What analysis do you use for trading?

[tech/a]

Both must be managed (Together) if you've "learnt how to trade".

 

[MRC & Co]

Both must be managed (Together) if you've "learnt how to trade".

Tushay. But you did attack myself and Mr J about 'money management' specifically, of which you created your own definition.

Do you remember where this debate started just a couple of posts ago?

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I didn't think so.

 

[white_goodman]

ooooh the PWNAGE!

 

[Mr J]

I was going to differentiate between 'money management' and 'trade management', but it will be clearer if I substitute 'money management' for 'bankroll management'.

Yes but it is equally important, but gets not a proportionet amount of attention. Consider you use no money managment and on average win 50% and lose 50%, and on average you make the same amount as you lose. Where are you? your behind given brokerage. So it is MM which helps generate profit.

If we win and lose 50%, and make the same amount on each, adjusting R:R will not help, neither will adjusting bankroll management.

If we assume markets are random, theory states that adjusting R:R will simply change the distribution of wins and losses. I.e. higher winrate but smaller wins, or larger wins but lower winrate. In practice, the markets are not random, so there may be a sweet spot, but I think any worthwhile edge at 4:1 reward-risk should be +ev (positive expectancy) at 1:1.

Many people think that we need a certain R:R to profit, or that adjusting R:R can make one profitable, but I disagree. I think that anyone who profits and attributes it to R:R, is just exploiting a bias in the market and not aware of it. Example, perhaps someone buys in a bull market and uses a 1:3 risk-reward. It's not the R:R that is allowing them to profit, but the fact they're buying in a bull market.

Mr J, while I understand the logic behind your entries, I too feel the start of the yellow sections would be more efficient. Or even a quick correction back from the yellow to the green perhaps. How much time do you spend in trades that go nowhere? And for those that do move in the right direction how long do you have to wait for the move to occur?

I used to do that, and I think it was marginal at best. I think my change to trying to pick tops and bottoms was a major leap forward for me.

I've found price doesn't retrace often or far enough to consider that as an entry.

It might move immediately, or take 10 hours.

If you feel your entry is somehow predicting moves in advance then thats another thing. A very good thing.

I think we all try to forecast moves, the difference is that a top or bottom picker is trying to do it before it occurs, while the yellow entries are doing it after it has been hinted. I do know that if I waited, it would cost me a lot.

Your kidding!!

As MRC says, I'm talking money management, not trade management. When I say 'money mangement', think 'bankroll management'.

 

[tech/a]

Many people think that we need a certain R:R to profit, or that adjusting R:R can make one profitable, but I disagree. I think that anyone who profits and attributes it to R:R, is just exploiting a bias in the market and not aware of it. Example, perhaps someone buys in a bull market and uses a 1:3 risk-reward. It's not the R:R that is allowing them to profit, but the fact they're buying in a bull market

Are you serious??
Truly amazing

 

[lukeaye]

Are you serious??
Truly amazing

I honestly cant fathom it either.

And when i say money management i do refer to those other things, like position sizing, pyramiding, stop loss, account size etc.

As i said, not enough importance is given to it. And If you sit down and work it out, it can turn a trader who is right 40% of the time, into a very profitable trader. That is a huge edge.

The other edge, is the fact that money management can be completely objective, you can control it, you cant control the way the markets move after you enter your position. (Or should i say trade management :S)

 

[brty]

Cade,

I find by keeping my approach simple and consistent I am able to be disciplined to follow it, and therefore learn and improve its execution.

One of the better posts in this thread, and ignored by many.

Mr J,

If we assume markets are random,

The absolutely worst place to start in talking about any concept of a system. As you state the assumption is wrong, therefore any probabilities/results that come from it will be incorrect in the real world.

Trade management is simply a subset of money management, why is there so much discussion about it? Money management is about keeping you in the game with an even consistency throughout trades over time. Trade management is about an individual event that has parameters to keep you within the original money management.

brty

 

[BBand]

Hi,
First of all read "The Zurich Axioms" - first British publication 1985.

Not much has changed since then, we still get the same old info regurgitated over and over again in the lastest must have Trading book with fancy names given to the obviious to impress the impressionable

In the old days we called trade management and money management COMMON SENSE - those who did not have it or could not apply it, did not last too long.

That other in word "expectancy" - its constituents have been around for a long long time, their outcome was shown in our account balance - the wise soon fathomed out when their "system" needed attention. I think it was Van Tharp who named and formulated it for the masses what the successful traders already new.

Apparently there are still the same ratio of winning traders to losing traders now as there was years ago, despite the fact that we now have access to an ever growing bank of trading knowledge and we now have far more superior equipment etc etc. - so how do you explain that

Just a little quicky, never gave it much thought - just said the obvious
I'm sure someone will latch on to that last sentence ha ha
Peter

 

[Mr J]

Are you serious??
Truly amazing

I'm serious. You think R:R alone can provide an edge? You might want to make sure you're correct before being condecending.

I can't prove my point without a proper explanation, but I don't think I can give a clear one. I'll look around on the internet.

As i said, not enough importance is given to it. And If you sit down and work it out, it can turn a trader who is right 40% of the time, into a very profitable trader. That is a huge edge.

The other edge, is the fact that money management can be completely objective, you can control it, you cant control the way the markets move after you enter your position. (Or should i say trade management :S)

R:R does not turn a 40% loser into a winner. If he wins 40% of the time, I'm pretty confident his average R:R will be about 1.5 to 1, before market bias, commissions and spread are deducted. If you change his reward to 3 to 1, then his winrate is likely to drop to something like 25%. Changing R:R has little impact on expectancy. The argument that r:r alone can make for profitable trades is as strong as using martingale for bankroll management.

You question why I think R:R alone does not make for profitable trades. I question why you think R:R alone does produce profitable trades. If it were that simple, why aren't the majority of traders successful?

The absolutely worst place to start in talking about any concept of a system. As you state the assumption is wrong, therefore any probabilities/results that come from it will be incorrect in the real world.

It's not the worst place to start at all, unless you don't follow me (I can't really explain all of this clearly). The assumption is wrong, but the general behaviour applies to the real world. The 'random' example is easier to understand, and when people understand why that doesn't work, they might be able to understand why it doesn't work in the real world.

Trade management is simply a subset of money management, why is there so much discussion about it?

Because the real discussion here is where or not R:R can provide an edge.

 

[xinyu09]

I read through the posts, I feel the real question here is how I can be 100% confident in trading?

Well, I am no expert on that but my opinion is that try all methods and stick with the one that work for you. Hope this helps.

(Thing worked for me last year: Buying a trending stock that going through consolidation and have healthy business earning growth, low debt, good market depth and cheaply price (most important) works for me. Such stocks like BKN.ax, SEK.ax, MCC.ax, FLT.ax just name a few I bought last year. Also, ASX share market game helps. It's getting hard to find such a stock now.)

 

[tech/a]

Because the real discussion here is where or not R:R can provide an edge

I trade 50% winners.
I have a Reward to Risk of 1
OR
I trade 50% winners
I have a Reward to Risk of 2 or 3 or 10

Let alone 70% winners etc----
OR
40% winners.---example example--etc.

So have I an edge over the first example?

If I work relentlessly at deminishing my actual risk on each trade and maximising my reward on each trade am I not altering my RR by doing so and as such having a considerable edge over someone who doesnt know how to improve his RR.? Speaking Discretionary trading here.

 

[lukeaye]

You question why I think R:R alone does not make for profitable trades. I question why you think R:R alone does produce profitable trades. If it were that simple, why aren't the majority of traders successful?

I have never stated that alone it makes a profitable trader? I have never said that anywhere, my point is, that you pass it off as if it is insignificant, like a passing thought that does not require any thought or signifigance.

R:R does not turn a 40% loser into a winner. If he wins 40% of the time, I'm pretty confident his average R:R will be about 1.5 to 1, before market bias, commissions and spread are deducted. If you change his reward to 3 to 1, then his winrate is likely to drop to something like 25%.

Where the hell do you pull that from? How could you possibly assume a 40% winner has a R:R of 1.5 : 1? So you are saying people who have an average R:R of 3 to 1 win 25% of the time?

 

[BBand]

Hi Mr J,
Like your posts !

I have just checked my trading plan for profit objectives.....

I have a formula which may help others define the R/R required to make their trading system to break even - anything above - your in profit

Formula: (100-win rate) / win rate = minimum profit objective

e.g. with 40% win rate

This gives 60/40 = 1.5

So in order for this trading strategy to break even at its current win rate, the risk/reward must be at least 1.5, win rate anything better and your in profit

So whatever your win rate is , just plug it in and find your minimum profit objective

This formula was picked up from some book which I read (think it was Adaptive Analysis)

Hope you don't mind J

Peter

 

[nunthewiser]

LOL . agrees with Brty re K.I.S.S .......... Most seem to take great pleasure in making it as complicated and cluttered as they can.

But hey it sounds good

Blessem.

 

[tech/a]

Hi Mr J,
Like your posts !

I have just checked my trading plan for profit objectives.....

I have a formula which may help others define the R/R required to make their trading system to break even - anything above - your in profit

Formula: (100-win rate) / win rate = minimum profit objective

e.g. with 40% win rate

This gives 60/40 = 1.5

So in order for this trading strategy to break even at its current win rate, the risk/reward must be at least 1.5, win rate anything better and your in profit

So whatever your win rate is , just plug it in and find your minimum profit objective

This formula was picked up from some book which I read (think it was Adaptive Analysis)

Hope you don't mind J

Peter

Understand all that.
10% winners you need massive R/R.
So R/R IS important.
If your getting 90% winners and Massive R/R ---take a holiday!

Im not talking theoretical R/R at the start of a trade either.
I'm talking closed trade R/R from your figures of past trades since you started.
You constanly work at increasing R/R and win rate.
If you dont succeed on win rate then yopu need to be increasing R/R
If your not increasing R/R then you better have a high win rate.

 

[brty]

Mr J,

The assumption is wrong, but the general behaviour applies to the real world.

???

unless you don't follow me (I can't really explain all of this clearly).

That might be an accurate assessment.

brty

 

[Mr J]

I trade 50% winners.
I have a Reward to Risk of 1
OR
I trade 50% winners
I have a Reward to Risk of 2 or 3 or 10

So have I an edge over the first example?

Maybe, are we talking about a trader who is hitting 50% at 2:1 or 3:1, rather than a trader who was hitting 50% at 1:1, and has decided to change it?

Do you think that edge came about simply from deciding your R:R would be 2:1 or 3:1?

I have never stated that alone it makes a profitable trader? I have never said that anywhere, my point is, that you pass it off as if it is insignificant, like a passing thought that does not require any thought or signifigance.

Fine. I never said MM was insignificant, I said it is irrelevant other than for scaling our return (by choosing how much we risk on a trade). If we include trade management under money management, then it's significant in distribution of wins and losses, but it's still not nearly as important as people make it out to be. The most important thing in trading is to have an edge, and money management does not create that edge.

Where the hell do you pull that from? How could you possibly assume a 40% winner has a R:R of 1.5 : 1? So you are saying people who have an average R:R of 3 to 1 win 25% of the time?

It's called maths. 1.5:1 is the breakeven performance for a 40% trader. You were talking about using MM to turn that 40% trader into a profitable trader, so I deduced that he wasn't currently a profitable trader.

So in order for this trading strategy to break even at its current win rate, the risk/reward must be at least 1.5, win rate anything better and your in profit

Yes. My point here is that adjusting R:R will just change winrate to what is needed to maintain breakeven. So if a 50% trader breaks even at 1:1, chances his reward-risk to 2:1, then his winrate drops to 33%. If he changes it to 1:2, his winrate rises to 66%. We know that the market isn't random, and our trader isn't making random entries, so in the real world they would be a rough estimate, and the breakeven trader may turn into a very marginal loser or winner by adjusting R:R, but nothing significant.

It's the same reasoning as why martingale and other betting strategies won't profit at blackjack.

Like your posts !

At least someone does . Not many people ever seem to agree with me down here in trading strategy discussion.

The assumption is wrong, but the general behaviour applies to the real world.

By this I mean markets are obviously not random, but the maths still applies, it just isn't as 'neat' in the real world. Instead of being precise, it becomes an estimate.

LOL . agrees with Brty re K.I.S.S

It's simple in my mind.

 

[nunthewiser]

At least someone does . Not many people ever seem to agree with me down here in trading strategy discussion.



.

Oh i do................ on the swing tops and bottoms and low % loss on stop point entrys taken at varying support lines before a confirmation of a move in the desired direction .

I use these lines and entrys to give me an instant notification that i am wrong OR right ..... simple really ....... one is either right or wrong and it costs on a minimal basis to prove it.....

But hey im a simple sort of nun and reckon if someone wants to wait a confirmation with a higher % loss to prove there wrong so be it .

It works for me , i couldnt care if it dont work for others


each to there own

 

[ThingyMajiggy]

At least someone does . Not many people ever seem to agree with me down here in trading strategy discussion.

Is it little wonder when you make your thoughts very well known by posting on most strategy threads, yet there is no real evidence from yourself and your trades.....that journal has gone mighty quiet

If I wash my car all the time and its nice and clean and looks the part, but my neighbour sees me doing it and tells me every time how he thinks it should've been done, yet I never see his car washed or see him washing it the way he says it should be done, agreeing with him is probably going be hard :

 

[tech/a]

J

Your a theories man.

Do you think that edge came about simply from deciding your R:R would be 2:1 or 3:1?

You/I anyone can manipulate if they actually trade their R/R and if you actually recorded and followed your R/R you wouldnt have posted the above.A trader doesnt decide anything it IS what it IS.

Im not talking theoretical R/R at the start of a trade either.
I'm talking closed trade R/R from your figures of past trades since you started.
You constanly work at increasing R/R and win rate.

This IS the difference a vast chasm!!
Has very little to do with Projected R:R initial trade objectives
I can double an initial R objective from 3 to 6 by halving the initial risk straight after I take the trade.

Get my drift!!
If not I'll do it diagramatically.