Increasing risk after a loss

ParisJOM · Oct 19, 2006

Quote from me1969:

If my equity is up I should use more of it. Example: I risk 1% per trade of my equity on 100.000, which means 1000 per trade. So when I am up 10% I should use 1100 per trade. Same vice versa (then it is more about preserving my equity).
You are right. Adding to a loser is different but I think you can compare it to taking more risk when you are loosing because both can very fast harm your equity (and without it no trading )

Ok, it would seem that we are just confusing terms here. If you maintain a fixed % risk on capital, then you may be increasing size after a win (but not necessarily, you could be reducing/ maintaining size and placing stop further out) and in consequence risking more in absolute terms. In regards to % risk on capital though you have not increased or decreased risk. Fine, clear.

My preceeding question was actualy asking how one could justify decreasing % risk after a loss and vice versa.

austinp · Oct 19, 2006

"Furthermore, in regards to increasing size after a loss is concerned, your acertation is incomplete. As I have mentioned many times here already, you can actualy increase size while decreasing risk... its just a question of running a tighter stop and in low volatility conditions this can be entirely justified."

Here's what happens to most traders in real time: string of losses hit, they add $$ size and tighten stops to level downside risk. Volatility ebbs & flows as usual. Stops are too often too tight, get repeatedly hit because they are inside normal market "noise".

The trader is no longer playing his/her method with correct entries and stop management balanced on optimal price action. Now it's all about the $$ risked, nil consideration what price action dictates.

What would otherwise winning trades in accordance with the method now become losers due to improper stops = bastardized balance of trading parameters. Losses mount. Process continues in vicious cycle until broken, usually with a broken account.

**

Paris, I appreciate the dialog in this thread, it is well done. I also get the feeling that you have an ironclad opinion about this topic and will defend it from all angles without consideration of anything else.

Let me say this about that: what may work for you and a slim minority of traders will absolutely devastate the vast majority of traders who try it. At the closing bell yesterday, x-number of traders ceased trading for awhile and maybe forever simply because they staked their biggest position possible on the last trade their account could handle.

As for FX traders? When they blow out an account, it is usually in spectacular fashion. FX is by far the most difficult market to trade, for a number of reasons. Traders who play with reverse leverage there will inevitably meet fiscal disaster.

Please take the words of considerable experience to heart. Paris, you and a minority of traders may play the games described while dancing around a bonfire. What you advocate will absolutely destroy most traders who read your words and act upon them. Be very careful what you teach... what works for a minority of people with advanced skills (or wild-a** luck) is not viable for the vast majority of traders out there.

Hope this explanation helps :>)
Austin

ParisJOM · Oct 19, 2006

Quote from austinp:

"Furthermore, in regards to increasing size after a loss is concerned, your acertation is incomplete. As I have mentioned many times here already, you can actualy increase size while decreasing risk... its just a question of running a tighter stop and in low volatility conditions this can be entirely justified."

Here's what happens to most traders in real time: string of losses hit, they add $$ size and tighten stops to level downside risk. Volatility ebbs & flows as usual. Stops are too often too tight, get repeatedly hit because they are inside normal market "noise".

The trader is no longer playing his/her method with correct entries and stop management balanced on optimal price action. Now it's all about the $$ risked, nil consideration what price action dictates.

What would otherwise winning trades in accordance with the method now become losers due to improper stops = bastardized balance of trading parameters. Losses mount. Process continues in vicious cycle until broken, usually with a broken account.

**

Paris, I appreciate the dialog in this thread, it is well done. I also get the feeling that you have an ironclad opinion about this topic and will defend it from all angles without consideration of anything else.

Let me say this about that: what may work for you and a slim minority of traders will absolutely devastate the vast majority of traders who try it. At the closing bell yesterday, x-number of traders ceased trading for awhile and maybe forever simply because they staked their biggest position possible on the last trade their account could handle.

As for FX traders? When they blow out an account, it is usually in spectacular fashion. FX is by far the most difficult market to trade, for a number of reasons. Traders who play with reverse leverage there will inevitably meet fiscal disaster.

Please take the words of considerable experience to heart. Paris, you and a minority of traders may play the games described while dancing around a bonfire. What you advocate will absolutely destroy most traders who read your words and ct upon them. Be very careful what you teach... what works for a minority of people with advanced skills (or wild-a** luck) is not viable for the vast majority of traders out there.

Hope this explanation helps :>)
Austin

Austin, I entirely apreciate your thoughts and I completely agree that many would blow up in attempting increasing risk after a loss because many are just naive, inexperienced, or don't take the time to do alot of research and build a workable model. ... In any case, I think that many inexperienced traders do a fine job blowing up with or without playing on risk factors.

Did you see the levels of risk% that I deal with ? If not, scroll back a few pages and you will see that I am dealing with risk% that many might consider "rediculously low" (keep in mind we are in a world where some think that leveraging an account to 100 x capital is safe).

Not to toot my horn or anything, but just to let you know that I am not particularly naive, I have been trading FX for about 13 years and work in the fund industry.... again, not to brag or say that I'm ultra brilliant or anything, just to let you know that I am not a naive newbie and am well aware of what happens to many.

As far as tightening stops is concerned, it seems quite obvious to me that stops should be placed, not at some arbitrary distance, but is consideration of volatility that the market has recently exhibited. I often say myself "tight stops kill" and I call them "virgin stops" (as in "too tight"

)

If you read back, I am NOT endorsing a simple mechanical system that does not take the reality of the market into consideration. As I have stated before, my model is greatly based on market volatility (I might go into further detail about my technical entries latter, but the most complex part of my model is definitely the risk management aspect).

austinp · Oct 19, 2006

Paris, with proper disclaimers in place, I see absolutely no problem with what you shared with everyone. Please emphasize the 13yr trading experience and fact that what you do is advanced-level tactics.

When speaking to the public, we have an unknown number of people who trust what they hear and cannot discern what's good for them or not. It is our responsibility to do no harm first, try to help secondly. Quite often our words of warning go unheeded at first, but ring much truer in time.

Congrats on lasting so long in such a challenging profession, and here's wishing your next 13 years to follow are ten times more fun that the last!

Best Trading Wishes,
Austin

patrick_newB · Oct 19, 2006

Quote from m4a1:

seems to me you are only considering 1 sequence of trades here. if you do a monte-carlo analysis of many sequences of trades, then the drag is not there. the compunding effect of consecutive winners negates the drag.

I learned something here. After running some simulations it appears that my observation is only true of a high win rate system, like 70% or higher, whereas with a 50% win rate system your observation is correct. Thanks for the insight.

ParisJOM · Oct 19, 2006

Quote from austinp:

Paris, ... It is our responsibility to do no harm first, try to help secondly....

Well said, yes, I agree that I should have emphasized a "do not attempt this at home until comprehensive research and modeling is accomplished"

I may add here that I blew up 2 accounts in my first 2 years of trading, but I was not doing what I do now. The problem was the classic overleveraging.

I might also add that my trading objective is not to attempt to double my account in a year or anything so daring. My objective is to simply make regular returns, keep draw dawns low, and outperform the better part of the FX funds out there (which did about 6% to 12% on average last year)... I did a bit over 25% for 2005. This year looks a bit less promissing, and I will be happy to see about 20% for 2006.

For those of you who are looking for 100%+ returns annualy, I wish you good luck, but am not interested in even attempting to take on the risk that such returns necessarily imply.

ParisJOM · Oct 19, 2006

Quote from patrick_newB:

I learned something here. After running some simulations it appears that my observation is only true of a high win rate system, like 70% or higher, whereas with a 50% win rate system your observation is correct. Thanks for the insight.

Yes, compounding is defintely key to long term success.

In regards to win rate, I run a low probability model. About 60 to 70% of my trades are losers that get stoped out. The winners tend to run for a rather long time (often a couple weeks to well over a month) and these winners largely make up for the losers. Too many people seen to be obsessed with "win rate" when this is only half the equasion. To coin one of Soros' sayings, "its not how often you win or lose that counts, but rather how much you win when you win, and how litle you lose when you lose".

One of the resons that I have opted for the lower probability aproach (ie several smaller losses for a single large win) is that is it cost and time efficient. Cost effecient inso far that it implies fewer transactions, and therefore less spreads, man-time, ..etc. The fact that it implies fewer transactions also makes for far less "missed opportunities".

This model uses 4 H data for technical entries/exits, and therefore is not a "day trading" system... though some transactions are opened & closed within 24 hours, but that is not the norm.

kahai · Jul 14, 2007

ParisJOM, are you still around to answer questions relating to this thread. I am impressed by your knowledge not only on this thread but also on another thread - I forgot the title - where you take apart those ridiculous systems which claim a hedging or even statistical arbitrage strategy by taking positions in two highly correlated currency pairs. I also freely admit that I do not completely understand everything you say since I am fairly new to forex trading and do it only part time. Worse, I prefer to subscribe to commercial services if I feel they are sound and the people behind it are honest in reporting their performances. Now, belief it or not, I came across a quantitative forex system based on statistical arbitrage which seems to share many of the characteristics you seem to favor, it is fx-quant.com. Now I certainly do not want to promote anything here but I would greatly appreciate your or any other heavyweight's opinion about it. The system would not appeal to most forex newbies anyway since it "only" aims at an average annual return of about 28%.

I just started going through some of the forex threads in a haphazardly manner and I am sure there are many other qualified people who could give their opinion about this system which I would appreciate.

PaulZW · Mar 28, 2012

ParisJOM is absolutely correct. Keeping the $ amount risk constant after the loss is the only way to move forward faster after losses.

I used to trade Risk % (Fixed Fractional) and it was very slow to come out of DDs. Now I use $ amount risk (which is roughly 2-3% of the beginning account's amount) and I keep it the same after a loss or couple of losses. So yes, my risk% after a loss increases, but very slightly.

Another way I control risk is that I grade my setups, i.e.: in Trading Range I will use less $ risk than in trending market, and so on. My perfect setup is A, then B and less favorable are C and D. I would risk more $ on triggers occuring in A and B setups.

And yes, it can be very dangerous for newbies, as it requires stable, reliable strategy.

I was very happy to find this topic here. Unfortunately it ended long ago. Thank you ParisJOM.

ElectricSavant · Mar 28, 2012

Nice!

Another way I control risk is that I grade my setups, i.e.: in Trading Range I will use less $ risk than in trending market, and so on. My perfect setup is A, then B and less favorable are C and D. I would risk more $ on triggers occuring in A and B setups.