk - what I still don't understand is your rationale for increasing risk BASED upon previous losses.

 

[JimmyJam]

Quote from ParisJOM:

In order to be profitable, gains must outwiegh losses. Therefore, preceding losses must be taken into consideration. Consideration of preceeding P/L is very important.

Furthermore, gains should also be accumulated at a faster rate than losses. In this regard, because we can not control the speed of market movement, we have to adjust size of trade to determine speed of P/L. In order to off-set a loss faster, larger risk must be taken on. Of course, the key here is to not initially take on too much risk, and when increasing risk, increase it at a reasonable rate.

Hi,

One page into your thread and I realized this was how you were approaching the trader's conundrum of how to increase contract size while trading and experiencing a loss, but not substantially increase their risk levels (thus leading to unnecessary drawdown).

The enclosed spreadsheet represents a first pass at your money (or I should say risk) management logic using the S&P500 e-mini product with a total of $40,000 in marginable equity.

According to the spreadsheet, you [a trader] would be able to experience 3 consecutive losses while experiencing less than 10% drawdown on initial equity AND increasing contract size to compensate for those losses.

As I work through different scenarios I'll upload examples of them (but for now I have to go get some coffee). The ramifications of such a money management algorithm are ... stunning if a trader has a system with at least a 50% win-rate and 2:1 - reward:risk ratio.

Best Regards,

Jimmy Jam

 

[austinp]

<i>"Emotion has nothing to do with it. Your P/L is just an objective figure.

If you do not get slightly more agressive after a loss, you will take longer and longer to get back to your highwatermark after each loss."</i>

If you have a solid, robust method with smooth distribution of wins and losses, getting aggressive after series of losses has probability of success to hit a string of wins.

If you get aggressive into a lengthy drawdown OR you have a method = system that simply sucks, you will go dead broke at an accelerated pace.

Those are the variables you control... parameters of your trading approach. If it's robust, you take calculated risk by varying bet size that string of losses won't be long or deep. If your trading approach has holes in it and you get more aggressive after each loss (i.e. pressing to "win it all back") you can kiss your trading account balance (and quite possibly trading career) goodbye.

Hope this helps
Austin

 

[late apex]

Quote from JimmyJam:


According to the spreadsheet, you [a trader] would be able to experience 3 consecutive losses while experiencing less than 10% drawdown on initial equity AND increasing contract size to compensate for those losses.

As I work through different scenarios I'll upload examples of them (but for now I have to go get some coffee). The ramifications of such a money management algorithm are ... stunning if a trader has a system with at least a 50% win-rate and 2:1 - reward:risk ratio.

Yes. To be fair, it helps (a great deal) that any system with such numbers -- perhaps mundane / unimpressive to some -- is a stunning, holy grail-ish foundation in itself, on which to overlay a particular MM. Even if your MM is terrribly sub-optimal, your results ought to be most impressive.

For example, such a system's Kelly optimal f is 25% (steel balls not included). Per each trade, that is... never mind 9.8% (=2.5%+3.3%+4%, from the spreadsheet) on 3 trades.