Learning Example: Active Capital $100,000 Purchase Price $100 Initial Stop $95 Fill Price $101 Trading Cost $10 Target Risk Percent: 1% Q. What is the Target Risk Amount? What is the Position Size? A. Target Risk = 1% of $100,000, or $1,000. Position Size = $1,000/(100-95), or 200. Q. What is the Actual Risk Amount? What should be done about it? A. Actual Risk = (101 â 95) * 200 = $1200. Since this is greater than the Target Risk Amount, consider raising the Initial Stop to $96. Initial Stop: $96. Q. What is the Cost Stop for 20 shares, assuming 3 more sales to follow? A. Cost is 5x$10 or $50. $50/20 = 2.5, so the Cost Stop price for 20 shares is $103.50. Assume the Cost Stop was executed as a Limit Order at $103.50. Q. What are the new 1R and 3R Risk Stop prices for 50 shares? For the entire position? A. 1R = $1000, so 1000/50 = 20, or $121 for 50 shares. 3R = $3,000, 3000/50 = 60, or $161 for 50 shares. For 1R, 1,000/180 = $5.55, or $106.55 for 180 shares. For 3R, 3000/180 = 16.67, or $117.67 for 180 shares. Q. If the Initial Stop were $98, what would the 2R for 50 shares be? A. (101-98)*200 = 600. 600/50 = 12, or $113 Risk Stop price for 50 shares. Assume sale of 80 shares for $106, leaving 100 shares. Q. What is the Pure Profit Stop for 80 shares? For 90 shares? A. We already took profits of $400 (5*80). Selling 80 shares leaves 20 shares at $101, or $2020. 2020-400 = 1620. 1620/80 = $20.25, or $121.25 per share. Selling 90 shares leaves 10 shares or $1010. $1010-400 = 610, 610/90 = 6.78, or $107.78. Executing the Pure Profit Stop at $107.78 recoups the original capital while keeping 10 shares at $107.78, or about 1R in stock. This amount will eventually be sold using a Closing Stop. Q. What price achieves a 1R gain for the full position? A. 1R = $1000. 1000/200 = 5, or $106. Using the Cost Stop and Pure Profit Stop accomplishes a 1R gain at $107.78 while freeing the original capital, with the initial risk protected at $106.55. A full position strategy has 1R at 106 (but has closed the entire position). After the Pure Profit Stop, the original capital is ready to invest in a new position while the 10 shares hopefully continue to move upward (with the Closing Stop trailing behind). Additional gains from the 10% may be modest, but the entire position is profit. ___________________________________ Feel free to ask questions or comment on the concepts used in this example. Chabah
Review Here are the main points to be reviewed: System Integrity Execution Integrity System Effectiveness Account Correctness System Integrity The trader must verify that the orders being placed align with the strategies being used. Incorrect orders are an obvious danger to the system. Execution Integrity Bad fills can be a serious problem. Monitor the difference between Purchase Price and Fill Price to identify discrepancies. Compare order execution results across brokerages from time to time to ensure that performance is comparable. System Effectiveness Changing market conditions can turn a winning system into a loser. Continual monitoring and testing is required to test each strategyâs edge. Account Correctness With 100 trades at an average of $50 profit, ensure that the account balance is +$5,000. If it is not, determine the reason. Fees or errors may be misleading â make sure they do not persist. _____________________________________ This is a very basic overview - later I will get into the much more complex analysis of System Effectiveness, determining which strategies work and how much money to allocate among systems and models. Most of that was covered in arcary's thread but I'll have my own spin as well. Please leave a comment if you find this interesting. It seems that interest has waned and I don't want to post too in depth of information if there won't be interaction. Thanks, Chabah
IMHO, the dialogue is too theoritical for people to relate to. It looks pretty sophisticated, and I'm sure it will work well for you, but at this point it's too much concept, not enough real-time for folks to get a handle on and relate to their own personal situation. Especially since trading is mainly psychological. Regards, Jimmy
Yeah I sort of feel like it's time for a turning point in the lesson. It's like a course on trading, after the vocabulary and introduction we want to get to the good stuff, i.e. screenshots, actual code etc. It's very detailed, more detailed than what I've seen in the industry. But I'm sure that will be beneficial in the long run. Can't hurt.
Nah, man, I think it's seriously over-optimized at this point. He could probably throw out half the stuff and still have a great automated system ... But at least lets see some historicals, this way we can see what the deal is. Best Regards, JJ
What I see here is a guy with the $300 golf bag, the $500 set of clubs, the $250 top of the line driver, spotless leather gloves, a monogrammed hand towel, fresh spikes tuned to today's soil moisture content, a portable ball washer, an electronic distance finder, a case of sparkling new high trajectory XL balls, who is about to walk up to the first tee and realize he has absolutely no idea how to swing the club. Fletch
I think you're on the right track, Chabah. I like the rigor in your thinking, that will help your trading results. And since your thought process is rigorous and logical, I assume you've already discarded at least half of the comments posted here Random Thoughts 1. An "Edge." You don't need one, and an "edge" does not exist in the market, except for those with illegal insider knowledge. Edge = Holy Grail = nonexistant. 2. A collolary of "no edge exists" is that a rigorous system like yours can make money by using simple algorithms to take positions in oversold and unloved sectors and stocks. When you're wrong, your stops will take you out and when you're right stay in. 3. Profit-taking: the only thing I question about your system is the reducing of position size when you have a profit. IMHO there should be provision for adding position size to winners. 4. Tight stops: IMHO stops should not be a fixed percentage; they should be variable based on the beta and volatility of the stock. Volatile stocks need room to back and fill. An approach might be to develop an equation that calculates a percentage stop based on the historical volatility of the stock. 5. Backtesting: crucial. Good luck with the system. Again, I think you're on the right track.
Chabah is rigorous and logical enough to dismiss this comment, that's for sure. If you can't get an edge you shouldn't play the game. Simple as that. Fletch
After making this comment, I can't believe this guy actually trades, maybe SIM, but not real money, and certainly not for a living. Here, let me help you, look up and read everything written by a guy named acrary. If you still believe edge does not exist, STOP TRADING (I mean like for, forever). Yeah, that's been done before too, see comment above ... only he found that operating with an edge proved to be more profitable. Where does this guy get his information? This time use Turtle Traders in the search engine. It's great on the upside, just get ready for the 65% drawdown (when, not if it happens). Well, 1 out 4 ain't bad, if you google it, I'm sure you'll find something along these lines. ... and this is going to lead to my next comment. Yes, sincere good luck. If you keep working at it, I'm sure you will succeed. Regards, Jimmy Jam