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# How much would you bet on this trade

Discussion in 'Risk Management' started by Ghost of Cutten, May 16, 2011.

1. ### Ghost of Cutten

75% win rate, 1.5-1 payoff (i.e. you make 1500 for each 1000 you risk)?

2. ### abattia

Nice stats!

Assuming a) the stats continue to be representative of the strategy's performance, b) the stats mean you are using a fixed target and stop, c) that your 75% winners were distributed more or less evenly throughout your sample (i.e. and so were not bunched all at the beginning), and d) that you are trying to maximise income over time rather than generate returns with a low volatility month to month ...

... then I would bet the bank on this trade (unless you have something else even better!).

Remember, 75% win rate means a resonable probability of needing to survive a run of 5 or 6 losers in a row; bear this in mind when sizing.

Good luck.

3. ### macroman

15% of the amount you can afford to lose per trade. After win, reinvest all winnings in next trade. And then rebase back to 15%. thats what I do.

This is assuming:

you are not falling into trap as hedge fund computers may detect same pattern as you at the same time or a bit after, because there is suddenly enough sample availabble to detect.

helps if there is also fundamental input....

edit: my numbers win ratio etc are slightly different. But risk adjusted as suggested.

4. ### Ghost of Cutten

It's a spread play between two related markets. I was thinking of risking 5% and wondering if it was too big. My drawdown tolerance is in the 20-25% range.

5. ### abattia

.

At 75% win rate, you have something like 2% - 9% chance of seeing a run of 5 - 6 consecutive losers in a 100-trade period... risking 5% per trade puts you 25% - 30% down after 5 - 6 consecutive losers.

On the other hand, if you are wrong about the 75% win rate and it is actually more like say 60%, then you have a reasonable chance (2% - 5%) of seeing 8 - 9 losers in a row during a 100-trade period ... that would be a 40% - 45% drawdown.

Conclusion? At 5% risk per trade, there is a reasonable chance your metal may be tested ...

6. ### acrary

With the numbers you've provided, the 95% confidence level is a drawdown of 23% per 100 trades. If you went to 3% per-trade the 95% confidence level drops to 14%. The expected maximum losing streak at 99% confidence is only 3.32 for 100 trades. At 1,000 trades it grows to about 5.

7. ### macroman

i look at it differently.

If your max drawdown in 7 net consecutive losses, say, then winning first trade will increase your skin to 8.5 losses. From random generator, for win 70% and win/loss 1.5:1 I found there is only 4 occasions out of 1000 where I would blow up starting witn 7 bullets.

One should assume that say after 30 attempts you will be up with large confidence.

Trick is: are the odds really 0.75 and winloss 1.5:1 !?!??! Or you just start trading this thing after streak of wins which is invariably followed by string of losses.

8. ### Ghost of Cutten

Would you mind posting the math for calculating those confidence levels please? Or if you have a link to something that gives the formula.

9. ### Ghost of Cutten

Could you post the math for working that out please? Cheers.

10. ### acrary

Here's the link for the streaks: