A thought thread.. Maverick in another thread said that a day trader would blow up if he risked more then 2% per day/trade. I'm assuming we agree we were talking about per day. The question one has to ask, is this true? He said if I risk 3% or 3.5% then I'd be certain to blow out. First, we have to think.. will 1% make the difference between returning a good risk/adjusted return versus blowing out? That's a problem right there with the logic. But there is another problem, the probability isn't factored in. Let's say I have 100k account and trade 1 contract, I set my stop to 3.5% of the account or $3500 and trade the ES. That's a 70 point movement! I'd be trading at 50% of the contract value. Clearly, a trader with any skill isn't likely to "blow out" even risking 3.5% of his account at that degree of leverage. A trader trading 70 contracts with 1 point stop loss would be very likely to lose the 3.5%. This thought experiment reveals that the RISK AMOUNT has VERY LITTLE to do with the PROBABILITY of LOSS. So what we have to think about is the PROBABILITY of loss and the SIZE of loss. I've my account set to risk up to around 3% on any single trade (I've thought about setting it anywhere from 2.5% to 5%). My daily loss limit is also approximately the same. My AVERAGE/TYPICAL loss is only about .6% to 1% of my account! Aha, now we get some clarity. But what if I were to take my worst loss and let's say its 3% and I take 12 MAX loss losers in a row... Let's see how that looks and compares to 2% Down 36% Down 24% There is a difference. But is it the difference between "blowing out" and not ? Nope... Let's find out the max loss run for both estimates assuming a 50% drawdown. 50/3 = 17 losses before taking a 50% loss 50/2 = 25 losses before taking a 50% loss Okay, so get quite a few more losses with 2% but it isn't night and day. More over, the probability of my taking a max hit loss is probably less then 3% because I manage my risk. The truth is that if one really wanted to push it and has a viable edge, they can push it safely a lot more then 3%. I have a system that can risk an AVERAGE 10% per trade, real risk, and even after running monte carlo simulations on it the probability of blowing out the account was below 3% for a given year. It might be high for some but I'd be willing to risk it with a small starter account. Finally, I want to say also that I call the entire direction. You aren't suppose to be able to make anything at what I do. Yet, I go in and win everyday. I win without HFT, without prop edge, etc. I mean, if I make anything its a miracle! Be happy... que the music. Second, I am concerned about the risk and consider it thoughtfully. I'd like to get my max risk down to below 3% and maybe I will. I don't like the idea of 1 bad day wiping out up to 3 good days of work. It becomes more of a problem as I've increased my leverage/size. One more thing, I monitor a lot of traders. I've seen a lot of traders come and go. And, I'm just saying that they have in common they used tight stops or they took huge losses. There is some ground between the extremes where I try to survive. One system now I'm monitoring on C2 risk about 1k per trade and trades the ES too. He had a great run and it looked like he was doing a great job. He trades 10 contracts. He had 5 or 6 losers in a row and is down 5k or 6k. What changed? The probability. Anyway, finally I want to say also that also I no longer have the ego. I am focused on performing at my best. Trust me when an experience trader says risking 3% will blow me out then I stand up and take notice. And, then I think about it and try to work it out. I respectfully disagree but will keep it in mind and try to reduce my risk.
Risk/Reward Continued.... (see previous post) I wanted to also factor in the number of trades. I'm running hypothetical monte carlo simulations to get these results. Sim Run A ------------- 10k starting account 3k left considered ruined (70% account loss) At 40 trades per year 50% win ratio, 1k win or loss, no edge At 10k: Ruin 21% At 17.5k: Ruin 1% At 300 trades per year 50% win ratio, 1k win or loss, no edge AT 10k: Ruin 63% At 35k : Ruin 6% -------------- Sim Run B 10k starting account 3k left considered ruined (70% account loss) At 40 trades per year 1k win, 1k loss, $200 profit (equivalent to $5 net profit per contract traded) At 10k: Ruin 6% At 12.5k : Ruin 2% At 300 trades At 10k: Ruin 21% At 17.5k: Ruin 4%, Median Return 112%, Median Drawdown 32.7% At 20k: Ruin 2%, Median Return 96%, Median Drawdown 32.7% --------------------- Sim Run C 10k starting account 3k left considered ruined (70% account loss) At 300 trades per year (say 100 trades per year or about 3 years) 1k win, 1k loss, and an average profit of $25 per contract traded (a good ES trader) At 10k: Ruin 0%, Median DD: 18%, Median Return 1,000% ------------- What this tells us? Risk per day is not same as risk per trade if one makes a lot of trades. It is similar for me because I only make a few trades per day. If one has even a small edge they can risk a lot more then without a high probability of ruin -- unlike what you read in books. If one is break even only and places a lot of trades then risk of ruin grows really fast -- sounds a like like a trader using a stop/loss break even. What does this tell about the risk, if you have even a small/tiny edge then you can push the risk up to about 5% per trade. If you go beyond that then you really have to have an edge. Placing more trades in general increases the risk. If you're placing a ton of trades then the 2% is probably a good rule. This assumes a stationary risk whereas my risk is more like 3% on 1% of my trades. This analysis fits closely with about where I thought I could push it. I will do more analysis. I could probably push my risk upward to an average of 2%-3% and a max of 5% and still have a good risk metric and fair median drawdown probability.
Cliffs: Maverick is stoopid, Lucias is smart, and no longer has an ego. And he is levering up the play money because his play balls have gotten bigger.
Today is a good example WHY I only trust what my MIND and HARD WORK validates and not what anyone else says. I listen to everyone but then do my own diligence. I got long at 52 and 48 for a run back to 55. Using a smaller stop loss, I took a 1/2% loss today. If I had given my trade more room to work, I would have took out a profit.. I used a tighter stop and took home a loss instead. Now, I had a reason to take a stop loss because I thought we were going to 44 which we did. However, I wasn't 100% on my game today and took home a loss. I had the opportunity to be aggressive and try the 44 and take home a good sized win. I took a $450 loss and a $120 loss using small stops. Optimal game plan required trying the 44. So total loss could have been about $1000+ with 3 stops. Setting a single loss at 40 would have resulted in a loss of $1200. Not much difference and less trades fees. I want to share though some people have asked why I don't trade my own systems if they are so great. Why have I tried to get funding? Why I have to offer signals/etc? Of course, there is risk. The other reason that even with a strong return and a small starting capital. Trading isn't very profitable. Okay.. I'll show some examples Start 3k. Do net 100% return. You end up +3k at the end of the year or equivalent to making about $15 per day. Okay maybe you're really good Take your 3k. Do 200% return. Now you've made 6k or $25 or so per day. Okay maybe you say 3k is potatoes.. take 5k. okay 5k. 100% return. 5k. You've made $5,000 or about $21 per day. Okay.. take 20k.. 20k at 100%. Now you've made 20k. That is less then 1/2 the average salary. You see where I'm going? Let's take 80k and do 50% return. That's 40k or less then the average salary. ------------------ Clearly even with strong return and reasonable capital, trading isn't a way to get rich in the short term If you look at the LONG RUN, say 5 years.. 8 years.. 10 years.. then it is possible to take a tiny account and make a lot of money on it. I am actually going back to trading my system at NADEX soon. One reason is that I've started to recognize the long run potential. I mean I'm 100% focused on the result. Not the path. I don't care how I get there. Getting there is what's important... if I can generate more cash flow from other avenues then I'll do that. I mean even my mentor Gary Smith, at one time, was involved in offering vendor services. Just thinking about Gary vs Me.. let's take a look Gary Struggled to trade consistently, nothing worked Traded real money from a early start, lost a lot Finally was able to get something to work over the long haul to be successful Me Always traded consistently, everything worked, his book "put the pieces togetehr for me" Rarely traded with real money, but have always won when I did So far haven't been able to get the rewards of my abilities. Now I'm starting to work for the long haul. I am thinking I will start to get some rewards. Where have I shown "long haul" ability? 1. Managing my C2 account for 3 years!! 2. Now preparing to trade my system with a small starting capital until it bust or produces an expected 100k to 1 million in a few years. I know a lot of traders here talk about the traders making a million per year. That's nice but let's be realistic. 99.99% of us will not get such opportunity. Look I'm great.. absolutely great and no one has contacted me. There is no opportunity in trading or the whole trading world is a fool.. or both. Let's also think too, these guys who can do a million per year without taking any risk. I could be a millionaire in just 10 years with just a tiny,tiny starting account. Uhm yet we don't here about these billionaire prop traders (sure there is 1 owner but what about the traders). Just a thought... But I'm not an elite trader! Small, tiny trader.. and always will be.
I know you can't hear me since you blocked me but I just want to point out to everyone else this guy never made money as he claims. He traded a small account with way too much leverage, ran well at first, then started to run bad. He quit just above the breakeven point, obviously because he couldn't handle the thought of going negative as he was about to. His sample size was way too small to know if he was a real winner or not. He just went nuts with leverage and had a brief good run. You can read all about it earlier in the journal if you can get through the narcissistic ramblings. I find it strangely fascinating for some reason and keep coming back for more.
Your comments about running a small account into millions just shows that your paper trading hasn't helped you much. There is no consideration of liquidity constraints of certain strategies. The ability to size up is a very emotional thing...well for most anyone it is. There are those who can just throw that aside and size up as necessary, but then after a certain point you have to able to stomach the volatility that comes with sizing up. If you are trading someone elses money I think it can be eaiser, but when you are trading your own cash its usually a different story!
this is the number one thing I have "worked on"... and as Frost said about the Road Less Travelled: ... and, it made All The Difference ! However "room" is subjective and never capable of clear definition. One time you give too much rope and it's just enough to hang yourself; then you have a large untenable loss. Another time it reverses right after you exit then turns your loss into what would have been the biggest gain that week. It is not a perfect science, but on balance in non-trending markets or markets that are range-bound and/or w/lots of volatility, giving more room works for me.
iceman1: Exactly.. that's why it is so important to know if the market is likely to trend against one. One way I like to explain it is that the market will judge you based on your claims. If you claim the market will close up for the day then you've made a quantifiable, measurable prediction. However, it isn't very precise. If you claim the market will reverse to within 2 points then you're making a pretty strong claim. Not only must you be right but you must also be extremely precise to make money. Which is more likely ? What I've found to work.. * Be aggressive on re-entry after taking a stop hit but have an uncle point. There is a reason for this. The primary reason is that when the market trends then it exhibits a different behavior. My principle is that I take a break if I start to lose. I'm usually done for the day or until I sleep but not always. Its a principle which can help me when I recognize things working out to get back in. * Use confidence based betting. I'm pushing my winners really hard and when I feel risk is higher, I'm trading small size. I experiment with small/tiny size too. I still trade "hard". This is really key to winning the futures game. My greatest talent is recognizing when I'm wrong. * Be stopped in/out of the market unless you can get out for a really small loss. If you've already taken a loss then go ahead and make the market stop you out. * You will NOT beat a larger stop on net profit. I can guarantee you this -- if you have an edge at all. What you can do is adjust the average win/loss and decrease the probability of a large loss. You can improve the risk/adjusted return. Efficiency, you can't beat trending on efficiency. This is why the big money firms are trend followers. However, it is possible to beat trend trading on a profit*probability measure by using size and targets. * Use multi-layered risk control. I have a max leverage ratio, a fixed constant % risk, and then also use my market read. If I had to take my max loss then it would be a % that I already agreed on. I never HAVE to watch a trade. I can let it run. * Targets work very similar to insurance. Stops do not. Prefer to take a small win over a loss when possible. ----- petrobas: My verifiable real-time signals are available for anyone to look at.
I use my confidence based position sizing all the time to push my best trades. But, I don't just use it too push my winners. I also use it when I think there might be an interesting trade setup but one that I'm not sure about. I'll send out a probe order. I'm basically practicing. trying to see or work with new ideas. Often, I lose more on these ideas then I'd like too. Sometimes, I'll just monitor the price and see if it would work. If I'm trying to buy a new low and my hypothetical trade didn't work it in my mind then I figure, well it wasn't a very good trade. I'm always aware that even with a small position that I have to manage the risk. Gamblers lament/remorse/close calls etc... It is said that gamblers are enticed by "close calls". Fortunately, the market's "close calls" provide one a feedback estimate on ones ability. I use my "close calls" to my best abilities to improve. There are always trade where I could have did better or worse. You know sometimes I look a trade sequence where I had the possibility to take a lot more profits. Often I did predict that peak and took some profits. And the market reverses and then I recognize the market nature changed, perhaps a bit late, and I end up taking 50% or less of my profits. The initial thought is I regret that I didn't get the full value. A bit later.. the market is down huge and I'm like, wow I'm glad I didn't lose all of that. Sometimes I've taken off a position at a target and then the market moves in my favor a huge amount. What I work toward is what I call "sure thing". There is nothing "sure", of course. But, I try to shoot for what I'm most confident that I can get. That's one of my styles. My others style is to trade the trend. And, so I can track "par' by looking at trends and various estimates. I look at a trade sequence and look at the full range of events. And, that kinda makes me feel better when I've not did as well as I wanted. I can look and say okay.. you know out all of these scenarios I did okay. What I try with the sure thing, I don't gamble. I'm trying to hit a trading style where I'm maximizing my win ratio, probability of profit, risk/adjusted return per trade, minimizing my realized risk per trade, and maximizing leverage. My favorite style of trading is "no heat" trading. Sometimes I trade a mix between high probability and trend trading. I certainly have many ways to approach the market and maybe that's because the market has many natures. Sometimes I look at my trades as sequences and the sequence... And if I look at the individual trades then I might feel bad. But, interesting thing is that the small wins that sometimes don't feel like much by the end of month do as much toward the bottom line as the wins that I felt really good about.