Would you ever trade a high probability, high risk method?

[clambill]

You might find this funny. But, I was looking at Oliver Velez' swing trading strategy. When I decided to "drill down time periods" and look at 60 minute charts, it was almost silly. Let's say you wanted to short once the price dipped below the 20 SMA. I saw many situations where the price dipped below, made like a U then went back up and crossed the 20 SMA again.

I figured hell, if it does that often enough, even if there's no logic to the trade, why don't I go long once the stock dips below the SMA and sell for a profit after it re-crosses the SMA. I mean it sounds hilarious because it doesn't seem like a "real strategy". Thing is though, after the price crosses the SMA and does that U, I'd be riding a paper loss long enough before it becomes a profit. I'm just not sure how I would manage my trades to do it.

How much liquidity do you need to do options trades?

 

[ProfLogic]

Quote from empee:

i dont get it. So lets say:

80% or 4 out of 5 times you make $1 = $4

20% or 1 out of 5 times you lose = $4

this doesn't have positive expectancy.

I agree. Risk to reward needs to be a whole lot smaller.

 

[intradaybill]

Quote from clambill:

I mean let's say if you could be right 80% or more of the time but your risk/reward ratio would be like 4:1. In other words, you'd be risking $4 to make $1.

Anybody have an idea how you would manage the trades?

Manage exactly what? If you are right 80% of the time your expected gain per trade (expectancy) is zero as someone else already pointed out to you:

E = prob win x avg win - prob loss x avg loss = .8 x 1 - .2 x 4 = 0

After taking into account slippage, commissions, missed trades, etc. you need to be right 90% of the time just to break even.

For the mathematical relationship of success rate to profit factor and risk/reward ratio I recommend this paper by Michael Harris:

http://www.tradingpatterns.com/profitability.pdf

 

[clambill]

Well, actually I wasn't sure what the exact probability is. I just meant a high risk, high probability trade. But, I appreciate the comments anyway.

 

[baggerlord]

All that matters is the positive expectancy. Then structure your risk so that you can survive a losing streak comfortably. Beyond that it is just personal preference on whether you want to trade this sort of payoff, or go for a 2:1 + RR ratio with lower win%. I would take whichever gave me the highest expected return on capital with risk i can live with.

 

[Rocko1]

Quote from empee:

i dont get it. So lets say:

80% or 4 out of 5 times you make $1 = $4

20% or 1 out of 5 times you lose = $4

this doesn't have positive expectancy.

I don't think he knows what expectancy means, hahaha

 

[total_keops]

I've try some scalping with that kind of risk/reward and expectancy. Fees get in the way big time. All automated maybe. Manually it's a waste of time and most probably money.

 

[carloskar]

All you guys are so wrong.

ofcourse you can trade a system with a 80% chans of sucess.
I think a 80% is a high percantage.

the thing is to cut your losses in time.

if you trade a really high risk method with an winning percentage of only 20% you can be very sucessfull.

it's all about having the discipline of cutting your losses in time so that you kep them small as possible.
And then when you hit that winning trade, hopefully the high risk givs a high return.
And if you have the discipline of sticking with your system and cutting your losing trades in time. The winning trades will be greater the your losses.

It's that simple. The hard thing is to find a system that fits your personality and trading style so that you have the patience of sticking with the system long enough so you can ride it's upside.

/ carloskar

 

[JamesJ]

you misunterstand the question carloskar..
he means a strategy were you win most of the time, and loose only very few times, but if you loose you loose big..


i wouldn't trade such a strategy i prefer it the way carloskar means...

lots of small losses / break even, and then from time to time a homerun...
i for example add on winners and adjust stop to break even level.. i get stopped out quite often like that, but if market continues in my direction it gives me a home run from time to time... which makes up for the losses due to stop out of initial position or the break evens after adding to winner...

it's also much easier to handle from a psychological point of view... small losses ("shit happens") and then a home run...
of course easier said than done... (after being stopped out several times you get pissed as well.. but instead of steaming i may not add to winner next time and take profit earlier.. or change the intervals or whatever, according to market conditions)...

 

[wiesman02]

Quote from clambill:

You might find this funny. But, I was looking at Oliver Velez' swing trading strategy. When I decided to "drill down time periods" and look at 60 minute charts, it was almost silly. Let's say you wanted to short once the price dipped below the 20 SMA. I saw many situations where the price dipped below, made like a U then went back up and crossed the 20 SMA again.

I figured hell, if it does that often enough, even if there's no logic to the trade, why don't I go long once the stock dips below the SMA and sell for a profit after it re-crosses the SMA. I mean it sounds hilarious because it doesn't seem like a "real strategy". Thing is though, after the price crosses the SMA and does that U, I'd be riding a paper loss long enough before it becomes a profit. I'm just not sure how I would manage my trades to do it.

How much liquidity do you need to do options trades?

Actually i find it rather stupid. Using a MA to determine your entry and exits is a losing strategy. Now if u combine the MA with price action from the past and present, then u might be on to something