I understand what you said about the drawdown not being more than 20%, because if you lose 20% to make it back you need to gain 25% or so, and that's going to be harder if that 20% was a part of the margin required to trade the system itself. Regarding all this, and my possible and usual extreme optimism and recklessness, I'll see how it goes as it goes - if I see that I am starting to lose everything extremely fast, I will stop and reconsider all these rules and contract ratios I have planned. For sure this time I am being more careful than the first and second time. I will know that I still wasn't careful enough if I'll go broke again (and only lose the initial 4000 dollars investment, after all). But I suppose that I will indeed start being more careful the more money I have. First let me get to 50,000 and then I will reduce the total amount invested. I think there's also to consider that the broker might go bankrupt, so that will force me to move out 20,000 every once in a while, and that will be one more security feature in my money management that I didn't mention until here. Once I reach 50,000 I will constantly keep 20% of the whole capital out of that brokerage account (by wiring it once a month). So if all goes wrong, I will still have that 20% (and then I would start doing things differently). If everything goes wrong before I reach 50,000, the way I see it is that all i lost is the initial 4000. Anyway I did a study of the kelly criterion on this, and I think it came out that - too complicated to do it all over again, as I am allergic to formulas - even if your capital decreases by 80%, as long as each loss doesn't wipe you out completely (like in the case you're investing in options, that go to zero when they expire), it will still be convenient to reinvest all your gains. I remember the calculations were like this: say you have a hundred. You then lose 20% and it goes to 80, but then if you lose another 20% you just go to 64. Then if you lose another 20%, you only get down to 51. Because each time you're investing in fewer contracts. Of course this is true only if you can infinitely divide your capital, which is not the case when I am starting with just enough margin for one contract. But I am hoping to get a bit lucky at the start, or rather I am hoping to not get extremely unlucky. If I do, I will just wire more money (probably a couple thousand more). Anyway as time goes by and the capital increases I will underbet and pretend my capital is 20% less than what it is. If I do it now, I will get nowhere, since I am starting with so little money. Besides, I should be reckless now that I have nothing to lose, and less reckless later when I'll have everything to lose. It makes so much sense to me, that I can't worry about what the theories say. But if anyone cares about what I was saying earlier this is a great wikipedia entry (for us ignorant people): http://en.wikipedia.org/wiki/Kelly_criterion ------------ Concerning the lack of stoploss as the only condition for allowing a 50% chance of winning, I have doubts. If you use both a stoploss and take profit, all other things equal, your chance should still be 50% (presuming obviously we're not considering the fact that stocks tend to go up more than down in time, and similar things) and this time you do have a stoploss in place. Of course if you only use a stoploss, then obviously your losing trades will increase in %, but then your gains should be compensated for the fewer wins by them being larger in size (as long as you devised a reasonable method for exiting). ------------ On this question: "3. Could you say what is your holding time when you lose, and your holding time when you win? I am guessing that your holding period when you win is larger than your holding period when you lose, for a system that is winning." I can answer that my holding time is always the same because I do not use any stoploss or takeprofit and just hold for the exact period the tests have proven is in my favor. Both because it works and because it allows me to keep my system as simple as possible, and without a risk of overoptimization. So, in other words, I go long and short and exit, based merely on a time approach. There's a time to get in, a time to hold and a time to get out, regardless of gains or losses. That's what my tests say. ----------- Regarding being courageous, I don't know what it means. It sounds like a compliment, so thank you. On the dictionary it says of "courage": "The state or quality of mind or spirit that enables one to face danger, fear, or vicissitudes with self-possession, confidence, and resolution; bravery". Am I "enabled" to face danger by my state of mind? No, because losing 4000 is not danger to me. Am I enabled to face fear? No, if I feared losing 4000 I wouldn't trade. So I am not courageous so far. Maybe I am facing danger, but I don't see it as danger, and I don't feel any fear. Maybe we could say I am irresponsible, but not even that because it is totally true that losing 4000 dollars will not harm me. I believe that I am totally rational instead. If I have so little money as I have, it's pointless for me to invest conservatively, because there is nothing to preserve. If I am in this game it's only because I want to make money and fast. I want to retire and quit my job. So I saw this clearly from the start - it can only happen with derivatives. And only if I invest in derivatives in an aggressive way, otherwise it just won't happen and then why did I bother with it? So in the past ten years, trying to become a millionaire quickly I lost about 30,000 euros. So what? If I had invested it in stocks, I would have lost most of it anyway. On top of it I would have learned nothing. Because derivatives have a faster way of teaching you things. If you invest in stocks and make a mistake you get a slap. If you invest in futures and make a mistake you get beaten up really badly. So you learn faster. And it only took me ten years so far. With stocks I would have never learned. Just the fact that you decide to invest stocks so you will lose less shows that you didn't understand much to begin with. Because if you are in this game is to win, and if you are in it to win, then you should try to win as much as possible, even if this means losing as much as possible when you lose (in leverage sense), but being understood that you're in it because you expect to figure out how to win more often than lose. In a sense, we could also say that people with a lot of money can't learn this game because they'll be too afraid of losing their capital. Or also, when they'll start trying to learn this game, they will lose so much money that it will freeze their learning ability. Instead me, I did lose all I had, but not enough to give up, because I only some savings each time. Yeah, I lost all my savings for ten years in a row. That taught me a lot of lessons. But if I had lost say 500,000 dollars inherited by a rich parent, that would have stopped my learning altogether. On the other hand, undercapitalized traders like me, may also be burdened by the drive to make it and get rich as quickly as possible, always too quickly to ever be able to make it happen. We'll see. So far this has been the case. But you see, I am still here trying. Whereas, I think if I had been given 500k by my dad 5 years ago, now I wouldn't be here still trying. So I think I think it is better to be forced to start with very little (but constantly flowing) money. Not zero money, because then you might be tempted to ask for a loan, and I don't think that is a good idea, because you have too much money and it's not yours. If I had taken out loans not this year like I did, but in any of the previous ten years, right now I think I'd be in big trouble and unable to trade for the rest of my life.
comment's on riskfreetrading: One does NOT have a 50% chance to win. This is one of the biggest mistakes people make. The chance to win is LESS than 50%. The meaning of a system is to optimize the probabilities to make money. So if your chances are less than 50% you have a bad system. In a good system your chances to win are HIGHER than 50%. I wrote about the 50% win probability because you wrote in one of your earlier posts that 50% is what one would expect. This is true only if you do not have a stop loss. Point 1. and the fact that you have a higher win ratio (assuming that your reward is higher than your risk) suggests to me that your tests may have been made WITHOUT a stop loss. Did you implement a stop loss in your tests? Test your systems with a stop loss, and you would notice that the win rate would drop very fast. A stoploss is used to eliminate losing trades and to protect the capital. Stoplosses have to improve the Sharp ratio. If that happens it doesnât matter whether you have less winning trades. What is important is: How much did you win in the winning trades? How much gave you back in the losing trades? Whatâs your maximum drawdown? I am writing a series of lessons on how to set the whole trading business. In it, I prove why the win/loss ratio is less than 1., meaning one loses more often than one wins if the trade are selected randomly, and there is a stop loss. This statement is completely irrelevant because the aim of a good system is NOT to trade randomly but based on optimized conditions. Some examples to show what I mean (although I have to admit that the samples are not always realistic examples): I want to rob banks. To optimize my chances I only rob banks where the money is put in big bags on the counter, where there are no guards and there is no alarm. My chances to succeed will be much higher than if I would rob a bank chosen randomly. I want to drive from NY to Chicago. I can choose between a car with brakes and a steering wheel, and one without brakes and steering wheel. With which one my changes will be better to reach Chicago in 1 piece? From the moment on when my system started working well, I personally never had less than 75% of profitable trades. On top of that my average win is much bigger than my average loss. I daytrade since 1990.
Big expensive lesson today. 1) Never trust a system that does great one year, but so so in all other years. Better to have a system that never does great, but does ok in all years, constantly. 2) Better to use two different systems, that do ok, than to use two systems that are correlated and succeed or fail at the same time. Today I took a huge loss because I did just the opposite. I traded at the same time two systems that are very correlated, and that do great in just two years, and poorly on all other years. As a consequence, I lost on both trades, and went down 1000 dollars, which in my case was about 20%. Thank you, markets, for teaching yet another lesson. I hope I'll remember this one.
Also check this paper, it is better than wikipedia's because it is from the point of view of trading with an example.
Thank you, even though those four pages are full of formulas and I can't get through it. Particularly when I saw that Sigma symbol, it reminded me of school, homework I never did, and I had to close the file immediately. I was permanently traumatized by all subjects they covered when I was at school. Thank God they didn't cover trading, so I can still do that. Thank God they didn't teach me how to watch movies, or I wouldn't be able to watch movies either.
Today, I had such a huge regret that I had to step away for a couple of hours not to risk getting mad and trying a revenge trade (that would have made me lose). I made a small profit of 300 euros instead of 4000 because I was a few seconds late in getting rid of the take profit (see attachment for details).
It was a fed move, many traders are aware of these moves and either have a plan to stay out or they will risk a few contracts. For example, lets say you were positioned in the wrong direction, your stops may not have even been honored and you could have blown out your account.
Pphew... holy cow. Thanks for the info. Great thing then that I only missed the best trade of my life, but that at least I wasn't in the wrong direction. I knew it was about to rise, but not by this much (I have always been a bottom picker, so I never go with the trend, which had been downward-sloping until then). Regarding the news that I had no info about - I can't follow all the news. It would be too much work, since I am trading 9 futures, and there's news everyday possibly... You know, it happens. Nobody is perfect. I am already crazy and excited enough as it is - if I went after the news, then I couldn't last long. Also, that is why I am trading so many systems, so the news won't be too important for me, and with all the trades that take place, the losses will only make me lose only a small percentage of my capital. Besides, the news most of the time only moves the market temporarily, and then it resumes the old direction and where it left at (big swings, up and down...), but, since I have no stoplosses but only time dependent exits and entries, it doesn't affect my trades very much. Occasionally I do blow out my accounts though, because as I said I always reinvest everything, so... I blow.
You could either look for a calendar that shows fed moves and jobs reports, then decide if your system should stay out or if it will not affect your trading. If you are hedging your trades correctly (for example you hedge the move before you are getting into a draw down not after), then not having a stop loss is fine. I wish I hedged more of my stock trades, since that would have been much better. I see on fast money, they might be long say a bank stock but then they buy a put to hedge the risk. The reason that I have not been hedging is that if you keep paying insurance each month, you will lose too much money over time. However, I think after say you are long a stock and it moves in your direction, you could lock in the move by buying a put. To hedge a negative movement from the start on a stock, you could take a 1/3 or 1/2 position, look to average cost down on a correction and then sell off one of the positions at 1st profit target. I have watched JPM range trade 2 times between $ 17 and $ 27/sh. I am testing averaging into some future trades by deciding what my plan is before the trade, not after I am in a draw down.
I am quite ignorant. I have no knowledge of finance or formulas (nor English language in some cases). I don't use any hedging, because, in simple words, besides not understanding much of it, I have always been convinced that it makes me lose money. It seems to me like betting at once on red and green at the casino. So instead of that, I just either go long or short on a given future, and right now I often do so with my entire capital (as I said it's small). I am quite reckless (because of being so undercapitalized).