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nvr735i
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Posts posted by nvr735i
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Thanks for the rewrite. I read it through and enjoyed it. Obviously I pushed a button not only with you because I got a PM from the owner referencing my post to you to be nicer.So let me try.
If you've gotten rich off trading futures, that's great for you. It was a long journey for me with a lot of heartaches and setbacks. I had made a bundle with stocks at a daytrading firm I traded from but the tech crash and going to penny increments pretty much killed that golden goose.
I transitioned to index futures and thought it wouldn't be all that different. But trading futures was something else. I blew through 2 accounts, the first one pretty sizable. I funded the last account with $10,000 and started with 1 contract.
I had a goal of getting to a million with futures and thought that would be the moment when I would never look back. In actuality, it was much sooner than that. It was when I got to 5 contracts ES and dwelled there for a long while. That was over 8 years ago and I've only been taking money out since.
Now, you might be so far ahead of me that you sneeze at a million. For me, it's a great year. I've reached it only twice trading futures, including this year. And to be honest, I feel pretty good about it. You might accuse me of bragging again, and maybe I am. My main point is that I've never had to set up math problems and figure risk or return or whatever else to get there. But I'm always looking to improve. So if you're as good as you imply in your post, I'll be sure to watch out for your posts going forward. Maybe I'll learn something and have a 10 million dollar year some day.
Cheers.
MUCH BETTER post!Just remember that no one here is saying the road thay took to
do well as a trader is the ONLY road to take.There are many ways to get to the same goal.All we try to do is be open-minded because everytime I thought I knew all I needed
to know about trading,I learned something more that helped open my eyes to greater possibilities.Then,I would look back at what i thought I knew ,and realized I knew almost nothing in comparison to what I had just learned.I'm sure my learning isn't over by any means!I'm sure there's much more to know.That's why although I may not agree with someone's opinions on trading,i still respect what they have to say.It's not about being
better than you or anyone else.i KNOW there are people who are vastly superior to me financially and in their trading record.It's about being the best that I can be and sharing information that might help somebody else along.That's why we're all here,in my opinion.
Good Luck to you!
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I have made many posts regarding risk, trading results, and expectations and the responses have been similar to the responses you would get if you told a gathering of followers that there is no god.Some of the names that have been mentioned on this thread are masters at promoting themselves and have attracted large sums of money on which they made their fortunes.
When you look closely they engage in gamesmanship to ensure that they have a fund that still has a high rate of return. Gamesmanship means splitting a fund into good assets and bad assets and making excuses about the fund with the bad assets.
They have survived so long not because they remain as the best traders, but because they know how to promote themselves.
It is all about the fees.
Actually that's not the case.Only 1 or 2 managers did that in 2008 for liquidity purposes.Paul Tudor Jones was flat in 2008 as the market fell apart,but investors had to draw on his fund because it was the only source of liquidity that wasn't destroyed.In order not to be forced into selling illiquid assets at a ridiculous price,He separated a small piece of his fund into a separate account to keep the investment intact.If you look at his performance before 2008 and after,his numbers are stellar.It's sad that people who can't accept the fact that someone does a great job, must make negative comments with no evidence to support them in order to make themselves feel better.These are people to learn and improve from.I highly doubt that any of the people i mentioned need fees to survive since they are all centimillionaires or billionaires!
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Hey, nvr, thanks for clarifying, but no problem -- I got it. You were replying to the one with the big mouth.glad you understood! stay well..
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It's all about the minimum position size.Let's say a trader has a $20,000 account and is conservative, trading at 1% risk. Let's take the SPY ETF as an example. He trades the SPY on a daily chart with a stop based on average true range. Let's say the ATR for the SPY (excluding the recent massive volatility increases) is 1.70 -- not far off the mark for the last couple of months. Say the stop is 3 x ATR -- or 3 x 1.7 = 5.1. At 1% account risk, this trader's loss to the stop needs to be $200. He can easily accommodate this by position sizing -- SPY is at $120, he would trade 39 shares of SPY at 120 - for a position size of $4,680. His stop would be at 120 - 5.1 = 114.9. If his stop is hit, he sells 39 shares at 114.9 for a total of $4,481. Purchase price $4,680 minus selling price $4,481 represents a loss of $199. As close as we can get to the desired 1% of account size. Theoretically, at least, we are within our desired risk parameters.
Now shift the whole thing to the ES. Say the ES is at 1200. The value of one contract is $60,000 ($50 x current price, ie 50 x 1200in this example). You might see the problem already, before we go any further. The trader was able to trade the SPY at a precisely determined size of $4,680, set by his desired risk level. With a $20,000 account, he can trade several contracts of ES according to margin requirements (not sure exactly what ES margin is right now - I never get ANYWHERE CLOSE to minimum margin), BUT each contract of ES is worth 60,000, his minimum position size is $60,000. Let's say he takes the trade at one lot, because margin requirements allow him to. He might even feel 'safe' because he is trading less than the maximum allowed on his account (after all the brokers must know, musn't they? They wouldn't allow this if it wasn't OK?..). So he purchases his one contract of ES at 1200. Stop is the same 3 x ATR. ATR on the daily chart is running at around 20 (again pretty close to where it was the last few months before the volatility spike). So his stop is 60 points. One point on the ES is worth $50. So the loss if the stop is hit is $3,000. With the trader's $20,000 capital, this is 15% of his account size. And he cannot trade any smaller -- this is the minimum size -- one contract. The size of the contract is defining the risk rather then the trader himself -- because he is under-capitalised for that market.
So, to take the same daily chart trade on the ES as he did on the SPY, and to maintain his desired 1% account risk, our trader would need an account size of not $20,000, but $300,000.
Conversely, trading at one lot with his $20,000 account, he only needs 7 losses in a row to be ruined.
And this is for one contract in one futures market. To achieve diversification and trade multiple markets, and also maintain a low risk factor, you can see how a larger account is required.
Also, there is the issue of 'granularity' when increasing your position size to match a growing account value (or decreasing lot size to match a smaller account after losses). Assuming you have sufficient capital to trade one contract within your own designated risk parameters, you will need to double your account size before you can add a second contract. Trading the SPY, on the other hand, allows you to increase your position size one share at a time -- you would be able to increase your position size and still maintain your risk profile just about after every winning trade -- ie your account grows much faster because compounding occurs straight away and continuously, as opposed to not starting to compound until you double your account size.
Trading 10 lots to start means you could add a further contract when your account is 10% up, rather yhan 100% up -- much better. But, you can do the sums as above -- how much capital do you need to stay within your own risk parameter and trade 10 lots of the ES?
Some will say that this example is extremely conservative -- and, yes, it is -- many trade the futures markets at much higher risk levels than this. Some will also probably point out that you could trade futures on a smaller timeframe and thus have a much smaller stop. Equally true. But the principles outlined above hold. You should choose your risk parameters accrding to your personality, according to how much pressure you can withstand (and it's always less in practice than you think it will be, so you are well-advised to be conservative here). You shouldn't be forced into higher risk due to the minimum position size possible in a given market. Nor should you be forced into a shorter timeframe because of account size. So, choose a market the allows you to remain within the risk profile you want, in the timeframe you want to trade, with the capital you have available.
Bt the way rdhtci,my comment about trading conservatively was not directed at you.It was directed at Gosu.In fact,my whole response earlier was to his comments on trading ES in response to you.Sorry if I indicated otherwise.
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It's all about the minimum position size.Let's say a trader has a $20,000 account and is conservative, trading at 1% risk. Let's take the SPY ETF as an example. He trades the SPY on a daily chart with a stop based on average true range. Let's say the ATR for the SPY (excluding the recent massive volatility increases) is 1.70 -- not far off the mark for the last couple of months. Say the stop is 3 x ATR -- or 3 x 1.7 = 5.1. At 1% account risk, this trader's loss to the stop needs to be $200. He can easily accommodate this by position sizing -- SPY is at $120, he would trade 39 shares of SPY at 120 - for a position size of $4,680. His stop would be at 120 - 5.1 = 114.9. If his stop is hit, he sells 39 shares at 114.9 for a total of $4,481. Purchase price $4,680 minus selling price $4,481 represents a loss of $199. As close as we can get to the desired 1% of account size. Theoretically, at least, we are within our desired risk parameters.
Now shift the whole thing to the ES. Say the ES is at 1200. The value of one contract is $60,000 ($50 x current price, ie 50 x 1200in this example). You might see the problem already, before we go any further. The trader was able to trade the SPY at a precisely determined size of $4,680, set by his desired risk level. With a $20,000 account, he can trade several contracts of ES according to margin requirements (not sure exactly what ES margin is right now - I never get ANYWHERE CLOSE to minimum margin), BUT each contract of ES is worth 60,000, his minimum position size is $60,000. Let's say he takes the trade at one lot, because margin requirements allow him to. He might even feel 'safe' because he is trading less than the maximum allowed on his account (after all the brokers must know, musn't they? They wouldn't allow this if it wasn't OK?..). So he purchases his one contract of ES at 1200. Stop is the same 3 x ATR. ATR on the daily chart is running at around 20 (again pretty close to where it was the last few months before the volatility spike). So his stop is 60 points. One point on the ES is worth $50. So the loss if the stop is hit is $3,000. With the trader's $20,000 capital, this is 15% of his account size. And he cannot trade any smaller -- this is the minimum size -- one contract. The size of the contract is defining the risk rather then the trader himself -- because he is under-capitalised for that market.
So, to take the same daily chart trade on the ES as he did on the SPY, and to maintain his desired 1% account risk, our trader would need an account size of not $20,000, but $300,000.
Conversely, trading at one lot with his $20,000 account, he only needs 7 losses in a row to be ruined.
And this is for one contract in one futures market. To achieve diversification and trade multiple markets, and also maintain a low risk factor, you can see how a larger account is required.
Also, there is the issue of 'granularity' when increasing your position size to match a growing account value (or decreasing lot size to match a smaller account after losses). Assuming you have sufficient capital to trade one contract within your own designated risk parameters, you will need to double your account size before you can add a second contract. Trading the SPY, on the other hand, allows you to increase your position size one share at a time -- you would be able to increase your position size and still maintain your risk profile just about after every winning trade -- ie your account grows much faster because compounding occurs straight away and continuously, as opposed to not starting to compound until you double your account size.
Trading 10 lots to start means you could add a further contract when your account is 10% up, rather yhan 100% up -- much better. But, you can do the sums as above -- how much capital do you need to stay within your own risk parameter and trade 10 lots of the ES?
Some will say that this example is extremely conservative -- and, yes, it is -- many trade the futures markets at much higher risk levels than this. Some will also probably point out that you could trade futures on a smaller timeframe and thus have a much smaller stop. Equally true. But the principles outlined above hold. You should choose your risk parameters accrding to your personality, according to how much pressure you can withstand (and it's always less in practice than you think it will be, so you are well-advised to be conservative here). You shouldn't be forced into higher risk due to the minimum position size possible in a given market. Nor should you be forced into a shorter timeframe because of account size. So, choose a market the allows you to remain within the risk profile you want, in the timeframe you want to trade, with the capital you have available.
By the way,If you think your examples are extremely conservative by risk standards,I wish you well but you may want to think again...............:crap:
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Amigo, these little math problems have little connection to actually trading the index futures which is something I know just a bit about as they are the only things I trade.$20,000 is more than enough to trade a contract of ES. Of course not in the way you describe. Only an idiot would trade that way. Just like only an idiot would trade one contract on a $300,000 account.
Do you understand that the index futures are a leveraged market? The current overnight initial margin on the ES is $5000. Most brokers allow intraday initial at half of that, some even much lower.
Can you understand that people with skill want to use leverage?
Can you see the possibility that there are people out there beyond your limited experience who do not trade the ES according to these silly math problems you invent?
Until this thread, I had no idea there was such a thing as a risk of ruin calculation in trading. LOL... Would I have made my first million faster knowing it? I doubt it.
I would be interested to know who was the first yahoo who applied it to trading? Sounds like some guy who failed at it and then went to invent something to sell to others to get his money back.
Amigo,
I understand the futures markets very well,as I am a licensed futures trader as well as securities trader of many financial instruments for a major institution.That silly little math problem you referred to has been used by Ed Seykota,William Eckhart,Richard Dennis,paul Tudor Jones,Michael Marcus,JohnHenry and Louis to name a few.When you can show me
your documented records that rival their returns,then i'll be happy to listen to you.As to my experience,i have been trading over 30 years and am still around so I think i might have some idea of how the whole thing works.Your example,unfortunately fails significantly at making your case.No,according to someone who trades their system properly,you CAN'T trade ES
because 1% of $20,000 is $200.The $3000 loss exceeds his parameters for risk so he is
PROHIBITED from trading it,if he's true to his system.You should have stopped there.Many people with SIGNIFICANT accounts have securites that are eliminated from their basket
for that very reason.It DOESN'T mean they can't trade at all.Who says I have to trade ES
to trade successfully?I could pick something else to trade that would fit my parameters
easily.I guess I and all the traders I mentioned above are idiots according to you,because that's how they trade!You must have over 10 Billion Dollars to call Ed Seykota or Louis Bacon an idiot.That silly math problem has kept them still trading as well.Who says that anyone would trade only 1 contract in an account as stated above.My statement was that you can trade a smaller account using trend following depending on what you trade.Who are you to say what or how a person should trade?I gave a simplified example of how someone could trade to avoid RoR.When did I say that this was the optimal way to trade?As to your comment about skill and not using silly little formulas ,that tells me that you have an ego and that you're probably trading aggressively.Us silly little quants don't say we have skill,we just were fortunate to have had a favorable probability outcome on our trade.You keep trading according to your skill and i'll keep trading according to my silly little formula.I never said my way was great and yours idiotic.I suggest you have the courtesy to do the same for me and anyone else who tries to help others have enough knowledge to make an informed decision
on how they want to trade.Lastly, I suggest you read the book "Market Wizards" by Jack Schwager and focus on the chapter about Larry Hite,the "IDIOT" who NEVER RISKS MORE
THAN 1% ON ANY TRADE,and has averaged 30% A YEAR,had annual returns of a WORST +13% to a BEST +60%,whose largest loss in any 6 month period was ONLY 15%, and UNDER 1% in ANY12 MONTH PERIOD.(NOT JUST CALENDER YEARS!) and then come back and try make your argument about"SILLY LITTLE FORMULAS" again! If you can do better than that with your SKILL,let me know........
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Hi nvr735i, I agree with limiting losses to only a fraction of your bank. To do this, you don't need to tinker with the parameters of the system. But simply set set your bank to be 20% of your account. So you would still make your 50% a year, but it would be 50% against 20% of your account, not your full account.Could you expand your thoughts on why you would need a large account to trade futures?
Yes.THe first reason is that the margin requirements on some futures contracts can be substantial so it may exceed the amount of capital you have available,so you would not be able to trade certain markets.Or when sizing for risk ,you might not even be able to trade 1 contract if you size for volatility.These factors would prohibit you from having the diversification and non correlation that you should have when trading futures contracts using a trend following methodology.
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A quick note on trend following. If you have a feel for RoR you will see that having a low number of % winners has a large effect on draw down and RoR. This means you need a large account to size properly. This is one of the main reasons it is not suitable for many. Oh, that and the fact that many trend followers will want to trade multiple instruments (with varying bet sizes in each) to help smooth the week to week equity curve.Hi BlowFish,
It's true that having a low number of% winners effects drawdown and RoR.However,it doesn't necessarily mean you need a large account to size properly,nor does it mean you have to trade multiple instruments,although preferable for non correlation purposes.The drawdown will be contingent on what percentage risk per position you use.If i risk .1% on a position and lose 89 times in a row, i would only have a single digit drawdown!As far as having a large account,
that depends on what instruments you are trading.If you trading futures,I agree.if you're trading equities or options(properly!) you don't have to have a very large account.I read your link and agreed with all but the argument of perceived risk with the 2 systems.A person should be trading mechanically for the exact purpose of avoiding emotions and being disciplined in their trading.Why the heck would i trade a lower expectancy system if i'm aware of the fact that
i will have significantly more strings of losses?The trader in the article is looking at the maximum end of position risk to make his argument.Why would i accept a reward to risk ratio of.50 vs. 1.1? Couldn't I bet $1 instead of $3 so that my drawdown will be much lower and i still get the higher expectancy over time.What if my system generates 3 times the amount of trades than system A does over the same time frame?That would be the equivalent of trading the maximum of 3 dollars to get the highest return with a much lower RoR.If the statement is that emotionally
it would be very hard for a trader to keep trading the system when in a drawdown,then he shouldn't trade it ,regardless of the expectancy.But if that system could be traded as i stated above where the drawdown would be comfortable with a much greater expectancy,then you should trade it.I agree with the overall premise of finding a trading system that fits you as a person.But the 1 critical factor being left out of that interview is what am I looking for as an acceptable rate of return?Why is it always assumed that we want to trade at the absolute limit
to get the gigantic return?If a system at the max makes 50% a year with a max drawdown of60%,can i trade it at a risk size that makes me 12% a year with a 14.5% drawdown?When building a system,it is critical to consider risk of ruin.But remember that RoR is subjective and
the first thing to consider is what i am looking for as an acceptable rate of return.My risk of ruin
could be i don't want to lose more than 20% of my account value versus yours being you don't want to lose more than 50% of your account.Just food for thought.
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russellhq -- we're going round in circles here. I responded to your post which said 'I don't think that's true...' by explaining exactly why what I said is true. Now you say it's true but irrelevant. Maybe you should make up your mind if you think it's true or not. Given that we're talking about the law of large numbers, that much is pretty simple - it's unequivocally true. If you think it's irrelevant, that's your prerogative, but I would caution you to think again.And I haven't skipped over what you term 'accumulation of results' - quite the reverse, it's exactly what I have been talking about. My posts have made several references to 'distribution of returns' and 'variance of returns'. In this context, 'distribution of returns' means how your wins and losses are grouped, 'variance of returns' refers to how far away from the average your returns are at any one time. Seems to me that these concepts are exactly what you are discussing.
I am trying to point out to you that no amount of mathematical calculation will stand you in any stead when your 'distribution' or 'variance' are suddenly a mile away from anything you have previously encountered, or anything you were able to predict, or anything your math calcs suggested... Or anything you were prepared for. If you don't work out how to prepare for that, you're out of the game. Ruin. If you think that's irrelevant to what you are discussing, I can only wish you luck.
As for your question about the results of 1,000,000 coin tosses under specified conditions -- I don't know. There's no point in calculating that because THAT is irrelevant. Why is it irrelevant? Because of everything I have been saying -- you have absolutely no way to determine your future returns -- not their average, not their distribution, not their variance. There is no correlation between real-world trading and anything concerning a coin toss EXCEPT that there will be variance in both. Which, in future trading, can only be unknown until after the event. That is precisely why approaching this problem from the angle of calculating the largest position size which will not cause ruin is fundamentally flawed...
I think I'll leave it there - I've tried to clarify, I don't think I can do any better -- if you think it's irrelevant, best of luck -- sincerely.
once again,i agree.That's why many traders stopped using the Kelly Criterion to determine optimal position sizing to maximize return.It's way too aggressive in terms of sizing as far as i'm concerned.
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Both statements are completely true.The law of large numbers states that actual results become closer to the expected as the number of instances increases. In other words a coin-flip produces closer to 50-50 the more times you flip. This has absolutely nothing to do with breakeven. The concept of breakeven introduces another factor, the size of a bet, which allows the distribution of returns to affect the result. If you introduce beakeven, your subject is no longer the number of heads or tails produced, it has become how much money has been made or lost.
Conversely, over a small number of coin tosses, a string of consecutive heads or tails can be far larger than the expected outcome would suggest -- leading to a short-term result further away from 50-50 than you might expect.
I have witnessed a small experiment where a number of series of 100 coin flips was performed and recorded. The strings of consecutive heads and tails were eye-opening. I have also traded long enough to see such strings in my own results. Sooner or later, everybody will experience this. Anyone who hasn't seen it has probably not consistently traded the same method for long enough.
This latter phenomeneon, the larger-than-expected string of losses, is precisely what connects the coin-toss to concepts of risk management. That and the position size element are precisely what combine to produce ruin. Put simply, a position size which is too large can combine with a larger-than-expected string of losses and wipe you out.
There really is no argument about this, and it embodies the precise problem faced by those trying to calculate the largest possible position size. The black swan is a much used phrase which has come to be incorrectly used as an analogy for a bad day in the market. It's not that at all - it refers to an event which has not previously happened in our experience. In other words, not just a larger-than-expected string of losses, but a string of losses which is so large that it has never been known to occur before.
That event is out there, it's in your future. Any calculations related to risk need to acknowledge this.
Again, it's importance is related to your personal circumstances -- specifically, it's related to account size. Without being in any way flippant <g>, it's a different matter trading an account that was funded with $500 from an extra job flipping burgers than it is trading a much larger account that represents 20 or 30 years of carefully accumulated capital. Or a large amount of capital representing other people's money. One is much more easily replaced than the other, and you might be happy accepting larger risk.
Which is precisely why professional traders trade at low risk levels. Inexperienced traders tend to push out the boat because they are unaware of these factors. They also tend to blow out their account.
One of the beautiful things about trading is that you create your own circumstances. But it's a double-edged sword. I am simply suggesting that anyone considering risk management should be aware of these simple elements.
You summed it up perfectly.We all probably haven't seen our worst drawdowns.However we can lower the probabilty of ruin by controlling position size and portfolio heat.
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Tom,
I don't see how having a stop as an exit can leave more money in the market than trading without stops!The very purpose of the stop is to have an exit that will help you quantify your risk.
As to your comments that a good trader can decipher news,trade on instinct,etc...,if that's your belief,i wish you well.As far as i'm concerned noone can predict or decipher anything that will
tell them where a security price will be in the future.All we can do is have a setup for entry,layout our best case and worse case scenario,hopefully preset our risk,and wait for the trade to either go one way or the other.That's how i trade and will continue to trade.I'm very happy knowing my portfolio heat at any given moment(barring a black swan or fat tail event).It helps me sleep at night and live to fight another day.So,I don't see a case for argument.I say to each his own and good luck!
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Very ,Very true! The supposedly once in a lifetime event seems to happen every few years!
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By the way most algorithmic trading also sets up for entry,and position sizing as well asdefining system parameters.
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Tom
You can trade as you like,but you should know that algorthmic trading is based on determining a mathematical exit or stop.Every major disaster from long term capital to lehman brothers was due to the lack of risk management.Tell me something ,if you have no stops,how do you decide where to get out?If you decide mentally than you're still using a mental stop.You can trade without stops obviously.However history has shown that trading on emotions (fear,greed) has been the worst way to trade.I'll send you the chart of inflows and outflows for the last 100 years if you like.By the way,no algorithmic trader would ever run a monte carlo sim on a coin toss for an actual system.It's a total waste of time.If you're using a strategic overlay as you said and that tells you where to get out,it's a stop.Just because you don't place it on the books it doesn't mean it doesn't exist.By the way also if you have a loss and don't sell,it's still a loss.Your alternative to trading without stops IS to trade without stops.if you're comfortable with that,i'm happy for you.I have no idea what you're talking about with the coin flip and getting nowhere comment.Nobody trades on a coin flip.We use actual intraday market data to determine if a system will be profitable or not.The good discretionary trader is a human with feelings.That's a disadvantage when it comes to trading.It doesn't mean you can't trade discretionarily.Lastly,it has been proven that entry/exit is one of the least important factors when trading.It's only about 10% of a system.Do some empirical research on the topic and i'm sure you'll come up with the same conclusion.Good luck!
P.S. By the way ,i've done several years of research on this ,contrary to your belief.I have
an office full of data that i can show you.We can compare your results to my results on
stops if you like!I hope you have empirical data to present your case.
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I ran a few simulations based on the following premise:The game is breakeven ie EV is 0
The success rate is varied from winning 10% of the time to winning 90% of the time
We play the game 100 times and accumulate our results after each play.
The accumulation of 100 plays is repeated 1 million times and the MAE is counted each time.
For each winning %, I look up the MAE that would occur roughly once in 10,000 times.
The results look like this:
So basically this confirms what we already suspected. High win% games have low drawdown and low win% games have high drawdown for the same EV. This is shown by a MAE of only 14 when we have a 90% win rate and a MAE of 89 when we have only a 10% win rate. (remember that the outcome on average for each win% is 0 i.e. EV=0)
Forgive me if I missed something but if the payout is always the same,isn't it obvious that
if you increase the win percentage,then you'll earn more and drawdown less?I guess i'm just missing the significance of the graph.How about if you have a game that has an 80% win rate of $.10 and a 20% loss rate of $.50.You have a high win probability but negative expectancy.
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Nakachalet -- glad you agree, thanks for commenting.nvr -- absolutely correct, completely relevant -- but incomplete...
1) the 35% win-rate thing is usually related to trend-following systems. A well-trodden road -- considered by some/many to be the only valid strategy-type. Proven to work out but with certain caveats, including time and capital -- coming up...
2) trend-following has certain characteristics which can make it difficult, or not a good choice for many:
(i) It works best as a fairly long-term system. Which means you can/will be in drawdown for long periods. I personally had an 8-month drawdown in such a system, which wasn't even particulary long-term Other, longer-term trend following systems I have tested have shown past drawdown periods measured in years. That doesn't mean months or years of countinuous loss, it means taking that long to reach a new equity high after a drawdown occurs. Not everybody (not many?) can live with this. I have discovered that I can't...
(ii) the low win rate means that you spend most of the time 'underwater' -- psychologically difficult for most but, more significantly, a single trade might provide your profit for the whole year. Miss that trade and you're in trouble. Utter consistency required, complete and utter faith in your system, and no vacations...
(iii) Perhaps most significant of all, the guys you mention are all managing huge amounts of trading capital. They are thus able to benefit from the diversification inherent in trading many different markets simultaneously. With a small account you will probably be under-capitalised and reduced to trading a single market -- now your equity curve is really up and down.
3) there are other trading models, which have a completely different profile -- larger percentage of wins, usually accompanied by a lower win/loss ratio. Smaller trades but more of them. Shorter timeframes. Less dependency on any one trade. Smaller trades means you might be able to trade more markets simultaneously on a given amount of capital.
Shorter timeframes (I am not talking about daytrading) have the reputation of being more difficult to trade, which may be true, but they also have benefits -- including shorter times in drawdown or, put another way, quicker to recover from losses, and quicker compounding of your capital.
IOW, (a) it can be misleading to quote certain statistics out of context -- a trading system needs to be considered in full context and in relation to all of its inter-related properties and (b) there's more than one way to skin a cat.
The way that suits you best may not be the one that suited Richard Dennis.
BTW,sorry for the name mixup,but I was doing 3 things at once!LOL
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Nakachalet -- glad you agree, thanks for commenting.nvr -- absolutely correct, completely relevant -- but incomplete...
1) the 35% win-rate thing is usually related to trend-following systems. A well-trodden road -- considered by some/many to be the only valid strategy-type. Proven to work out but with certain caveats, including time and capital -- coming up...
2) trend-following has certain characteristics which can make it difficult, or not a good choice for many:
(i) It works best as a fairly long-term system. Which means you can/will be in drawdown for long periods. I personally had an 8-month drawdown in such a system, which wasn't even particulary long-term Other, longer-term trend following systems I have tested have shown past drawdown periods measured in years. That doesn't mean months or years of countinuous loss, it means taking that long to reach a new equity high after a drawdown occurs. Not everybody (not many?) can live with this. I have discovered that I can't...
(ii) the low win rate means that you spend most of the time 'underwater' -- psychologically difficult for most but, more significantly, a single trade might provide your profit for the whole year. Miss that trade and you're in trouble. Utter consistency required, complete and utter faith in your system, and no vacations...
(iii) Perhaps most significant of all, the guys you mention are all managing huge amounts of trading capital. They are thus able to benefit from the diversification inherent in trading many different markets simultaneously. With a small account you will probably be under-capitalised and reduced to trading a single market -- now your equity curve is really up and down.
3) there are other trading models, which have a completely different profile -- larger percentage of wins, usually accompanied by a lower win/loss ratio. Smaller trades but more of them. Shorter timeframes. Less dependency on any one trade. Smaller trades means you might be able to trade more markets simultaneously on a given amount of capital.
Shorter timeframes (I am not talking about daytrading) have the reputation of being more difficult to trade, which may be true, but they also have benefits -- including shorter times in drawdown or, put another way, quicker to recover from losses, and quicker compounding of your capital.
IOW, (a) it can be misleading to quote certain statistics out of context -- a trading system needs to be considered in full context and in relation to all of its inter-related properties and (b) there's more than one way to skin a cat.
The way that suits you best may not be the one that suited Richard Dennis.
Thanks for the reply Nakachalet,
I wasn't implying that trend following is the only way to trade.Jones and Bacon are macro traders,Simmons is an algorithmic HFT trader,william o'neil is CANSLIM.However what i was trying to point out is that the common factor of all these traders is risk management.That's more important than entry,exit and win/loss percentages yet many traders tend to focus on the latter.As to your comments and experience in trend following ,I humbly disagree.I have traded my own modified trend following and run about 50 million (literally!) monte carlos and simulations and have found that:
1) Win Loss ratio is even to slightly below even.
2)You don't need a very lage amount of capital to trade trend following systems.It's
a function of what you trade and how much risk you take per position.
3)Drawdowns are not very long at all if you don't risk a large percentage per position.If you trade like Richard Dennis then they might be,but like you said not everybody wants to trade like richard dennis(including myself!)
4)The profit is not predominantly deriveed from a small number of trades.That is only the case when you trade concentrated positions.If your portfolio heat is spread among 20 or 30 instruments with small risk per trade parameters,then you won't see that phenomenon.There are thousands of ETFs that will do the trick if you don't trade futures(Which I Don't).
5)Timeframes are set by the trader,not the system.Certainly a system will have parameters that work better than others but anyone can devise or find a system that suits their timeframe.
Lastly, I again reiterate that I was not implying that Trend Following is the only way to make money trading.I trade other styles such as mean reversion as well.What i was trying to get across is that your money management algorithm and position sizing strategy are the most inportant factors that should be considered when trading any system.Also,you might want to try running your trend following tests using smaller risk levels and more instruments.You'll probably see that the returns and drawdowns relation to each other improves not assymetricly with the percentage adjustment down in risk.In fact in most cases,risk to drawdown improves nicely.Just food for thought. All the best,Nick
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Guys,
All I can say is that trading without stops is almost a sure way of guaranteeing you will be wiped out at some point.I've done alot of research on this topic.In this thread i see the Gambler's Fallacy,prediction bias,confirmation bias etc...,.The big points you're missing in all this are that: 1) In real trading ,you can lose way more than $1 when making a trade(gap down,gap up,etc) and 2)it's not how many times you win or lose,it's how much you make when you win vs how much you lose.If your wins are multiple sizes larger than your losses, you will still make money even when your win percentage is substantially below your loss plercentage.If you look at guys like William Eckhart,Richard dennis,ed seykota,Jim simmons,Louis Bacon,Paul Tudor Jones,they've stated publicly that they are only right about 35% of the time.However,if you look at their track record(really long ones!)
they have never remotely come close to ruin.They have all attributed this to risk management.(Trading with predetermined exits)Just build a system that over the long term has a positive expectation and risk amounts per trade that will make you money but
always keep you alive to trade the next day.This is only my humble opinion.i hope it helps.
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Reminiscences is a great example of investor psychology and its pitfalls.It also exemplifies how trend following can lead to great success if adhered to.By the way,Livermore had millions left when he died both in cash and had given his wife a trust
account worth millions which she blew up.The fact that Reminiscences is recommended still today by some of the greatest traders in the world(who are not dead or broke by the way!) should speak for itself.
Risk of Ruin Discussion
in Risk & Money Management
Posted
Unfortunately,that's very true.You have to keep the seats filled in the casino to make money.It's sad that in reality the average investor doesn't really have a shot by following the buy and hold mantra being regurgitated constantly by the industry.I understand the skepticism and disgust that i read in many of these postsThat's why forums like this are needed more than ever.