Money management techniques, that increases probability

Discussion in 'Risk Management' started by drasfs, Apr 1, 2007.

  1. drasfs

    drasfs

    Wel maybe not. However, what im about to show you is a new interesting approach to money management that might work.


    Say that you buy one lot currency at 50. Then it moves down to 42 and you buy one more extra lot. But it keeps moving down another 8 pip to 34 and then you buy 2 more lots(doubling your lot size). But it keeps moving down yet another 8 pips to 26 there you buy yet 4 more lots. It keeps moving down to 18 and you buy 8 more lots, but it keeps moving down to 10, where you close your position.

    If one lot is worth 10 dollar, spread is 1.2(as it is with oanda on eurusd)you have incurred losses of ((8+1.2)+(8+1.2)+(16+2.4)+(32+4.8)+(64+9.6))*10=1385.6 dollar.

    And lets say that your chance of winnning is 50%. Your take profit is 8pip. If chances of losing is 50%, then the the probability of having 5 consecutive losers as the example illustrated is (0.5^5)*100=3.125%

    And the rule is to only close after the market goes against you 5 times in a row.

    If you do 100 trades, given what is said above, these losses and profits will occur:

    Losses: 3.125*1385.6=4330
    Profits: ((100-3.125)*80)-((100-3.125)*(1.2*10))= 6587.5


    Result= 6587.5-4330=2257.5 dollar.

    Well, one could argue whether the the chance of winning is 50% if you go against the trend in a trending market, so obviously, this method should be applied in ranging markets. One could also argue whether 5 losses(with 8pip) would ever happen in a ranging market. One would also employ this method with discretion, and evauluate whether the market is trending or ranging or change the rule of closing after 5 losers, to only 2 losers,if one comes to the conclusion that the market is beginning to trend.

    And of course, if you have been trading for a while, im sure your chance of winning is more than 50%, so the premises given in the example could have been better. And if you are only trading during ranging markets you would automatically have a winning percentage higher than 50%, if you buy at low and sell at highs, because 5 losses of 8 pips in the same direction in a ranging market isnt too common.

    Well, i just came up with this idea now. I would like some input. Im also sure that there are similiar approaches to take profit that increases your probability. So I would appreciate any suggestions on money management technique swhen it comes to take profits.
     
  2. Partial quote from drafts:
    "....Say that you buy one lot currency at 50. Then it moves down to 42 and you buy one more extra lot. But it keeps moving down another 8 pip to 34 and then you buy 2 more lots(doubling your lot size). But it keeps moving down yet another 8 pips to 26 there you buy yet 4 more lots. It keeps moving down to 18 and you buy 8 more lots, but it keeps moving down to 10, where you close your position.
    ________________________________

    Insane!
    mF
     
  3. You might be right 50% in a year, but you might be wrong 100% in a week. You trade enough in the off period, you might just wipe yourself out.
     
  4. drasfs

    drasfs

    well, that obviosly depends on how much leverage you use. If 1300dollar is 0.001% of your capital, you could sustain 1000 losers in a row.
     
  5. Right. And what the rest of your 1 mln dollar capital is doing meanwhile? Taking a vacation?
     
  6. drasfs

    drasfs

    Well, 0.001% is obviously too conservative. You will just have to find the optimum level, or a risk level that you can be confident with.
     
  7. What's wrong with just stopping and reversing, even twice if you like ( give them a good chance to move, obviously-unless its a pinball bollinger band play for example, where the stop and reverse levels are built in)

    Gives you two trades (or three, whatever) for the price of one larger stop loss.


    And by definition, If your not stopped out, your still in with a chance, thereby inreasing probability of a larger move.


    Particularly, if you happen to like watching rangebound markets, or enjoy peak counting and S&R levels.


    Obviously, spreading any respective risk over a good dozen or so concurrent orders, over non correlated markets.


    There, how's that?
    :)
     
  8. The concept of a finite martingale, or doubling down up to a pre-determined loss limit is not exactly new, but a couple of centuries old. ;) It can work IF...

    - it fits your personality (many small wins, few large losses)
    - it fits the trading instrument (EUR/USD is only so-so; highly correlated intra-European crosses are better)
    - you are in a favorable (non-trending) regime for that instrument
    - you pick your entry points with skill to skew the probabilities in your favor (employing S/R and oscillators)
    - you identify, research, test and properly "balance" all the MM variables involved.

    Your math is wrong, though.

    Loss = (50-10)x$10+(42-10)x$10+(34-10)x$20+(26-10)x$40+(18-10)x$80 = $2,480.

    Incidentally, I'd suggest working with TP and SL net of spread, the way they are usually quoted. If you're long @50 (ask) and out @10 (bid), you lost 40, even though EUR/USD moved only 40-1.2=38.8 on your particular platform. The spread does affect your probabilities of hitting TP and SL.

    Accepting for the moment your probabilities,

    Expectancy (per trade) = 96.875% x $80 - 3.125% x $2,480 = $77.50 - $77.50 = 0.

    Doing it your way, spread-wise, the expectancy would be negative.

    Besides 5 IF points above to consider, here's another key suggestion: unfix your TP. As your Unrealized P&L grows, your TP needs to be dynamically modified toward your WAP, weighted average price.
     
  9. drasfs

    drasfs

    Acronym: Thanks for ideas. yeah you could of course reverse the trade. Well my ideas are obviously not elaborated enough
     
  10. drasfs

    drasfs


    Yeah, i thought it was too good to be true. So in the end, there is really no advantage to this method and one cannot increase their probabilities in anyway through some money management techniques?

    And i dont really understand how you can modify the tp to wap, and why one would do that Thanks in advance.
     
    #10     Apr 1, 2007