what's the biggest difference between profitable and...

Discussion in 'Trading' started by liam, Sep 25, 2001.

  1. Fohat

    Fohat

    "profitable trading style" is not an explanation, but a synonym of a "profitable trader".

    Because, every "profitable trader" has a "profitable trading style".
    And vice versa, if a trader has a "profitable trading style", he is a "profitable trader"

    "profitable trading style" doesn't explain anything, it is simply a synonym for a "profitable trader"

    Fohat
     
    #11     Sep 29, 2001
  2. tymjr

    tymjr

    Hitman: “If you are not profitable, either your style is fundamentally wrong (99.99% of the styles directly taken from books), or it is not the right style for you, keep looking.”

    Actually, I believe the correct figure is 99.983%.
     
    #12     Sep 29, 2001
  3. Magna

    Magna Administrator

    Nic,

    If you consistently enter trades with a poor risk/reward ratio nothing will help you.

    Agreed, and it would be hard to argue your point. But I'm not sure it's useful in determining anything. For instance, I could look at a potential trade, figure that it has a profit target of 1.50 and a stop of .50. In other words, a 3:1 reward/risk ratio. Hmmm, sounds pretty darn good. But then I only pick 20% winners that hit my targets, so I'm a loser even though my reward/risk ratio is good.

    I say even more important is a positive expectancy system where you become the casino rather than the schmuck walking into the casino.
     
    #13     Sep 29, 2001
  4. tymjr

    tymjr

    Jens: “I experienced that discipline is definitely the most important key to success combined with experience, patience, good risk management and a positive state of mind towards being successful.”

    I like your post, Jens.

    -Discipline to engage in tedious and laborious research, planning, and re-evaluation to specify a strategy.
    -Discipline to pursue an appropriate strategy in the face of difficulty.
    -Discipline to cultivate the skills you’ve mentioned when they may not be innate strengths so that a trader can effectively implement his strategy.
     
    #14     Sep 29, 2001
  5. If you can find and enter trades with a 3 to 1 risk/reward ratio, you cannot lose over the long run. I absolutely agree that you must have a method with a positive expectency. Its just my opinion that the first step in that method is determining risk and reward. If your only picking 20% winners then your risk/reward analysis is flawed and only illustrates my point.
     
    #15     Sep 29, 2001
  6. lescor

    lescor

    That's assuming you have the discipline to stick to your rules once you enter the trade. This is why many successful traders don't mind sharing their systems- they know that most peole can't follow the rules. This also points to another thing successful traders have in common- a system that matches their personality.

    Win rate and the risk/reward of each trade, taken individually, won't tell you if you have a profitable system. For example, I use stops of 6-8% on most of my swing trades. But I cash out the winners at 5.5%. Yet because of my win rate (about 65%), I have a positive expectancy. Conversely, you could have a profitable system with only a 20% win rate if your losses were considerably smaller than your winners.
     
    #16     Sep 29, 2001
  7. Magna

    Magna Administrator

    Nic,

    If you can find and enter trades with a 3 to 1 risk/reward ratio, you cannot lose over the long run.
    Unfortunately not true, as my example clearly showed. The problem is the 3:1 reward/risk ratio is determined before you are in the trade where you set your profit target and your stop loss and divide to get the ratio. And therefore it's very arbitrary i.e., should 1.50 be my target or maybe 1.00 (lower ratio), but I see resistance up there in the high of yesterday, or was it the close of yesterday, oops the trendline shows resistance at another point, oops the moving average shows resistance at another point, oops the bollinger bands show resistance at still another point, etc. etc.

    Since reward/risk is determined before you enter the trade you could easily select a multitude of trades that appear to you (depending on what you base your targets and stops on) to have excellent R/R ratios. Yet the trades fail a good portion of the time because your targets aren't hit before your stops are hit.

    In contrast, positive expectancy isn't determined before the trade, it's determined after reviewing a large sampling of your trades. So it doesn't care what indicators you use, how you determine your targets or stops, etc. It only shows whether, over a period of time, with ample opportunities, your system is profitable. Just like the casinos.
     
    #17     Sep 29, 2001
  8. "Since reward/risk is determined before you enter the trade you could easily select a multitude of trades that appear to you (depending on what you base your targets and stops on) to have excellent R/R ratios. Yet the trades fail a good portion of the time because your targets aren't hit before your stops are hit. "

    I'll try one more time then drop it. If your trades fail a good portion of the time because your targets aren't hit then it should be quite obvious that there is something wrong with your trade selection. A winning trader has the ability to pick trades with a good risk/reward consistently and these trades must hit his target with some frequency or he wouldnt be a winner! The scenerio you describe is that of a loser.
     
    #18     Sep 29, 2001
  9. vikana

    vikana Moderator

    The main problem is that trading is very stressful and requires you to do things that go against natural instinct and a typical academic education.

    • take loses quickly and hold winners. This is much more difficult than it sounds. I certainly like to hear the "cash register ring", hence tend to cash out too soon.
    • you have to have the stamina to continue to trade even after loosing 5 or more trades in a row. This will happen, and the only way out is to continue to fight.
    • it's not about being right (ie having a high number of trades be profitable), but about making money. This goes against everything we've been taught in school and life. You can easily be very profitable with 50% accuracy, but we all know how we'd feel about only getting 50% right on an exam. Very very tough to overcome this "human" limitation.

    My few cents ...
     
    #19     Sep 29, 2001
  10. Magna

    Magna Administrator

    Nic,

    I think either I'm not explaining myself clearly or you keep missing my point.

    A winning trader has the ability to pick trades with a good risk/reward consistently
    What you say is simply not true. For many years Gary B. Smith was successful (increasing the value of his total account an average of about 40+% per year) with targets of 5% and stops of 6%. Do the math - his reward/risk ratio was less than 1.00, which by any standard is a lousy reward/risk ratio. But he was successful because his percentage of hits was high, opportunity was there, and his expectancy was positive.

    So my whole challege to your statement that you thought the most important thing to a winning trader was a strong reward/risk ratio was that you could have a strong one (4:1) or a weak one (less than 1:1 like GBS used to trade), but with good money management, an appropriate hit ratio, and opportunity, as long as your overall system provided positive expectancy you would be profitable. Period. Not because of your reward/risk ratio alone, nor your money management alone, nor anything alone, but because the overall system had a positive expectancy.

    Now how you piece together a system with positive expectancy is another discussion (and that's where your reward/risk approach might have merit), but I was answering the question of what's the fundamental difference between profitable and unprofitable traders.
     
    #20     Sep 29, 2001