Also, I made no contention that smaller lots contribute to the feasibility of percentage goals (WTF?). Those are totally independent statements. I even tried to signify that by using separate paragraphs.
Well, not quite the same. What you're saying is true, in the sense that a really long string of winning trades (even small wins), each at ever-increasing size, does give you an exponential equity curve. Thanks to frequent (after every trade) compounding / reinvesting of profits. However, that's a sufficient, but not necessary, condition. A lot less perfection will do just fine, i.e., bring out the power of frequent compounding. Virtually any sequence of fixed-size trades, ending with a positive cumulative result, will produce even higher result, if you are able to adjust position size after each trade, back to back wins or not. The difference can be dramatic -- as in multiples, after just a year or two -- depending on factors such as 1) leverage, 2) the above ratio of account size to MTS, or available trade "granularity", 3) relative number of wins and losses, 4) relative size of wins and losses, 5) overall number of trades. Think of it as the power of more frequent compounding, or the power of dynamic, not static, money management.
How does the math work in the event (unlikely, I know) that the second trade is a losing trade? And if it is a losing trade, which trader has come out ahead and which one has taken the better risk/reward proposition? Letâs see: Based on your example: Trader A & Trader B start with $10,000, each makes $5,000 on the first trade (â50% in this caseâ), boosting both to $15,000. Trader A pockets his entire $5,000 profit at that point, because you say his account lacks the added capital (for margin, I surmise) to raise his bet on the second trade. For the second trade, continuing to follow your hypothetical, Trader B raises his bet by 50%, while Trader A trades the same amount as his first bet. Both lose 50% on the second trade (the reverse of the 50% win you posit). As a result, after the second trade, Trader Aâs account has $5,000, plus Trader A has $5,000 in his pocket = $10,000, which is break even for the two trades. Trader Bâs account has $7,500, plus Trader B has zero in his pocket = $7,500, which is a loss of $2,500 for the two trades. Trader A comes out even better if you view his second trade in terms of the risk to his starting stake of $10,000. Assuming that both traders risked $5,000 to win $5,000 in the first trade, and assuming that trade number two has that same 1 to 1 risk to reward ratio, Trader A has risked a total of $5,000 for the total chance to win $10,000 (the 5k already made, plus the second 5k wagered for), which is a 1 to 2 risk/reward proposition. Trader B has risked a total of $7,500 for a chance to win $12,500 (the 5k already made, plus the 7.5k wagered for), which is 1 to 1.67 risk/reward proposition. 1 to 2 is better than 1 to 1.67. Trader B, you see, risks $2,500 of his original amount in the second trade, whereas Trader A has risked nothing of his original stake in the second trade. The proposition can be stated differently, of course. For example, which of these two propositions is better: a free chance to win $10,000, or a chance to win $12,500 in return for risking $2,500? Bottom line? Math and âfree lunchâ are not synonymous.
Geez, I realize I'm asking to be spoon fed on this, but is the above the same as saying it's a lot better to win all your larger trades and lose only your smaller trades? How much smaller in size do the losers have to be, and/or how much delay occurs in obtaining exponential profits if a couple of losing larger trades are interspersed? Also, which is harder -- to string together many winning larger trades in a row, say 15 winners large, or to string together a series of larger winning trades broken with losers only of the smaller variety, say 3 winners large, one loser small, with that sequence repeated until you get a total of 15 winners only of the large variety? I ask because the magnititude of difficulty may very similar.
And yet we inevitably have redundant posts emphasizing risk and the fact that FX is not easy. In future posts, to save time, I will refer to the importance of money management, doing your own DD and the difficulty of FX as "yada yada." I still believe that FX offers great opportunities, and is an excellent place to generate stellar returns using a sound strategy. As always, yada yada.
And if the first trade is a loss (unlikely, I know) who has come out ahead? I guess this one's open to debate: Trader A has 5000, and can no longer trade. Trader B has 5000 and can trade with anything from 10 to 5000. And if the third loss is a trade ("50% in this case") who has come out ahead? Trader A has 10000 remaining, Trader B has 11250 remaining. Yes, if the 2nd trade is a 50% loss, Trader A comes out ahead. We can surely conjure many scenarios in which Trader A or B comes out ahead. It was an example, I doubt anyone puts all of their money on one trade. But this seems to be more about money management, and Chood, you and I both know yada yada.
I think you're still missing some of the essence of this money management strategy. Let me give it another shot. Recall Rule 1: The key here isn't whether you have large or small losses and wins, or how many of each kind, or what sort of unbroken strings of wins. The parenthetical word "positive" is the key here. A reasonable winninng, i.e., cumulative positive, sequence of trades is a must, in order to benefit from incremental trade sizing, aka per-trade compounding. If you apply it to a losing track record, then, sure, it's generally going to make things worse. Put another way, the math works both ways, if you adjust (up or down) the trade size after each trade, win or lose. What's more, per-trade compounding works best on more than just token returns. Hence the word "reasonable" above. If you average, say, only 2% or 3% a month, it may not pay off and may actually subtract from total return, although typically slightly so. (This is known as negative effects of "asymmetrical leverage"; as an example, a 1% loss requires an almost identical 1.01% gain to get back to break-even, while a 10% loss -- a larger 11.11% gain, and so on. Mathematically, 1 / (1 - x) - 1 > x, with the difference increasing as x increases, where the absolute value of the loss is 0 < x < 100%.) Once you get into the 5%-10% monthly returns range and higher, the benefits of compounding will begin to come through, loud and clear. The more you average per month and over the longer period of time, the more you'll benefit. Over a year or two, incremental trade sizing by a consistently profitable trader blows away the other, discontinuous way of money management.
Source from another trading forum: Risk-Free Money with Grid Trading Forex Original idea: Q First of all kudos for roger for making us think outside the box.......i devolped the super high interest trading through his system and creativity.....so lets get started...... 1-open an account with marketiva, why? because they have accounts that do not charge interest or swap fees......i can start seeing the wheels turn.....or......open an account with F x c m and tell them you want to open a interest free account, you might have to tell them your muslim 2-open an account with your regular broker, that charges regular interest........ 3-now, with your regular account open a long position with the gbp/jpy pair or any other interest positive so you collect interest everyday and triple interest on wednesdays.... 4-with your interest free account place a hedge/opposite trade on the gbp/jpy........ 5- be careful not to over leverage yourself, so you have enough time to switch money around if your margin gets a little high on one of the accounts...... 6-enjoy making free money!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! UQ Response: Q Before you venture into this method, even though the numbers seems attractive, there are several things you need to consider: 1) Used margin = money used for position collateral at an interest-paying broker like O.a.n.d.a, or even I.n.t.e.r.b.a.n.k.F.X or any other broker with same positive rate of overnight rollover interest rate. Say $200, like the website says, with a 1-2% of overnight rate paid to us. 2) Hedge margin = money used for hedging at a non-interest broker like F.X.C.M & M.a.r.k.e.t.i.v.a. This is used to keep your money from disappearing when the market goes against your position. 3) Buffer margin = remaining money used to hold interest-paying position from getting stopped out when the market goes way far against us, more than th used margin would allow. 4) Interest rate on leverage. From ElectricSavant's spreadsheet, best is to long AUDJPY at 1:50 which equals to 250% per annum of collateral margin without being compounded back. Yes, 250% wow!!! The scenario: - in order to profit from the interest, you need the interest-paying position to be active at ALL TIME, even though the trade goes against us in pip. - the best condition is when the hedge account blows up in the end (yes, zeroed!), as we have the market going our way along with the interest rate, all in the same account. this way we save the hassle of wiring the money back - the worst condition is when market goes to the hedged direction, especially before we get the chance to pile up on interest. That account gets fatter on pip differential, while the interest account drowns quickly (slowed by interest). In this scenario, we need to pump more money before it gets stopped out and stops the interest from flowing. Remember, pip move go faster than interest. - Let's do some math. If, for example, our interest position is long EURUSD and EURUSD dived 2000 pips like in 2005 (1.38 to 1.18), our $200 collateral in interest account would've gotten a margin call - unless we have more money than the collateral still available. How much? Well suppose on 1:50 leverage, 1 pip = $1, $200 can only sustain a 150-pip negative swing. U need to stock up for the 1850-pip remaining. $200 on 1:50 lev = $10K position (roughly) at $1/pip = -150 pips before a 25% remaining margin call. If we were to sustain a 2000 pip drop this year (or may study from annual movement range statistics), we need to supply $2500 more in the interest account. OK. Now pay attention. $200 for interest collateral (O.a.n.d.a/ I.n.t.e.r.b.a.n.k.F.X /etc.) $200 for non-interest hedge account (F.X.C.M/M.a.r.k.e.t.i.v.a/etc.) $2600 for interest account margin buffer (or for non-interest account, incase market goes the other way) $40 x 2 account withdrawal fee = $80 (fixed cost), may be more if we need to juggle margin by transferring between account but provide less margin buffer - dont forget time needed for wiring money! It needs to get there in time before position gets liquidated by broker. $200+$200+$2500+$80 = $3000 250% of $200 = $500 $500/$3000 * 100% = 16% roughly ... where did that 250% pa go? - another scenario, where we reinvest everyday to increase the interest riding position like in the website. Well, you'll need to hedge the same amount to your non-interest position as well. So, you may appear to have more money, but unfortunately, u need to provide the same amount to hedge it with. I'm not saying that it doesn't work. It does, and it should. But it's really not as attractive as you think and you need to juggle the margin manually. Perhaps better for conservative fund management growth rate or banking in the fixed income sector (25% or less annually), but not attractive for small capitals who looks for 50% or more per quarter. However, the good side: you cant lose. Just think of the broker as another banking facility. UQ
Naz You did post on 24th October 2005 .... " I'm a newb to forex...." I guess, anyone reading that and doing the maths would therefore say it's taken you about 3 months to become an expert. Webs of deceit usually fall when the person can't remember what lies they have told and eventually get caught out. Of course, not saying that's you but it might be worthwhile checking/remembering what you posted before making any new claims. Anyways, you are not alone on forums for this prob.