TheBramble’s Trading 201

TheBramble

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hmmm...maybe not a good idea.

Edit: Tuesday June 24th

There is a quicker, easier, better way to do this…
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You have a system (you wish) where your R:R is 1:4. You had a trading capital base of $375,000. You risk 1% of your capital on every trade. Your system so far has yielded an average winning trade value of $464 and an average losing trade value of $295. Your winning trades outnumber your losing trades 1:1.5. You have executed 134 trades and are currently flat. You have been trading this system for 23 weeks.

What is your expectancy?

What, statistically, will be/will have been your drawdown?

What would you calculate to be the current value of your trading capital?

What is your Aw:Al?

What is your Pw:pl?

How many consecutive winners/losers can you expect based on this system’s profile?
 
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oh come on, TheBramble!!

that was an enticing opening post, and I was all ready to learn more.
I even didnt respond with my usual vacuous one-liners to keep the thread tidy.

(I thought you were going to mention that what stops us from making the huge componded profits were the hidden break-even trades that dont make it into the Win/Loss statistics, and slows growth down. I anticipated some views on not moving stop-losses to break-even, or even a series on posts suggesting we dont have stop-losses at all.)

disappointed, as your threads tend to be more deeply thought out than most. :(
 
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oh come on, TheBramble!!

that was an enticing opening post, and I was all ready to learn more.
I even didnt respond with my usual vacuous one-liners to keep the thread tidy.
I just got to thinking about my my approach trendie, not the idea. After a night mulling it over, I came up with what I thought was a better way of going about this. Hence the edit this morning.

I depend on your one-liners for my stand-up routine in the local ladyboy nightclub....

(
I thought you were going to mention that what stops us from making the huge componded profits were the hidden break-even trades that dont make it into the Win/Loss statistics, and slows growth down. I anticipated some views on not moving stop-losses to break-even, or even a series on posts suggesting we dont have stop-losses at all.)
You're definitely on the money with those and you've just killed the thread.

Well, there are a couple of other things which may or may not also be of interest. If only to your continued curiosity into my state of mind.

disappointed, as your threads tend to be more deeply thought out than most. :(
Yeah, I know. Kiss of Death on this site.....
 
QED.

Now, let's get back to those Zimbabween Sandwiches....

ok, I will do the sums to keep the thread going. (I reckon actually getting involved practically, we learn more, a sort of kinasthetic (sp) thing)

first, of the 134 trades taken, am I to take it none were break-even ones?

if all 134 trades resulted in either a win or loss, and no BE trades, then:

with a win:loss of 1.5:1, thats 3 wins for every 2 lost.

Ave Win: Ave Loss = (3 * 464) : (2 * 295) = 1392:590 = 2.36
Aw:Al = 2.36

Percentage Wins:percentage losses = 60%. (3 wins for every 2 lost: ie, for every 5 trades you win 3, or every 10 trades, win 6)

Pw:pl = 60:40

Expectancy = (amounts won - amounts lost) / no of trades
= (464 * 3) - (295 * 2) / 5
= 1392 - 590 = $802 over 5 trades.
Your expectancy = $160 per trade.

if you have had 134 trades, thats (134 * 160) = $21,440.

you current capital should be about $396,440.

dont know how to statistic drawdown or consec win/loss.
 
It's no good you guys doing it. I KNOW you know where I'm going with this because you've already been through it.
 
trendie's response

Thanks for the response mate. Let it stand for abit and see what others come up with.
 
Anyone else spotted the smoke & mirrors in this question yet?

the bits I calculated were based on historical events, and are purely arithemtic.

the drawdowns and win/losses are subjective, as they cannot be known with any certainty since they are a function of the trading method relative to the market behaviour.
a highly volatile market may result in long string of wins, and a rangey market may result in a string of losses, so the clumping of wins and losses are not mathematical, but a reflection of the reaction of the trading rules to the actual market.
drawdowns are a function of wins/losses.

commissions?

the fact that the system risks $3,750 to make $160 on average?

cant see the mirrors for the smoke!
 
if you have risk:reward of 1:4, that means you make $4 for every $1 risked.
if you win 3 times out of 5: (1.5:1)

you should win ($4 * 3) = $12 for every ($1 * 2) = $2 risked.

you should be making $12 for every $2 risked?

the actual values are not representative of the given R:R?
 
imho,

this system is working with a trailing stop loss which is why the average loser is significantly less then the initial risk. however this is a sticking point for me, when calculating your r:r do you use actual results or the original and maximum stop loss.

Spanishs trading is a good (or bad) example of this, on paper his r:r looks scary to say the least but he is yet to close a trade on that far away stop so acual results r:r look much better, however sooner or later tht stop might be hit!
 
Overwhelm

OK. Traders remorse. I really should have gone with my earlier instinct to pull this thread. I had an intuition of the Tsunami of Apathy this topic was going to generate. It is a very boring topic in that it doesn’t feature jokes, Zimbabwe, Holy Grail Indicators, breasts, One-Shot Trading Calls, Stockport, new names for historical dinosaurs of chart patterns, or purple font. Out of respect for those that have contributed, I’ll finish the basic thrust of what I started, but don’t expect me to expand eloquently on the issues associated with the psychology of dependence upon formulas and the blind alleys it can lead you down which I found pivotal to the more effective utilisation of my trading capital – or more correctly – the change in my approach to trading and expectations of how I was using it and how I started making profits in line with the underlying potential of my trading systems and methods. You’ll have to read between the lines for that one now. I blame the parents.

I’ll split it over a number of posts to (a) heighten the already breaking point tension of expectation (b) make it easier to read them while flicking through The Sun (or in many cases, continually flicking through page 3), (b) break it down into logical pieces which can be printed off and framed (c) reduce the time and effort I have to spend at any one time making the effort to translate the ineffable into something you morons and your Neanderthal brains can try to understand and finally (d) test your powers of observation and comprehension by using the same list value more than once.
 
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Expectancy & Drawdown

Expectancy is (Pw * Aw) – (Pl * Al). In the example data given:-

(0.6666 * $464) – (0.3334 * $295) which yields $210.95.

This means, I can expect on average every trade to yield $210.95.

So, after 134 trades, do I have an additional $28,267.30 in the account attribuatble to trading activities?

Drawdown is a function of losses or more correctly, the order and sequence of losses. Reality clusters. That is, you’re likely to get ungainly random clumps of consecutive strings of losses (and wins) rather than equally spaced out according to the Pw:pl ratio. While 2 wins followed by a loss would be nice and orderly, it’s not that likely to occur in practise.

Doesn’t matter which method you use to calculate consecutive losses, for a system with the profile stated it’s going to come in at around 7. That is, statistically, you should expect clusters of 7 consecutive losses. Before you go running off to work out what you can increase your risk to as you’re only ever going to a max of 7 losers in a row, stop. This is just statistics – you could have an infinite number of losses in theory. Of course, a (not the) big question is, what do most traders when, for the first time faced with this very unappealing situation, do? Do they sit tight and trade on through it, as it’s part of the plan? Separate issue and another one we’re not going to deal with on this thread.

As another aside, this system should generate you a series of 13 consecutive wins and you shouldn’t be overly surprised, you wouldn’t need to raise an eyebrow – though you probably would. (I’m not a betting man, but I reckon you’d pull the plug and scupper yourself long before you allowed 13 consecutive wins to favour your account…LOL).

It’s interesting that Captain Currency went with a figure of 5 ‘based on gut’. That tells me a number of things. CC doesn’t use formulas to work out potentially winners/loser ahead of time for his system. Smart man. He intuitively expects the same run of consecutive losers as winners. Also smart man, as that’s how it turns out mostly and he wont be psychologically wrong-footed with Expectation Failure. It also tells me how 3 Ducks is performing….

So having found the max (statistically) number of consecutive losses, what else do we need to know? We need to know how often that is likely to occur. Well, for this system’s profile, it’s (statistically) going to occur every 2184 trades. Now, where shall we place this event? At the beginning, when it’ll drain your energy and (relative) account the quickest? At the end when it’ll take the most absolute lump out of your dosh? We’ll use the statisticians cop-out and stick in half way at trade 1088. It’s AS likely to occur anywhere, if at all, in your trading sequence in reality. Are you beginning to get a picture of where I’m leading with all this yet?

We’ve only had 134 trades so far. Well, there’s another little formula we can use to work out how many consecutive losers we’ve had (or are likely to have had) given this system’s performance profile for any given number of trades. For this system we can expect: 1 losing trade every 3. 2 consecutive losing trades every 9. 3 consecutive losing trades for every 27. 4 consecutive losing trades every 81. 5 consecutive losing trades every 243. So, for our purposes right now, we can calculate a worst case of 5 consecutive losing trades just occurred in the last 5 trades, taking out the biggest absolute slice of our trading moolah. So, what was/is our max drawdown.

Before I do that calculation (in fact, I’m NOT going to do it for reasons that are just about to be explained), there’s something you should know. Expectancy and drawdown and all the other formulas relating to this side of the business and completely useless. At every point from trade 1 to trade 134, your Aw, Al, Pw, Pl and by derivation your expectancy, max drawdown and consecutive losers (and winners) are potentially different. They potentially change with every trade. All I’ve given you is the data as a snapshot at the end of trade 134. That’s all you’ll ever have – the status as of NOW.

As you move further into your system and do more trades, you may imagine it will ‘settle down’ and the values wont move around too much. Well they may and they may not. All depends on a number of factors. Such as the standard deviation of your winning and losing amounts, the clustering of winning and losing sequences and some non-Gaussian analysis of your system against higher level derivatives of the instrument(s) you are trading.
 
first, of the 134 trades taken, am I to take it none were break-even ones?
First good point. Do you really, truly have that many dead breakeven trades - totally zero? And those that you do, do you count them as a winner or a loser? You can choose, and choose you must. How do you think most traders would choose to classify them? In the context of these formulas, how do you think traders SHOULD classify them?
 
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the drawdowns and win/losses are subjective, as they cannot be known with any certainty since they are a function of the trading method relative to the market behaviour.
Method indeed. And VERY subjective as the trader takes his/her expectations of their system into every trade – unless they train themselves not to.

a highly volatile market may result in long string of wins, and a rangey market may result in a string of losses,
…or the other way round of course, or neither.

so the clumping of wins and losses are not mathematical, but a reflection of the reaction of the trading rules to the actual market.
No, they’re not mathematical or predictable in any useful or meaningful way. They are NOT a reflection of the market at all. They are a reflection of the traders expectations of their system and the actual performance of his/her system at any given time. On any given day, with similar market conditions, a trader will make vastly different decisions (and therefore profits) based on very subjective feedback of performance.
 
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