Prudent Risk Management Is The Only True Edge In TRADING

[JSSPMK]

3rd Accumulator wins at odds of 6.5, 3 out of 10 hit rate (low), 100% return.

 

[Buy1Sell2]

There is nothing new under the sun.

 

[algofy]

Believe me, your style is being used by numerous people whether you or they know it or not.

False

Im using non standard bar types and non standard indicators. When you combine that with multiple conditions for entry, it's highly unlikely.

 

[algofy]

Geez, the amount of people who think they know everything is making me want to vomit.

 

[777]

Think of Expectancy as your profit in a business.

Expectancy = (Probability of WINNING × AVERAGE $WIN) - (Probability LOSING × AVERAGE $LOSS)

This number has to be Positive.

1) If Win Rate is 70% and Average Win is $50 and Average Loss is $100 then

Expectancy = [(.70 * $50) - (0.3 * $100)] = $35-$30 = $5 = POSITIVE

This system is a winner but not a great one.

2) If Win Rate is 50% and Avg Win is $100 and Average Loss is $100 (PERFECT Coin Flip System)

Expectancy = [(0.5 * $100) - (0.5 * $100)] = $50-$50 = ZERO

This system is a loser because no one trades 100% perfectly every trade and this does not likely account for commisions. This system has ZERO hope of being Profitable no matter what PRM you want to emplore.

3) If Win Rate is 50% and Avg Win is $130 and Avg Loss is $95

Expectancy = [(0.50 * $130) - (0.50 * $95)] = $65 - $42.75 = $22.75 = POSITIVE

- If Win Rate is 40% and Avg Win is $200 and Avg Loss is $95

Expectancy = $23 = POSITIVE

Notice these last 2 systems were SIMILAR POSITIVE Expectancy even though win rate was different. The better of the 2 systems is likely the 50% win rate one because you will have smaller losing streaks (higher win rate) and less drawdown of your capital so you can risk a bit more than the guy using the 40% win rate system.

4) If Win Rate is 60% and Avg Win is $80 and Avg Loss is $95

Expectancy = $10 POSITIVE

- If Win Rate is 55% and Avg Win is $75 and Avg Loss is $95

Expectancy = -$1.50 = NEGATIVE

Notice these last 2 systems were similar win rate and average win amount but one is a failing system and the other is at least positive but probably a marginal system. PRM will help the 1st of these to maximize his gain and the 2nd of these is a loser no matter what.

You need BOTH Positive Expectancy AND PRM to maximize a system and be as profitable as possible with as little drawdown as you can reasonably accept.

I think you and I are saying the same things. Just in different ways perhaps. But a Holy Grail system is not one with a High Win Rate. Nor is it one with the Highest Positive Expectancy. Its the one that had BOTH and then you maximize it with PRM. Most systems have a blend of win rate and Expectancy and are acceptable systems. Yes absolutely PRM is critical. My point is simply that PRM IN AND OF ITSELF is NOT going to make you profitable. You MUST have a Positive Expectancy and THEN AND ONLY THEN will PRM help you MAXIMIZE the results of your system for maximum profit with acceptable drawdown. I think a better trading proverb would be "Limit Losses and the Winners will take care of themselves Assuming you have a Positive Expectancy"

You need BOTH a Positive Expectancy AND PRM. Either one alone is not enough. But the "Edge" is what gets you the Positive Expectancy (Profitable system) and PRM maximizes the expectancy.

For further reference read Van Tharpe's books like "Trade You Way to Financial Freedom" or "The Definitive Guide to Position Sizing". They are very good in my opinion.

Yes, of course.

It is better to have a 100% edge on a 50/50 shot like betting on a coin with two heads, than a 100 percent edge on a 100 to 1 shot where you would win only a small percentage of the time.

 

[MrScalper]

Thus it can be easily seen that successful traders have a certain edge over other traders and that is the ability to implement PRM. ---There is no other edge available to the trader.

Why do you persist as if you are right. Is your trading the same?

The ability to not risk too much per trade, use stops, take profits at pre-defined levels and scale in an out of positions does not guarantee success (consistent profits).

Success is when your winners and losers are added up and the end result is a profit. The amount of trading you do is determined by your circumstances, available capital, understanding of the chosen markets/instruments and last but not least, your experience.

Prudent risk management is a fundamental requirement (which most fail to recognize), it is not "an edge". An edge is something like using your accumulated experiences to make good judgement calls in relation to placing and exiting trades. Daytrading the ES is not the same as taking a position in INTC for 3 to 6 months.

The worst thing any person starting out can do is take seriously what people post on the internet. Venturing into any new business without covering the proper fundamentals is a foolish endeavor. The financial industry is like a big circus, full of clowns who make people laugh (whilst picking their pockets at the same time).

It is not an edge, why can you not understand this simple fact?

 

[JSSPMK]

The worst thing any person starting out can do is take seriously what people post on the internet.

Does that mean we are to ignore your post?

 

[algofy]

Does that mean we are to ignore your post?

Honestly 90%+ of everything on here should be ignored...including most of what I post

 

[Buy1Sell2]

Why do you persist as if you are right.

Because I am

 

[Buy1Sell2]

take profits at pre-defined levels and scale in an out of positions does not guarantee success (consistent profits).

These are not part of PRM.