Make a spreadsheet model that shows the equity curve of a series of trades based on the parameters you choose, with the random function determining wins/losses according to the win/loss % you input. Keep hitting whatever button recalculates it all so you can get a feel for the potential equity curves that different parameters will give you.
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The 2% loss rule
- Thread starter clambill
- Start date
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Quote from spindr0:
If I don't like how the trade is behaving, I cut it loose regardless of the profit or loss. Fixed arbitrary numbers don't work for me.
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There's no magical stop loss number that will pave the way to profits. Money management is as important as the set up. You have to protect your cities and preserve capital so that you can stay in the game. Whether it's 1% for Joe or 5% for Schmoe is irrelevant. You have to find out what works for you.
Quote from spindr0:
If I don't like how the trade is behaving, I cut it loose regardless of the profit or loss. Fixed arbitrary numbers don't work for me.
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Hindisght is 20/20. When you exit a position, there's no way to know whether it would have been a bigger winner or a bigger bust.Quote from clambill:
I think I know what you mean, but for me, I find my judgement could get me out of a trade that would have worked out eventually if I just get out because it "doesn't feel right".
There's no magical stop loss number that will pave the way to profits. Money management is as important as the set up. You have to protect your cities and preserve capital so that you can stay in the game. Whether it's 1% for Joe or 5% for Schmoe is irrelevant. You have to find out what works for you.
Quote from clambill:
Wait, do you mean if your loss on every trade is 3.3% or if you risk 3.3% of your money? I meant if I permit myself to LOSE 3.3% on every trade.
It is 3.3% loss of current bankroll on every trade, assuming p and odds remain constant and this is of course an unjustifiable assumption in most cases. %K will ruin the accounts of traders with underperforming systems very fast and exponentially grow - within limits of liquidity of course- the accounts of traders with overperforming systems. This is a good paper on %K.
Quote from clambill:
Well, my risk reward ratio (would actually fluctuate) is about 1:2. Meaning I'm generally aiming for profits twice as large as my losses.
I came up with the 3.3% partly because it would give me a 33% drawdown with 10 consecutive losses. If I filter my trades, I'm figuring my losses might not even get up to 10 consecutive losses.
I know I'm questioning what seems obvious, but sometimes I like to test ideas with real-time prices to see if I could possibly be wrong even when I suspect I know the answer beforehand. Then I know with better certainty.
Clam,
Your risk reward may be 1:2 in your set ups, but we don't have the other two thirds of the equation---how often do you win vs. lose, and how much of a draw down are you willing to endure. (it sounds like 33% is a rough estimate ; ) You can get win/loss information with simulated results, but they have their limitations.
I would say, take your system, decide what you think a reasonable amount to risk is per trade, divide that by 4, and trade your system LIVE with an extremely reduced position size. This will give you actual results without risking too much of your capital (lifeblood). It is slow, and you probably have the urge to go out and start making money right NOW, but there is no rush.
I repeat, THERE IS NO RUSH!
Oh, and by the way, you WILL have 10 losses in a row if you trade long enough. Don't use optimal F. That formula assumes you know the worst that can happen. You haven't seen the worst, and you don't want to when you are risking that large of an amount.
Good luck,
Eric