these are the reasons probability is what trading is all about , not money management , if you keep trading and your trades have a profitable probability , given enough trades you'll win , even the best money management in the world won't do this over the long term.
a) I can handle 20 losing trades if they are equal to 2% of my account balance in total (i.e. 20 x 0.1% of fixed account balance risked at the start of each day/week/month). b) Otherwise I can handle 10 losses if they are equal to 2% of my balance (double risked per trade of above.) c) Otherwise I can handle 4 losses @ 0.5% per trade, again 2% of my handle. d) But I prefer to risk 2% on one trade, again 2% of my handle. So if I do 150 trades of (a) or 15 trades of (d) I should about end up the same win/loss % wise. but Im doing it at 10 times the speed. Also, @ (d), I would want that the standard deviation away from the mean losses over the past month to be nice and flat, otherwise I would drop back to (c), etc.. black swans are black swans though, so again, to play it safe switch down. For this stuff to work - stick to it for a month, aggresively at least fortnightly, flip fliping dont cut it. (Mean/Mode/Median to work out these things?), I would stick to the mean over the last four weeks of trading (for me because I track the lunar cycle - I like to bring everything back to that for my analysis). (d) when risking bigger bucks, if your down and want to make back the loss, its harder to wait around with your rational mind intact , whereas with (1) its no big deal, but the tendency is there to go after everything, therefore reducing the win/loss percentage. (1) is hard though when you only got a few thou in your account, but whatever it takes, right? So, If you can somehow find where you are at in the learning curve and then slide into that way of doing things, then live long and prosper. This assumes that the dollar values above remain constant in the above examples.
NoDoJi â You have an excellent communications method. I enjoyed your post. However, I my case I found your method was not quite complete for my uses. About 10-12 years ago I developed a daily trading system that worked great for trading stock. There was only one glitch in the system during live trading. Every couple years it had a winning and losing period that was different from the long historical tests I had done. During these periods consecutive losses went from 5 max to 8 max. During one such string of losses I cut it off at 7 and was confused why this was happening to a system that was a gem for more than 2 years. That is when I discovered my trading systems edge had characteristics. What I had forgotten to take into account was the price characteristics of my edge. In this case the trading system did not like the markets change to high volatility in bearish periods. The increase in the size of the price bars, the movement of calculated stops away from the price bars had created havoc with my system. In hindsight when I discovered what volatility was doing to the system I thought out a different trading method. I only traded my edge in the conditions it was meant to be used in. This increased my profitability by 29% and I have never experienced more than 6 consecutive losing trades during normal trading since. So I would modify your casino method to allow for complete trading unless a card counter hits the black jack table. Even casinos know when their edge has been lost. And thatâs the question I keep asking traders. How do you discern between normal trading conditions for your edge and the abnormal? Is it consecutive loses? When have you lost your edge and how do you know it?
Basically you want to know the durability of the moat of your edges. Well, all i can say is that some edges show up for weeks, some for a few months, some for a few years, I have seen quite a few things come and go in my 4 years full time trading. Gut feeling.
I KNEW if I stuck with Elite Trader long enough the true secret to trading success would be revealed! (And to think all this time Mr. R.W. had me convinced it was a lucky coin.)
I routinely experience 20 losses in a row (or more frequently, a 20 loss drawdown). I set my pain level at a 50 net loss drawdown, so I have some room to breath. However, this is because of trading multiple instruments simultaneously that may have losses across the board (currencies that are not very well non-correlated). BUT, when the trends kick back in, the upside could be 100% to 200% gain back of losses. It works, but it has taken me 2 years to become fairly comfortable in executing. I have taken a 'pause' countless times after 10-20 losses in the past, and invariably those times were succeeded by trending periods. You just have to live and learn from experience.
You know the system or your edge is gone when you consistently lose money even after following the system without exception i.e your account equity decreases over time. After how long and how much you lose for you to know depends on your trading style and account size. There is no one answer. A $5K day trading account has different performance mearsuring parameters than a position trading $50K account and so on.
That is a very interesting post. You are to be commended for trading through that level of consecutive losses. I tried some of this in my day trading foray, about 8 years ago, with 12 loses in a row and a ¼% position size (3% max drawdown). However, I could never quite get my edge to work consistently so I gave it up.
Shagi â I trade automated systems. From the optimization statistics I know what +- 2 Standard Deviations from the norm for drawdowns and losing trades. I build an exit plan before I live trade the system from these stats and I monitor market conditions. If either goes against my strategy Iâm out most of the time.
It has less to do with the amount of consecutive losses a trader can handle and more to do with the ability of a trader figuring out what works and what doesn't work throughout their trading career. I would write more but it seems this market might actually start moving.