How to compound

Hi folks, I'm just working on a model to figure out the best way to increase risk sizes per trade as you make progress doing god's work in FX. With emphasis on scaling quickly within a risk level (yet to be defined risk level)

So far I am thinking simulations around Absolute Drawdown:

if probability of winning is x, in 10,000 simulated runs of 300 trades, taking the cumulative PnL and Absolute Drawdown for each run (over 300 trades)

How much profit should I accrue before increasing the risk and reward from the base case to the increment case, so that the Absolute Drawdown in the increment case is equal to or less than the base case 95% of the time.

The base and increment case Absolute Drawdowns are compared on an identical sequence of wins and losses.

Base Case: risk = 10,000, reward = 5,000.
Increment Case: risk = 20,000, reward = 10,000

Would be interested to hear your thoughts and experiences in this area. Maybe there are some other things to consider?

 

Another man's Position sizing tool.
Fixed fraction vs fixed ratio...
There's a slideshare version Ryan Jones' book on fixed ratio etc, "The Trading Game".
https://elitetrader.com/et/threads/fixed-ratio-position-sizing-money-management.303441/#post-5012086

 

@easymon1 . Thanks, looks interesting. similar principles. will look further.

 

I always adjust position size according to the capital risked if my stop-loss is hit - my target for maximum risk is always 2%. I aim for r:r of 1:1.5.

So if my capital totals £1,000, my risk is £20 and my potential gain £30.
If my capital totals £10,000, my risk is £200, potential gain £300. etc.

My aim is to not make any withdrawals at this stage.

 

@tomorton . Nice post, keep it coming.

 

This is a good plan, take a max risk of 2% like many advice from an expert and professional traders.

 

I think what you're mentioning is to maintain a risk of 2% on the account balance, and continuously compound as the account balance increases. Risking no more than 2% of the new balance each time.

Problem is, if you continuously compound at 2% (or any %) as in case 1 on the left. You expose yourself to a higher risk of absolute drawdown after x number of future trades. In this x = 20 trades in the future. The further you go into the future, the higher the risk; your profit potential increases, and your risk increases in tandem.

The far right column is the difference using a simple example with the above parameters.

conclusion: you should retain a fixed amount of risk (say 2% of original) until you have accrued a certain amount of profit. After which you can increase your risk per trade. The objective would be to know the amount of profit to accrue before upsizing your risk per trade, so that the 3rd column on the right is zero, most of the time.

 

But; it depends on what you are trying to achieve and individual goals.

 

to achieve any goal first of all we the traders need a strong mindset. without it no way to survive successfully.