Thank you for your shared info. Would you please explain how did you use the formula to get the 10% results? Physician here not mathematician
Good chart. Another way to look at it is in terms of points: If you lose x points, you need to gain x points to get it back.
Very helpful.. Thank you.. However, let us build on that to say my exact situation. Assume you have a system that could have 100% hypothetical winning. So, on a simulator, it will never lose. However, on live situation, there are many factors could affect this outcome such as broker-related insufficiencies. For instances as you know; broker could slip you greatly, or could even NOT execute certain order for you or could execute partial size. What do you think the optimal mathematical way to approach this?. I know these issues are hardly to be calculated but is there any math-related solution? Thank you.. Your help is much appreciated. McGene
No, you need more reward. Why would your average Risk/Reward be 2:1? It seems you should be looking for either less risk with same reward, or same risk with greater reward. I never even take a trade that has an RR of less than 3. Most of mine are 12 or better. Risk 0.17% gain 2% with stocks or risk 3% gain 36% with options. And when pyramiding is added to this, some trades end up well over 100% with options with an initial risk of 3%. Losses are important to manage, but I wouldn't start to think that there is a direct relationship between risk and reward on every trade.
I have read/watched that TradeWorx has never been ended in any day with loss for very long stretch of days. Taken into consideration, those guys are HFTers so they are putting thousands or orders in every second. A considerable number of these orders will be executed. So, their probability of winning is extremely high. On this perspective, if those guys have 100% probability winning ratio, how do they approach optimizing their trading sizes. I know they have fine science for that but is there any idea to know how could a retail trader having similar situation " 100% hypothetical win ratio" could approach this based on math? As a disclaimer, I do not have the holy grail or even close to it.
No, it's not. I would have thought that after 1987, 1997, 2000, and 2008 people would have the sense to realize that stops cannot be counted on for protection when TSHTF.
Don't be so freaking literal. I think everyone understands the possibility of gaps. Most of all, someone who uses stops.
The formula is very simple, as it uses only three terms: probability of winning, probability of losing, and the net odds. Middle school math should be enough to calculate the result: f = (b*p - q) / b = (1*0.55 - 0.45) / 1 = 0.1 = 10% For in-depth discussion, you may be interested in this book: http://www.amazon.com/Fortunes-Formula-Scientific-Betting-Casinos/dp/0809045990/
Alternately, you could be more accurate in what you're presenting. What's your fudge factor for blown stops?