Discussion in 'Trading' started by acrary, Jan 21, 2004.

  1. dbphoenix


    For the time being, I'm in the ET room.
    #31     Jan 22, 2004
  2. dbphoenix


    Which takes us back to the importance of entry, which has been debated/argued at length before. If one believes that entry doesn't matter, that exit is all, then he's going to view all this differently from someone who believes that entry is critical.
    #32     Jan 22, 2004
  3. acrary


    I guess I wasn't obvious enough about the intent of the thread.
    "Limit your risk...not your reward". You could use the trade management technique with 2:1 or do a reverse on a method that wins 70% of the time and has 1:1 by putting on your whole position and then take off half when you're halfway to your stop loss point. You won't get as much benefit because the biggest rewards are on the outlier trades (remember fat tail?) that are only possible when you let your profits run.
    #33     Jan 22, 2004
  4. Yes, the Excel sheet clearly shows how a (30% win + 70% losers) can result in a profit.

    If you took it a step further and used acrary's technique of (1/2 position to breakeven then add other half) you would add even more leverage.

    Once again, this is a great thread that puts the focus on a technique that is necessary to be a professional trader. Keep the risk constant, maximize the profits.
    #34     Jan 22, 2004
  5. This is the most useful sentence I read in ET. To me the importance of this sentence to trading is equivalent to the role of DNA for living organisms.

    #35     Jan 22, 2004
  6. 20 cents:

    Possibly an effective way to kill many potential trades just before they become profitable! :D

    #36     Jan 22, 2004
  7. 3:1 is what is recommended by most people and books, but its usually in context to higher TF trading, such as swing trading and much longer term daytrading. If you are scalping, things happen very fast and change direction for no rhyme or reason. I shoot for a 2:1 on the ES, but I scalp. The most imporant thing is that if the market is starting to look like its going to move against the original reason you entered the trade, then you may consider exiting it, whether or not you have hit your mark. I personally use trailing stops at minor swing highs and lows and go from there. I find that for me, the theoritical 2:1 is quite different from the actual. Mine on average is more like 1.6:1 once its all said and done.
    #37     Jan 22, 2004
  8. prox


    I agree, this is written by people talking about much longer time frames. In daytrading, you have time, range, and noise issues every day. The only ways that I can see to achieve even a 2 to 1 ratio reliably is to buy bottoms and sell tops. This presumes you are using a meaningful stop area and not some fixed 2 point risk that means nothing.
    #38     Jan 22, 2004
  9. Cutten


    Acrary - with a random market, this system will generate identical profits to any other (i.e. zero minus commissions). The increased reward/risk will be exactly offset by a proportional decrease in win rate, minus commissions. Position-management alone is entirely edgeless unless there is some non-random market character that fits the rules of the system.

    Thus your system will clearly do well in strongly trending markets with more trend continuations and relatively few fakeout corrections. However it will miss out on choppy trends, and will do terribly in ranging markets with lots of false breakouts.

    You need to demonstrate either i) the character of the markets over the long-term is such that this 3:1 system is sufficient to make above average profits without unacceptable risk, or ii) you have some method of detecting those market states which suit the system, whilst avoiding market states where the system performs poorly. You did not bring up any supporting evidence for this during your post.

    Finally, your post appears to treat open position equity as different to closed position equity. I don't see how this assumption can be supported. If we have two traders, wth identical positions and identical exit criteria, then their risk/reward is also identical. No matter how the market behaves going forward, they will make or lose exactly the same. Their entry price makes no difference at all to the risk/reward calculation.

    #39     Jan 22, 2004
  10. Cutten


    Exactly - have market exposure when your risk/reward from *current* prices (not entry price) appears to be favourable; have no exposure when the risk/reward is no longer favourable.

    In some market environments, the triggering of a trailing stop will indeed indicate that the risk/reward is no longer favourable. In other markets it could mean simply that a stop-gunning counter-trend move is occuring - in which case the risk/reward may be even *better* than before.

    The trouble with acrary's system is that it assesses risk/reward based on limited information, some of which is entirely arbitrary. For example, entry price alone has no bearing on risk/reward whatsoever. Otherwise two traders with identical positions and stops but different entry prices would have different risk/reward - a clear impossibility. Even a volatility based stop only uses past market volatility to assess risk/reward.

    A system which judges risk/reward based on *all* available criteria (e.g. forthcoming earnings releases, government announcements, impending news etc, as well as price action and implied volatility) is generally going to outperform one based on limited, backward-looking and often arbitrary information.
    #40     Jan 22, 2004