ping me. I run an equity research & global macro internship (free & fully remote now) 2x year mainly for students from a few local Uni’s. It’s geared towards people with existing coursework in finance / economics who want to develop the skill set useful in investment banking, equity research, or sales & trading. Underlying strategy is market and factor neutral, similar to those run at multi managers / pod shops (balyasny, millennium, p72, surveyor capital, etc.). Typically requires ~20 hours per week. By the middle half you’ll have learned how to generate and structure ideas, and the 2nd half is actual practice with assigned coverage (regional from global macro, and vertical/sub industry for equities).
Good Morning danielc1, Great discussion. Can you please answer my question in red? Thank you for the response.
I think its excellent that you ask SML, but I would like to give my own input. If we consider a dice with 6 sides, hence lets call it a 1:6 vs 1:5 ratio, and you win $100 for each time you hit a 6, but lose $10 for each time you get any other number, this would clearly be profitable. (its of course a 1:10 payout with a 16% win rate) Its easy to keep rolling the dice over and over and watch as your money rolls in. Of course if you start with only $50, you might not even hit a win before your $50 runs out on the losses, so this could be tricky, but over time, it should work. But when rolling dice, there isn't much work involved, and you know right away the result. With trading, so much blood, sweat and tears go into putting on that trade, and its trade after trade so you get worn down. You begin to question if you're even putting on trades properly when you're hitting 3, 4, 5 losers in a row, and doubt your system. And worst of all, when you maybe finally have a winner, you don't wait for the $100 win but take only a $50 win because of how many losses you've already had. Clearly with the dice, this wouldn't be possible, to take a partial win, but its very possible with trading, and the waiting for the profit to hit feels like an eternity with the market always turning away from you just as you thought your target was about to hit. So if you don't get that $100 win, you're completely messing with the math of a profitable system. If I run a monte carlo simulation of my above scenario, here is what I get. Running the simulation 200 times, you can see that it is still possible for this to be a loss at the low end of probabilities, the red line, but the white lines shows the midpoint PnL, and that is nicely profitable. But look at the trade distribution... a 15 loss streak! Who is gonna sit through that while trading? So I think you're right that mentally, this is very difficult and why most traders would maybe want to settle on a 50% win rate, or at least no less than 25%. Even with 50%, 3-5 losers in a row is to be expected, and that makes you question your whole process. And when you start questioning, you start tinkering, and then all your math and stats go out the window. I don't fully believe in a rigid system as I think the unfolding market dynamics should dictate entries and exits, but certainly being aware of your average win rate in relation to your average win value in dollars vs. your average loser is important.
Although your post is excellent, and I don't mean to argue with it, there is I believe a fallacy that stands out. If you are meant to take profits on trades so that you at least hit a win 20% of the time, how are you going to capture that outlier which would give a 50:1 or 200:1 payout? Sure you can keep moving up a "take profit target" that is never hit as the market goes parabolic, but more often than not, the market will hardly ever move in a straight line and that profit you did have, vanishes. Here is my example. Say you risk $100 to make $1000, and you have your 20% win rate. You're hoping that at least 1 out of 5 times you hit your $1000 win because all the other times you're losing $100. And here comes your $1000 win but you don't take it because you're hoping for that 50:1 fat tail. Maybe it rallies up to $1100 and then $1200, but then comes back down. It drops below $1000, and goes all the way back to your entry. Maybe you use a trailing stop so you still get your $1000, but there are also other times where you don't initially take the $1000 win, and there is no chance to lock it in. Then it drops to $900, and you're waiting for $1000 again, and it never climbs back up. If you take the profit at only $500 now, you're now messing with the stats, but missing 1 win of $1000 and getting nothing for it is certainly a huge blow since you're only supposed to get about 20% wins anyway, and you just blew one. So I think its difficult to have a low win rate and need those wins, but at the same time say to skip taking the win in order to go for the lottery ticket.
What you said is not going to work. "cut your losers and let your winners run." It is the same as someone says" trading is simple, buy low and sell high". Only layman thinks it is simple.
How much time per week are you prepared to commit to this project? How do you feel about Price Action Trading? How do you feel about Technical Analysis? What timeframe charts do you want to trade?
Good Morning NoahA, Awesome write up and I agree with everything you wrote. I perfectly understand what you are saying. It is a grind. Everyone says "cut your losers short and let your winners run", but I have a question. Can your brain do this 250 trading days a year for the next 30 years? Thank you