Let's say you trade against trend as you've already mentioned and start shorting at 2500, and add to the position every 10 points the market gets against you. You add equal sizes every time. Short at 2500, short at 2490, short at 2480, etc. till bottom of 1750. That makes and average price of your position 2125, or 375 points away from the bottom. That's 50% retracement from 750 point move. That's right, you need at least 50% retracement to at least break even. The only way to profit from 36% retracement is to increase size when adding to position. That would make a ridiculous martingale strategy. But you say they would take a loss during the dive. So my bet is that the earliest trades (shorted near 2500) had to be taken off with a loss when they exceeded expected MAE (that you calculate by assuming normal distribution). Although still not sure how would you make more than you lost during that 36% retracement. The only way that is possible is if you increased size for each new addition to the position. Also you say your average loser is 100 times larger than your average winner. Here's an idea for you: randomly place trades that have SL 100 times larger than profit target. See if that's any different than your approach. Here's what I think what you did: You bootstrapped MAE of all possible trades and took simulated value @98%.
99% profitable? i would be checking, then double checking, then tripple checking my coding. but congrats. i'll be interested to see how it performs real time.
Wayne, Quickly took a read of your post. I will reread it later in the day when I have some more time but check out the forums on Oanda. This strategy has been discussed many times. People have tried to calculate an MAE where the position size and account could manage as they martingale into a position. Most make tons of money, then blow up. Check out posts by Mutant Wizard... People are giving you sh*t because you are suffering from overconfidence bias. "People are overconfident. Psychologists have determined that overconfidence causes people to overestimate their knowledge, underestimate risks, and exaggerate their ability to control events. Does overconfidence occur in investment decision making? Security selection is a difficult task. It is precisely this type of task at which people exhibit the greatest overconfidence." Nofsinger (2001) "Overconfidence is greatest when accuracy is near chance levels. Overconfidence diminishes as accuracy increases from 50 to 80 percent, and once accuracy exceeds 80 percent, people often become underconfident. In other words, the gap between accuracy and confidence is smallest when accuracy is around 80 percent, and it grows larger as accuracy departs from this level. Discrepancies between accuracy and confidence are not related to a decision maker's intelligence." Never be confident in any backtest...
Indrionas, Correction. I never take a loss during a dive or any trades. They're emotionally (for me) hard to stomach. I prefer to have small enough position size to stick with them and turn them to winners. Your approach and conclusion seem correct. With that approach you would have waited several years for a 50% retracement to recoup your losses after Black Monday. Of course, an "emergency exit" has to be there but it must be far outside of even the outliers like Black Monday. Instead, outliers get handled by proper money management and position size. Now, your specific question, how can you make back enough on a 36% retracement to cover for losses during the dive? The simple answer of course is obvious in hindsight but the challenge is consistency and reliability in the face the unpredictability such as, how far will it dive? Where's bottom? When will it retrace? How much will it retrace? Maybe that's no big deal to some people but for me, it feels like the holy grail of trading--never a losing trade. Let's leave that for homework. The other thread about randomness in the markets is fascinating around the same point about unpredictability. Several who posted there obviously understand similar concepts. Sincerely, Wayne
Knocks420, Point well taken. It's a good reminder. Again, I been there, done that. The solution is micro lot trades where your actual risk is pocket change. I find that only risking a tiny amount of my account size keeps my head clear and emotions at bay. When I formerly risked 10% or more per trade--you talk about sweat!!! My system is already multithreaded and capable of trading dozens of instruments simultaneously. I'm starting with Forex due to my limited funds since I trade a dozen currencies on micro lots to diversify. As the funds grow, I'll diversify into stocks, commodities, etc. I have run the numbers through the charts and they same simple system works on all of them. It's just planning for the outliers that is the key to success. So in the worst case scenario you can still come back and trade another day. Sincerely, Wayne
I do not understand how outliers can be handled by money management & position sizing while not drastically undersizing the positions that would be a winner even if a relatively tight stop was used. Can you explain this? Regards, Eric
Wayne, Sorry my friend, this strategy has been discussed ad infinum, especially in FX circles exactly for the reasons you specify, leverage, microlots, commissions, etc. They've even taken it a step futher by combining non-correlated instruments. Trading too small and you won't make adequate return, trade to big and you blow up. Any successful individual who did this incorporates some sort of 'trading' strategy to boost returns. Although trading in such small size does allow you room to make many incorrect entries. Please read this thread from start to finish. http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=009605;p=56 But its all part of the learning process, go ahead and do it, fine tune/adapt, manage your risk, and hopefully you will be making money one day, it jusn't won't be as easy as you think....
Trader922, I'm certainly no expert--and this particular strategy hasn't gone live yet, trade at your own risk, etc. With that disclaimer out of the way... Handling outliers for sure means you have to trade with very small (<--TINY) positions relative to your account. Add to that the confidence that you will exit even the outliers without a loss except on extremely rare occasions. But think about 99% profitability, do the math on how much money you make even with small trades when they all profit almost without exception day in and day out. Realize that even when you hit the outliers, you can calmly manage your way (or your auto system does it for you) out of them without a loss. So you never suffer a major set back. The key is always making sure you have enough cash, margin, etc to stick with positions and even add to them until they win even in the case of big outliers like Black Monday. It may appear smarter to exit them at a certain point. But that never works. Too many other trades turn right around and profit from the same point you try to exit. So it always damages the strategy to exit except in an extreme emergency. So your emergency exit must be FAR away from the outliers. You'll read many experienced trades on ET and other forums say that they never use a stop except maybe an emergency stop. At first that idea drove me crazy. How to suffer the risk of almost unlimited losses? I thought, the nerves would drive me crazy. My stop was my crutch. The secret is position size, position size, position size. The smaller the position relative to your entire bankroll, the less you sweat or worry about volatility. In fact, the volatility and unpredictability become your best friend. It was a very kind trader on kreslik.com who drilled that into me. He got me to do a monte carlo analysis of my systems. I had to build a monte carlo tool myself but it was an epiphany at how dangerous it really is to risk anything more than something like 1/2% of your account at any time. Additionally, I was shocked how my formerly unprofitable strategies did so much better simply from reducing the position size and reinvesting. That caused me to drop those old worn out ideas and seek new ones that capitalize on the power of position size. Sorry, I don't feel qualified to "teach" anything. But I appreciate the questions because it helps me to organize and crystallize my thoughts and what I learned over the last several months. It's therapeutic in a way. Wayne
Knocks420, Why do you apologize? You said you're sorry that this has been discussed before? Why be sorry. I always insisted I never discovered anything new but just had personal epiphany. You must have missed that I have my system framework setup for non correlated portfolio trading. That's the primary discussion point in this thread. Maybe you felt sorry because you were hoping I found something totally new that nobody else discovered before. I doubt that I have that kind of intelligence. Also, I have trading strategies additionally to handle the outliers by combining with other models that watch the prevailing trend, etc. So I do everything possible to reduce the frequency of those outlier MAE's from the 2 or 3 per year to far less. Additionally, I'm not giving away some of the secrets in the sauce about the entry. So I agree with your point that a trading strategy of some sort will boost the profits even higher. Because if you perfect the exit and manage your position size, you have more opportunity to trade a variety of strategies that would never be profitable with a simple stop loss. Wayne