tech/a
No Ordinary Duck
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THE WHAT that will make you consistantly PROFITABLE?
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tech/a
No Ordinary Duck
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markrmau said:
In answer to your question.
Entries,Exits and Stops are simply points of action.How you define or arrive at your entry ,exit ,or stop is of no consequence.
HOWEVER you cannot be profitable in ANY trading method unless the combination and Implimentation of all 3 lead to a POSITIVE EXPECTANCY
To your questions.
(1) Yes
(2) Yes I presume you mean on the portfolio being traded not individual stocks.
(3) See statement above in red
(4)NYSE it works well but you do have to alter some parameters eg
$ value of the stock.
Liquidity
Universe of stocks.
Margin lists.
BT have a complete list on their site so does comsec.
If you mean NYSE stock margin lists I do have (Only reciently) a list of the top 200.I havent run tests on these yet.
I have run tests on Hong Kong and they are very good.
Alos FTSE and they are also OK not mind bending.
tech
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Tech,
Did you happen to explain POSITIVE EXPECTANCY in more details somewhere? That's what I'm looking forward to and I certainly don't want to miss that. Just asking as I couldn't find anything but there are so many threads and postings going on, if one isn't around much for a few days it gets cofusing.
Happy trading
Stefan
Did you happen to explain POSITIVE EXPECTANCY in more details somewhere? That's what I'm looking forward to and I certainly don't want to miss that. Just asking as I couldn't find anything but there are so many threads and postings going on, if one isn't around much for a few days it gets cofusing.
Happy trading
Stefan
tech/a
No Ordinary Duck
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Stef.
Im going to run through it from the perspective of most here.
That is that they dont have test capable software and have very little technical or mathamatical knowledge.(There will be some simple maths---sorry).
The objective (although we wont be able to finitely prove it) will be to put traders in a POSITION to have a positive expectancy and hence trade to a profit.
If nothing else Im sure people will look at what they are doing and how they are doing it in a different light.
Many will go from spasmodic profit to consistant profit and thats what we all want.
Then we can work on ways to MAXIMISE that profit.
Then we will all be filthy rich and meet in Barbados!! And kick Paris Hilton off the front cover of magazines. :bier:
tech
Im going to run through it from the perspective of most here.
That is that they dont have test capable software and have very little technical or mathamatical knowledge.(There will be some simple maths---sorry).
The objective (although we wont be able to finitely prove it) will be to put traders in a POSITION to have a positive expectancy and hence trade to a profit.
If nothing else Im sure people will look at what they are doing and how they are doing it in a different light.
Many will go from spasmodic profit to consistant profit and thats what we all want.
Then we can work on ways to MAXIMISE that profit.
Then we will all be filthy rich and meet in Barbados!! And kick Paris Hilton off the front cover of magazines. :bier:
tech
wayneL
'Abba Shboq Lhon'
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Here is an article I wrote a few months ago for a firm I was doing some work for:
This is not a Casino
Most of the people I talk to refer to the market as one big Casino. The unfortunate fact of the matter is that somewhere between 75% and 95% of people who become involved with the sharemarket as traders lose some or all of their capital. So who can blame them for coming to that conclusion?
I can!
You see most people get involved with the sharemarket because they see all their friends making money out of it, the newspapers are talking about it, heck, even your hairdresser is waffling on about nickel stocks! So they think to themselves, "Hey this looks easy, I'll have a go!" The public has become excited about a bull run in the market and for a while, everyone is making money despite themselves.
Genius is a rising market!
Unfortunately, bull runs don't last forever. Our brand new sharemarket traders also leaped in without learning the rules of the game.....a recipe for disaster! This phenomenon always occurs at tops in the market because that is when the most excitement is generated. Exactly the time when the professionals are SELLING!
What happens next is ugly. The market starts going down, it may even crash as it did in 1987. Our brand new traders never learnt how to preserve profits and they watch their profits quickly disappear, hoping that prices go back up again. Can't sell now because they've been bragging to their mates how well this sharemarket thing is going!
So they hold on, and prices continue right on down until eventually the pain becomes too great and they then sell all of their holdings at a substantial loss. This usually occurs right at the market bottom. To add insult to injury, this is when the market starts going back up again! This is when the conclusion is reached; "The sharemarket is nothing more than a hyped up casino!!!!!" They swear to never, ever go near the sharemarket ever again!
What has just happened, is that they went to the market with "Casino Mentality". Attracted by the bright lights and the excitement and the stories of big winnings, they placed their chips on the table.....and got fleeced by the professionals!
That would never have happened if our new trader had learnt the rules of the game first.
No! I don't even like the word "game"! It's a business, and should be treated as such! Even if you are starting out with a small amount of money! If you were going to start a cafe' business, wouldn't you learn how to run one, where to buy the coffee wholesale, where's the best place to situate it, how to hire staff, how much to pay them etc. etc. etc.?
You bet you would!
Well I'm not going to teach you how to trade in this article, but I am going to show you the principle the professionals use to turn a profit. But first lets have some fun and take a trip to the casino to see how they make money out of you. It involves a little bit of mathematics, but bear with me.
A Trip to the Casino
OK, we've been sucked in by the bright lights and Harry down the pub just told us how he cleaned up at the roulette table, so that's what we'll play, roulette. After the household treasurer has commandeered the bulk of our pay for groceries and paying bills, we have $100 left. So this is what we have brought along with us, this is our capital.
Here's the rules, we're going to place a $10 chip on either red or black every spin of the wheel. This gives us 18 chances out of 37 to win, for which the casino will pay us even money. So if we lose, we lose $10, this is our risk. If we win we make $10, this is our reward.
Now we can work out some ratios and see how they might impact on our capital.
Our generous hosts have given us 18 chances out of 37 to win, so our win/loss ratio is 18/37 or 48.65%. We've already worked out our risk and reward but we need to put that into a ratio as well. We have one unit risk verses one unit reward and it is expressed as such- 1:1. This is our risk/reward ratio. ( Actually it is more correct to express this as reward/risk, but for some reason we traders say it the other way round).
OK one more calculation for now: Expectancy
Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1
=((1 + 1) * 0.4865)-1
= -0.027
In other words for every dollar you risk, on average, you will lose 2.7 cents...straight into the casinos coffers. This is what we call negative expectancy. That's not too bad you say, I can have fun gambling $1000 over the course of the evening and only lose $27...a cheap evening out!
It gets worse though. because in the real world it doesn't happen that way does it? Depending on your luck you may come out ahead or you may lose all of your capital very quickly. I tested this scenario a thousands times using an excel random number generator and guess what? Six times out of 10 the entire capital was lost before 100 bets and that's no fun at all!
This brings up a whole new subject and that is money management, which will discuss this when the time comes, OK.?
Now think about this! It's one thing taking $100 out on a Friday night and blowing the lot; but it's entirely another thing to take your life savings into the sharemarket with casino mentality and blowing the lot!
It's no wonder that casinos......and sharemarket professionals, make so much money!
OK how do the pro's do it then?
This part is a little bit contradictory because a lot of the features of trading somewhat resembles gambling. We have winners and losers just the same as a gambler, but we still do not approach the sharemarket with casino mentality!
The difference is that the successful sharemarket trader uses strategies to ensure a positive expectancy. We won't go into that in detail now, but briefly it goes something like this; we cut our losses short and let our winners run, and we do that enough times for wins to overcome losses. Therefore the sum of our winning trades will always be greater than the sum of our losing trades. This is of paramount importance. Remember in my last article, I told you to remember the phrase "risk/ reward ratio", well this is where it applies.
Ok then, lets go ahead and make some assumptions. Lets say that we risk the same $10, but when we win, our reward is $20. This gives us a risk/reward ratio of 2:1. ( or reward/risk ratio if we're being pedantic.)
Lets say though, that we are not that accurate at picking winners and our win/loss ratio is 37% .......hmmmmmm lets go ahead and do our expectancy equation:
Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1
=((1 + 2) * 0.37)-1
= 0.11
AHAH! There's our positive expectancy! For every dollar risked we will make 11 cents on average.
Here's a question for you. Would you take your life savings and risk it in the market on the above scenario....I wouldn't! You still have about a 15% chance of losing all of your capital. Run the numbers through excel and you will see what I mean.
You must add in money management (and perhaps a system with a higher expectancy), a topic worthy of a separate article.
How Does a Trader Use Expectancy?
There are a few ways; one is to examine your historical trading performance.
If you become a good trader, your risk/reward ratio and your win/loss ratio will be a lot better than the figures above. To give you an idea, at the time of writing, with my swing trades, my win/loss ratio is running at 57% and my risk/reward ratio is 3.4:1. So based on those figures my expectancy works out to be 1.508. So that means that for every dollar I placed at risk in the market, I made about $1.51 profit. That's a pretty good figure. It gives me every confidence to go right on trading exactly the way I have been. It lets me know that every further dollar I place at risk in the market, I can expect to make around $1.50....and that is a great psychological advantage to have that in my mind.
It has a further use in that it helps me to optimise my money management....and if there is one thing that can improve profitability, it's proper money management.
The second way that expectancy can be used is to compare trading systems.
The technical trader can create computer trading models and backtest these with his/her charting software. This is where the trading system is tested with historical price data. There are even specialized software packages specifically for this purpose. We can devise a new trading format, backtest it, and come up with an expectancy figure for that system.
This is useful as we can compare the expectancy of one system over another and select which one(s) we are prepared to use in our trading. We can compare our new models against our current system in use also.
Here is an example:
Suppose I have thought of two new trading systems. After doing my backtests I have found that one system has a win/loss ratio of 90% and a risk/reward ratio of 1.2:1. The second system has a win/loss ratio of 35% and a risk/ reward ratio of 5.5:1.
How am I going to decide which one is better and how am I going to decide if these new systems are better than my current one? You guessed it right first time didn't you......expectancy! Let go ahead and do the calcs:
Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1
System 1 =((1 + 1.2) * 0.9)-1
= 0.98
System 2 =((1 + 5.5) * 0.35)-1
= 1.275
Interesting! The second system has a higher expectancy than the first system even though it wins only a third as often. Presuming that the opportunity to trade these two systems is similar (something which must also be considered), I would prefer to trade the second system, obviously. Hang on a minute! my current system is running at 1.508! Hey I'll just stick with what I'm doing.
There is a third way to use expectancy. Suppose that six months ago I created a trading model with an expectancy of 0.87 and decided to trade it. After six months trading, I can now compare the actual results against my expectancy figures to see if it is performing as anticipated.
This is why the sharemarket is not a casino. There is no way that you can change the negative expectancy at the casino into a positive expectancy; and if you do they'll ban you from ever coming back!!!!! Not so in the sharemarket.
In the share market one can truly play to win!
This is not a Casino
Most of the people I talk to refer to the market as one big Casino. The unfortunate fact of the matter is that somewhere between 75% and 95% of people who become involved with the sharemarket as traders lose some or all of their capital. So who can blame them for coming to that conclusion?
I can!
You see most people get involved with the sharemarket because they see all their friends making money out of it, the newspapers are talking about it, heck, even your hairdresser is waffling on about nickel stocks! So they think to themselves, "Hey this looks easy, I'll have a go!" The public has become excited about a bull run in the market and for a while, everyone is making money despite themselves.
Genius is a rising market!
Unfortunately, bull runs don't last forever. Our brand new sharemarket traders also leaped in without learning the rules of the game.....a recipe for disaster! This phenomenon always occurs at tops in the market because that is when the most excitement is generated. Exactly the time when the professionals are SELLING!
What happens next is ugly. The market starts going down, it may even crash as it did in 1987. Our brand new traders never learnt how to preserve profits and they watch their profits quickly disappear, hoping that prices go back up again. Can't sell now because they've been bragging to their mates how well this sharemarket thing is going!
So they hold on, and prices continue right on down until eventually the pain becomes too great and they then sell all of their holdings at a substantial loss. This usually occurs right at the market bottom. To add insult to injury, this is when the market starts going back up again! This is when the conclusion is reached; "The sharemarket is nothing more than a hyped up casino!!!!!" They swear to never, ever go near the sharemarket ever again!
What has just happened, is that they went to the market with "Casino Mentality". Attracted by the bright lights and the excitement and the stories of big winnings, they placed their chips on the table.....and got fleeced by the professionals!
That would never have happened if our new trader had learnt the rules of the game first.
No! I don't even like the word "game"! It's a business, and should be treated as such! Even if you are starting out with a small amount of money! If you were going to start a cafe' business, wouldn't you learn how to run one, where to buy the coffee wholesale, where's the best place to situate it, how to hire staff, how much to pay them etc. etc. etc.?
You bet you would!
Well I'm not going to teach you how to trade in this article, but I am going to show you the principle the professionals use to turn a profit. But first lets have some fun and take a trip to the casino to see how they make money out of you. It involves a little bit of mathematics, but bear with me.
A Trip to the Casino
OK, we've been sucked in by the bright lights and Harry down the pub just told us how he cleaned up at the roulette table, so that's what we'll play, roulette. After the household treasurer has commandeered the bulk of our pay for groceries and paying bills, we have $100 left. So this is what we have brought along with us, this is our capital.
Here's the rules, we're going to place a $10 chip on either red or black every spin of the wheel. This gives us 18 chances out of 37 to win, for which the casino will pay us even money. So if we lose, we lose $10, this is our risk. If we win we make $10, this is our reward.
Now we can work out some ratios and see how they might impact on our capital.
Our generous hosts have given us 18 chances out of 37 to win, so our win/loss ratio is 18/37 or 48.65%. We've already worked out our risk and reward but we need to put that into a ratio as well. We have one unit risk verses one unit reward and it is expressed as such- 1:1. This is our risk/reward ratio. ( Actually it is more correct to express this as reward/risk, but for some reason we traders say it the other way round).
OK one more calculation for now: Expectancy
Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1
=((1 + 1) * 0.4865)-1
= -0.027
In other words for every dollar you risk, on average, you will lose 2.7 cents...straight into the casinos coffers. This is what we call negative expectancy. That's not too bad you say, I can have fun gambling $1000 over the course of the evening and only lose $27...a cheap evening out!
It gets worse though. because in the real world it doesn't happen that way does it? Depending on your luck you may come out ahead or you may lose all of your capital very quickly. I tested this scenario a thousands times using an excel random number generator and guess what? Six times out of 10 the entire capital was lost before 100 bets and that's no fun at all!
This brings up a whole new subject and that is money management, which will discuss this when the time comes, OK.?
Now think about this! It's one thing taking $100 out on a Friday night and blowing the lot; but it's entirely another thing to take your life savings into the sharemarket with casino mentality and blowing the lot!
It's no wonder that casinos......and sharemarket professionals, make so much money!
OK how do the pro's do it then?
This part is a little bit contradictory because a lot of the features of trading somewhat resembles gambling. We have winners and losers just the same as a gambler, but we still do not approach the sharemarket with casino mentality!
The difference is that the successful sharemarket trader uses strategies to ensure a positive expectancy. We won't go into that in detail now, but briefly it goes something like this; we cut our losses short and let our winners run, and we do that enough times for wins to overcome losses. Therefore the sum of our winning trades will always be greater than the sum of our losing trades. This is of paramount importance. Remember in my last article, I told you to remember the phrase "risk/ reward ratio", well this is where it applies.
Ok then, lets go ahead and make some assumptions. Lets say that we risk the same $10, but when we win, our reward is $20. This gives us a risk/reward ratio of 2:1. ( or reward/risk ratio if we're being pedantic.)
Lets say though, that we are not that accurate at picking winners and our win/loss ratio is 37% .......hmmmmmm lets go ahead and do our expectancy equation:
Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1
=((1 + 2) * 0.37)-1
= 0.11
AHAH! There's our positive expectancy! For every dollar risked we will make 11 cents on average.
Here's a question for you. Would you take your life savings and risk it in the market on the above scenario....I wouldn't! You still have about a 15% chance of losing all of your capital. Run the numbers through excel and you will see what I mean.
You must add in money management (and perhaps a system with a higher expectancy), a topic worthy of a separate article.
How Does a Trader Use Expectancy?
There are a few ways; one is to examine your historical trading performance.
If you become a good trader, your risk/reward ratio and your win/loss ratio will be a lot better than the figures above. To give you an idea, at the time of writing, with my swing trades, my win/loss ratio is running at 57% and my risk/reward ratio is 3.4:1. So based on those figures my expectancy works out to be 1.508. So that means that for every dollar I placed at risk in the market, I made about $1.51 profit. That's a pretty good figure. It gives me every confidence to go right on trading exactly the way I have been. It lets me know that every further dollar I place at risk in the market, I can expect to make around $1.50....and that is a great psychological advantage to have that in my mind.
It has a further use in that it helps me to optimise my money management....and if there is one thing that can improve profitability, it's proper money management.
The second way that expectancy can be used is to compare trading systems.
The technical trader can create computer trading models and backtest these with his/her charting software. This is where the trading system is tested with historical price data. There are even specialized software packages specifically for this purpose. We can devise a new trading format, backtest it, and come up with an expectancy figure for that system.
This is useful as we can compare the expectancy of one system over another and select which one(s) we are prepared to use in our trading. We can compare our new models against our current system in use also.
Here is an example:
Suppose I have thought of two new trading systems. After doing my backtests I have found that one system has a win/loss ratio of 90% and a risk/reward ratio of 1.2:1. The second system has a win/loss ratio of 35% and a risk/ reward ratio of 5.5:1.
How am I going to decide which one is better and how am I going to decide if these new systems are better than my current one? You guessed it right first time didn't you......expectancy! Let go ahead and do the calcs:
Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1
System 1 =((1 + 1.2) * 0.9)-1
= 0.98
System 2 =((1 + 5.5) * 0.35)-1
= 1.275
Interesting! The second system has a higher expectancy than the first system even though it wins only a third as often. Presuming that the opportunity to trade these two systems is similar (something which must also be considered), I would prefer to trade the second system, obviously. Hang on a minute! my current system is running at 1.508! Hey I'll just stick with what I'm doing.
There is a third way to use expectancy. Suppose that six months ago I created a trading model with an expectancy of 0.87 and decided to trade it. After six months trading, I can now compare the actual results against my expectancy figures to see if it is performing as anticipated.
This is why the sharemarket is not a casino. There is no way that you can change the negative expectancy at the casino into a positive expectancy; and if you do they'll ban you from ever coming back!!!!! Not so in the sharemarket.
In the share market one can truly play to win!
tech/a
No Ordinary Duck
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Wayne.
Saved me sometime.
Wayne has bought up an important point here ----its not simply a matter of having a beter win ratio to loss ratio and its not just about having higher wins than losses.
We are talking Risk to Ruin here and this is determinate on consecutive losses.
If your losses can at anytime wipe out your capital its game over.
Infact they dont have to wipe it out just make position size in effective and that comes well before ZERO.
Now before going on to what Joe Average can do to increase his chance of having Positive Expectancy are we clear on the explaination?
More needed? Could go a little deeper if you want some charts and examples if you like---it is IMPORTANT VERY IMPORTANT dont be shy!
tech
Saved me sometime.
Wayne has bought up an important point here ----its not simply a matter of having a beter win ratio to loss ratio and its not just about having higher wins than losses.
We are talking Risk to Ruin here and this is determinate on consecutive losses.
If your losses can at anytime wipe out your capital its game over.
Infact they dont have to wipe it out just make position size in effective and that comes well before ZERO.
Now before going on to what Joe Average can do to increase his chance of having Positive Expectancy are we clear on the explaination?
More needed? Could go a little deeper if you want some charts and examples if you like---it is IMPORTANT VERY IMPORTANT dont be shy!
tech
tech/a
No Ordinary Duck
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Time to get to the meat of the topic.
Most traders here trade in a Fundamental/Discretionary manner.A few others trade both Fundamental and some Technical but again in a Discretionary manner.Very few have a Sytematic or Mechcanical Trading methodology.
The following is for everyone but in particular the majority of traders here,-----And of course those who are interested ---- the first 2.---They are by the look of the majority of posts SHORT TERM TRADERS as well.
This is fine---its not the "WHY" or the "HOW" that will make you profitable its the "WHAT"
Success doesnt come without some effort on your part-------infact Ive found that result is directly proportional to effort!
The aim of the following is to give you the greatest opportunity to trade by ANY METHOD you choose and have a positive expectancy
Now some general info.
Short term traders need to be right more often than longer term traders as their time in a trade means that in general terms they are taking smaller profits (Yes there are some exceptions).So I would expect that to be profitable you need a method which turns a profit over 40% of trades and preferably more than 55%,Ive seen 75%.You will soon be able to determine this from your method (well in a year or so! unless you have great records of past trades!).
It is easier to achieve short term trading success by following a singular entity (futures) or a very small group of Stocks,(Watch list) rather than a longterm portfolio approach (trading 10 or so at a time)
(1) KEEP RECORDS
You must now keep a record of all trades the GOOD the BAD and the downright UGLY.In particular you NEED to know.
(a) Buy Price.
(b) Sell Price.
(c) Loss in $ terms
(d) Gain in $ terms
(e) Parcel size.
(f) Total capital being used in your trading.
(g) Have 2 sets of figures --winning trades and Losing trades seperate.
(h) Entry and Exit DATES
(i) Brokerage costs. Very important for the short term trader
(j) Stop level and seperate record of Stopped trades.
From these records you will be able to find out.(Among other things)
(1) Length of trades.Time in days
(2) Consecutive number of winners AND losers.
(3) Average win.
(4) Average Loss
(5) Risk Reward ratio Average win/Average loss.
(6) Net Position---then annual return or annualised return if partial to a year.
(7) An indication of Positve expectancy (Only an indication as we cannot compile extensive testing from just one set of records).
RECORDS will have little meaning unless.
(2) YOU SET A STOP LEVEL
On ALL your trades.
Defining a stop ( a point where you can say--Im WRONG OR My timing isnt Spot on.) gives you a finite RISK.A level which many other calculations can reference.Having NO STOP equates to having UNLIMITED RISK
Much is written on the 2% risk rule and while a good figure in general everyones method will be effected by the amount of RISK allocated.Note there is a great deal of difference to being stopped out of a trade and an open ended Losing Trade!
The biggest fear is pulling out of a trade ---taking a loss and then seeing the trade turn to a profit.Ponder this--The longer you remain in a losing trade the greater this fear becomes!!
Not only that but the greater the potential loss.
QUESTION---What is better a single 20% loss OR 10 2% losses and WHY?
How important is all this?
How serious are you at turning a profit?
Do you want to be in the 3% or the 97%
You can choose to do nothing and nothing will change.
Next will be some charts to demonstrate.When I get time.
tech
Most traders here trade in a Fundamental/Discretionary manner.A few others trade both Fundamental and some Technical but again in a Discretionary manner.Very few have a Sytematic or Mechcanical Trading methodology.
The following is for everyone but in particular the majority of traders here,-----And of course those who are interested ---- the first 2.---They are by the look of the majority of posts SHORT TERM TRADERS as well.
This is fine---its not the "WHY" or the "HOW" that will make you profitable its the "WHAT"
Success doesnt come without some effort on your part-------infact Ive found that result is directly proportional to effort!
The aim of the following is to give you the greatest opportunity to trade by ANY METHOD you choose and have a positive expectancy
Now some general info.
Short term traders need to be right more often than longer term traders as their time in a trade means that in general terms they are taking smaller profits (Yes there are some exceptions).So I would expect that to be profitable you need a method which turns a profit over 40% of trades and preferably more than 55%,Ive seen 75%.You will soon be able to determine this from your method (well in a year or so! unless you have great records of past trades!).
It is easier to achieve short term trading success by following a singular entity (futures) or a very small group of Stocks,(Watch list) rather than a longterm portfolio approach (trading 10 or so at a time)
(1) KEEP RECORDS
You must now keep a record of all trades the GOOD the BAD and the downright UGLY.In particular you NEED to know.
(a) Buy Price.
(b) Sell Price.
(c) Loss in $ terms
(d) Gain in $ terms
(e) Parcel size.
(f) Total capital being used in your trading.
(g) Have 2 sets of figures --winning trades and Losing trades seperate.
(h) Entry and Exit DATES
(i) Brokerage costs. Very important for the short term trader
(j) Stop level and seperate record of Stopped trades.
From these records you will be able to find out.(Among other things)
(1) Length of trades.Time in days
(2) Consecutive number of winners AND losers.
(3) Average win.
(4) Average Loss
(5) Risk Reward ratio Average win/Average loss.
(6) Net Position---then annual return or annualised return if partial to a year.
(7) An indication of Positve expectancy (Only an indication as we cannot compile extensive testing from just one set of records).
RECORDS will have little meaning unless.
(2) YOU SET A STOP LEVEL
On ALL your trades.
Defining a stop ( a point where you can say--Im WRONG OR My timing isnt Spot on.) gives you a finite RISK.A level which many other calculations can reference.Having NO STOP equates to having UNLIMITED RISK
Much is written on the 2% risk rule and while a good figure in general everyones method will be effected by the amount of RISK allocated.Note there is a great deal of difference to being stopped out of a trade and an open ended Losing Trade!
The biggest fear is pulling out of a trade ---taking a loss and then seeing the trade turn to a profit.Ponder this--The longer you remain in a losing trade the greater this fear becomes!!
Not only that but the greater the potential loss.
QUESTION---What is better a single 20% loss OR 10 2% losses and WHY?
How important is all this?
How serious are you at turning a profit?
Do you want to be in the 3% or the 97%
You can choose to do nothing and nothing will change.
Next will be some charts to demonstrate.When I get time.
tech
tech/a
No Ordinary Duck
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Just quickly on the One year equity curve above.
The return is $22000 on the $100,000 invested ---22%.
(The 7% is on closed out trades.--before you ask).
However when trading on margin I would have $35K of my money being used to generate the $22K.
Return on $35K original investment is 62%.
Leverage and Compounding are other topics first things first.
Longterm trading can make remarkable returns!
Ive only just begun on the last post much more to come on what you can do to increase your chances of a Positive expectancy!!
The return is $22000 on the $100,000 invested ---22%.
(The 7% is on closed out trades.--before you ask).
However when trading on margin I would have $35K of my money being used to generate the $22K.
Return on $35K original investment is 62%.
Leverage and Compounding are other topics first things first.
Longterm trading can make remarkable returns!
Ive only just begun on the last post much more to come on what you can do to increase your chances of a Positive expectancy!!
tech/a
No Ordinary Duck
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tech/a said:
Any takers before we move on?
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OK I'll bite:
10 x 2% losses from a mathematical point of view (each subsequent 2% loss is from a lower total trading pool), ie:
20% loss of $100k pool leaves you $80k
10 x 2% losses of $100k pool leaves you $81,707.28
Also from a back-testing point of view, it would be easier to identify a trading weakness and correct it from a larger sample (10 small losses), rather than just sitting back after copping a 20% pasting and asking "what the hell happened?"
I'd cop 10 x 2% losses a year (always do?) if my winning trades more than compensated for it (yes for last two years, no previously)
Now I guess tech/a is going to teach me how wrong I am? (do it constructively please, enjoying your posts so far)
Thanks for your thoughts tech/a,
Mofra
10 x 2% losses from a mathematical point of view (each subsequent 2% loss is from a lower total trading pool), ie:
20% loss of $100k pool leaves you $80k
10 x 2% losses of $100k pool leaves you $81,707.28
Also from a back-testing point of view, it would be easier to identify a trading weakness and correct it from a larger sample (10 small losses), rather than just sitting back after copping a 20% pasting and asking "what the hell happened?"
I'd cop 10 x 2% losses a year (always do?) if my winning trades more than compensated for it (yes for last two years, no previously)
Now I guess tech/a is going to teach me how wrong I am? (do it constructively please, enjoying your posts so far)
Thanks for your thoughts tech/a,
Mofra
tech/a
No Ordinary Duck
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Both of you have good points.
Taking the 2% is a little cheaper even when including brokerage.
OK
The 2% is the more preferable.
WHY.
You have 9x the opportunity of finding a trade which goes in your direction.
I should have been clearer on the 2% that is meant as 2% of Total Equity.
Now the issue of how long we should hold a trade that doesnt move in our direction
IE the best balance point for a STOP value has been answered by exhaustive testing.(Not mine although I have checked my results against it).
9% of trades get stopped out if 20% of purchase price is used as a stop.
27% if 10%
over 50% if 5%
Anything below 5% seems to be un workable.
This is an exhaustive topic and one we will cover later.
However I wished to point out a COST we dont often think about and one a few here are experiencing.
OPPORTUNITY COST While we are in a trade that is doing nothing wether it be in profit or sitting between our buy point and our stop-------the $$s we have invested in the trade are not working positively for us.
This is known as OPPORTUNITY COST
Taking the 2% is a little cheaper even when including brokerage.
OK
The 2% is the more preferable.
WHY.
You have 9x the opportunity of finding a trade which goes in your direction.
I should have been clearer on the 2% that is meant as 2% of Total Equity.
Now the issue of how long we should hold a trade that doesnt move in our direction
IE the best balance point for a STOP value has been answered by exhaustive testing.(Not mine although I have checked my results against it).
9% of trades get stopped out if 20% of purchase price is used as a stop.
27% if 10%
over 50% if 5%
Anything below 5% seems to be un workable.
This is an exhaustive topic and one we will cover later.
However I wished to point out a COST we dont often think about and one a few here are experiencing.
OPPORTUNITY COST While we are in a trade that is doing nothing wether it be in profit or sitting between our buy point and our stop-------the $$s we have invested in the trade are not working positively for us.
This is known as OPPORTUNITY COST
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I agree. BUT how can you calculate this cost? You're saying that this cost applies whether the stock is profitable or not. However, if a stock is currently returning 20% and you're expecting more over the next few months, what do you base your opportunity cost on? How expensive is it to hold a stock that's currently returning a profit with all indicators pointing upwards? This may not be of importance if your a short term trader. But as a long term investor it becomes a major issue. How long do you hold on to a stock that's grown but stopped?
Happy trading
Stefan
tech/a
No Ordinary Duck
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stefan said:
It can be calculated but youll need System testing software.Simply you add a filter to your exit for stocks which dont advance X over Y periods.It can have a significant effect on a portfolio.
I guess another way to put it is LOST OPPORTUNITY COST.
This I agree will vary from timeframe to timeframe,and there are a number of ways Ive seen for dealing with it.Ill go through a few Ive come in contact with.
(1) You test the time period for which both the stock stays within its Initial buy and Stop level without increasing,You also test an inactivity exit where this stock fails to make a new high in X periods.If these increase the return of the system then you trade it that way no questions.
OR
(2) You have a buy opportunity you are fully committed. You pick your most inactive stock and sell it to finance your new purchase.
OR
(3) You recognise a no (2) Opportunity but sell only the cost of the trade EG you bought 10000 at $1 and now they are $1.70 you sell $10000 worth and take $10000 of the New position.The remainder is profit on the original trade which you just leave to run until exit is triggered OR you add to it if another buy opportunity appears
2 and 3 are really topics on there own in the area of Creative Money Management.
Frankly most traders infact the general populace dont have their money working hard enough!
How expensive if a stock is in profit with all indicators pointing upward.
Could be very expensive if it doesnt make new highs or worse reverses.
Trade Price action and watch indicators!
Personally Im doing (2) but Im questioning efficiency(Use of $$s) number (3) has the most appeal.(Number One should be determined regardless of which method I use.)
The time period is 6 mths but it isnt fully tested (Pretty dumb as I advocate rigorous testing!!)However the results have been better than holding the non performing stock in the portfolio.Logic has paid off in this instance.
About 6 yrs ago I revisited a short term portfolio I traded (with very little knowledge of what I use now and Talk about here).It lost 35% of initial capital.
If I had used Method (3) I would have made a 200% gain (I had traded that way for 2 yrs.) Mainly due to 2 stocks going Nuts when I wasnt even watching!!
Stef ------ A way of getting the timing right while making best use of funds.
Afterall youd have to have the stock delisted to lose 100% of your winnings!
OPTION (3)
tech
tech/a
No Ordinary Duck
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So how can we be more confident in the method we use----even though we cannot prove Positive Expectancy---as 99% of traders here dont have the software capabilities necessary.
There are 3 aspects we must be constantly aware of
](1) % winners( Long term methods(Holds of 12 mths or more) will/Should have approx 30-40% winners,Medium term (Holds of 3-9 mths) will have up to 50% and Short term (a few days to 3 mths) up to 70%.---Intraday (Could be up to 90% winners)
(2) GAINS / LOSS known as your Reward to Risk ratio.(Long term will always be higher 5 to 20 times Reward to risk,Medium term 3 to 10 times Short term 1.5 to 4 times and Intraday can be as low as .8 due to a high win rate.
(3) Number of consecutive losses.This must be applied to your RISK. If you have a 10% risk on each trade in 10 trades your broke and in 8 trades you have capital exhaustion.
Longer Term methods will have more consecutive losses as trades last for months-there is much we can do to reduce this figure and increase 2 and 3
The first and one of the most important issues to address is the UNIVERSE of stocks we will choose to trade.
Im sure many have heard of the "Top Down" Trading approach.Simply the theory is that you pick the strongest sector and then the strongest stocks from that sector.
Great in theory but in practice by the time the sector has flagged that its out performing the market and the one or two stocks within that sector that are causing this outperformance are identified the opportunity to ride a winner is often far gone.
What is needed is EARLY RECOGNITION and this will come from individual stocks well before an index shows out performance as these stocks must pull the whole index beyond mediocrety while other stocks in the index do little--- infact in many cases underperform the Index/Market.
The UNIVERSE of stocks you choose will have the Greatest bearing on your future trading performance and Profit
Whether your UNIVERSE consists of 1 stock or 100s.
Now most traders understand the concept of Gambling.Lets say you have Two horses who races every day and their wins and losses are recorded.
Of these 2 horses which would you back??
There are 3 aspects we must be constantly aware of
](1) % winners( Long term methods(Holds of 12 mths or more) will/Should have approx 30-40% winners,Medium term (Holds of 3-9 mths) will have up to 50% and Short term (a few days to 3 mths) up to 70%.---Intraday (Could be up to 90% winners)
(2) GAINS / LOSS known as your Reward to Risk ratio.(Long term will always be higher 5 to 20 times Reward to risk,Medium term 3 to 10 times Short term 1.5 to 4 times and Intraday can be as low as .8 due to a high win rate.
(3) Number of consecutive losses.This must be applied to your RISK. If you have a 10% risk on each trade in 10 trades your broke and in 8 trades you have capital exhaustion.
Longer Term methods will have more consecutive losses as trades last for months-there is much we can do to reduce this figure and increase 2 and 3
The first and one of the most important issues to address is the UNIVERSE of stocks we will choose to trade.
Im sure many have heard of the "Top Down" Trading approach.Simply the theory is that you pick the strongest sector and then the strongest stocks from that sector.
Great in theory but in practice by the time the sector has flagged that its out performing the market and the one or two stocks within that sector that are causing this outperformance are identified the opportunity to ride a winner is often far gone.
What is needed is EARLY RECOGNITION and this will come from individual stocks well before an index shows out performance as these stocks must pull the whole index beyond mediocrety while other stocks in the index do little--- infact in many cases underperform the Index/Market.
The UNIVERSE of stocks you choose will have the Greatest bearing on your future trading performance and Profit
Whether your UNIVERSE consists of 1 stock or 100s.
Now most traders understand the concept of Gambling.Lets say you have Two horses who races every day and their wins and losses are recorded.
Of these 2 horses which would you back??
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GreatPig
Pigs In Space
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Tech,
Given that the first chart looks like MUL, I'd have to think that many would pick that one
.
GP
Given that the first chart looks like MUL, I'd have to think that many would pick that one
.GP
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tech/a,
I like the Martin Pring quote "a trend is assumed to be continuing until overwhelming evidence to the contrary".
Obviously the second has a greater chance of continuing upward then the first does of halting AND reversing.
What you haven't touched on yet (as far as I can tell) is the effect of basic human intuitions, the sort of reactions that would have kept us alive as cavemen but hurt us as traders. This is the intuition that tells newbies to buy those trending down because they are "bargains" and ignore those going up because they are "getting expensive". They are the same emotions as the ancient caveman who would grab any bounty he could before running back to his cave - like the trader who snaps and takes a small win on a stock that is moving upwards instead of holding for greater gains.
Trading is a counter intuitive activity - and because of this, I suspect most people will learn trading rules the hard way (I certainly did).
Thanks for posting tech/a
Mofra
I like the Martin Pring quote "a trend is assumed to be continuing until overwhelming evidence to the contrary".
Obviously the second has a greater chance of continuing upward then the first does of halting AND reversing.
What you haven't touched on yet (as far as I can tell) is the effect of basic human intuitions, the sort of reactions that would have kept us alive as cavemen but hurt us as traders. This is the intuition that tells newbies to buy those trending down because they are "bargains" and ignore those going up because they are "getting expensive". They are the same emotions as the ancient caveman who would grab any bounty he could before running back to his cave - like the trader who snaps and takes a small win on a stock that is moving upwards instead of holding for greater gains.
Trading is a counter intuitive activity - and because of this, I suspect most people will learn trading rules the hard way (I certainly did).
Thanks for posting tech/a
Mofra
RichKid
PlanYourTrade > TradeYourPlan
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Hi Tech,
Just saw the last few posts. I look for risk to reward ratios of 1:3 min and trade short term (generally a week to a few months). Does this mean I'm not fitting into (1) and (2) above or are your figures just guidelines to show the concept? I'm probably missing something here as I haven't enough trades to get real stats but was intrigued by the low risk reward ratio for short-term traders (I don't trade that often- that may be the assumption not stated above in your post). Also, I haven't counted my winners percentage but I can't see it needing to be so high (70%) if I don't trade often and my risk to return is high.
Do I make sense??? Still learning....maybe I don't understand the relevance of (3) yet? Maybe that's it...
Just saw the last few posts. I look for risk to reward ratios of 1:3 min and trade short term (generally a week to a few months). Does this mean I'm not fitting into (1) and (2) above or are your figures just guidelines to show the concept? I'm probably missing something here as I haven't enough trades to get real stats but was intrigued by the low risk reward ratio for short-term traders (I don't trade that often- that may be the assumption not stated above in your post). Also, I haven't counted my winners percentage but I can't see it needing to be so high (70%) if I don't trade often and my risk to return is high.
Do I make sense??? Still learning....maybe I don't understand the relevance of (3) yet? Maybe that's it...
tech/a
No Ordinary Duck
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Rich.
I think it is necessary to explain using charts the various R/R ratios.
A low Risk Reward number like 2 doesnt mean its less risky to trade infact its more.Simply it means if Im risking a $ Im expecting a return of $2.
My longer term method expects a return of $12---an R/R ratio of 12
Ill put together some charts and post them up.
I think it is necessary to explain using charts the various R/R ratios.
A low Risk Reward number like 2 doesnt mean its less risky to trade infact its more.Simply it means if Im risking a $ Im expecting a return of $2.
My longer term method expects a return of $12---an R/R ratio of 12
Ill put together some charts and post them up.
tech/a
No Ordinary Duck
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Firstly its vitally important that all understand the difference between Risk Reward Ratio and Positive Expectancy.Im getting the feeling that some maybe confusing them as being one of the same.-They're not!
Having a positive Risk Reward Ratio doesnt GUARENTEE a Positive expectancy trading method particularly if the R/R ratio is a theorehtical ratio of return without a sufficient sample of recorded data to determine a more accurate R/R value.
Simply the longer you have accurate recorded results of the method you are trading the more likely you will be able to develope both an Acceptable R/R ratio and a method with a positive expectancy.Once you understand the Simplicity of Profitable trading youll also see the value in investing in software that can save you Months of calculations all done in seconds.
There are many but those of best value and universal appeal are.
(1) Amibroker.(about $395 Aus)
(2) Wealthlab (Not sure but think $1000+)
(3) Metastock coupled with Tradesim (My choice of software Over $2300)
(4) Tradestation not suitable for Portfolio analysis ($1500)
But as we have said we are presuming you dont have and cant get it (If you cant afford it why are you trading???)
Here are 2 case scenarios.
(1)Starting capital $10000 and Risk / trade 5% (Cant be less as parcel size would be meaningless).R/R ratio 3:1
(2)Starting capital $10000 and Risk / trade 5% (Cant be less as parcel size would be meaningless).R/R ratio 10:1
If anyone wants the Probability calculator email me rwi@chariot.com.au address it R/R calculator as i delete emails Im not aware of.
Please take the time to understand your trading profit is at stake!!
Having a positive Risk Reward Ratio doesnt GUARENTEE a Positive expectancy trading method particularly if the R/R ratio is a theorehtical ratio of return without a sufficient sample of recorded data to determine a more accurate R/R value.
Simply the longer you have accurate recorded results of the method you are trading the more likely you will be able to develope both an Acceptable R/R ratio and a method with a positive expectancy.Once you understand the Simplicity of Profitable trading youll also see the value in investing in software that can save you Months of calculations all done in seconds.
There are many but those of best value and universal appeal are.
(1) Amibroker.(about $395 Aus)
(2) Wealthlab (Not sure but think $1000+)
(3) Metastock coupled with Tradesim (My choice of software Over $2300)
(4) Tradestation not suitable for Portfolio analysis ($1500)
But as we have said we are presuming you dont have and cant get it (If you cant afford it why are you trading???)
Here are 2 case scenarios.
(1)Starting capital $10000 and Risk / trade 5% (Cant be less as parcel size would be meaningless).R/R ratio 3:1
(2)Starting capital $10000 and Risk / trade 5% (Cant be less as parcel size would be meaningless).R/R ratio 10:1
If anyone wants the Probability calculator email me rwi@chariot.com.au address it R/R calculator as i delete emails Im not aware of.
Please take the time to understand your trading profit is at stake!!
