Risk of Ruin

This is a discussion on Risk of Ruin within the Psychology, Risk & Money Management forums, part of the Methods category; Originally Posted by brewski1984 Wondered why my ears were burning Runs of consecutive losses and risk of (or actual) ruin ...

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Old Dec 2, 2017, 11:27pm   #16
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Originally Posted by brewski1984 View Post
Wondered why my ears were burning

Runs of consecutive losses and risk of (or actual) ruin is my area of expertise


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Old Dec 3, 2017, 10:19pm   #17
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Originally Posted by timsk View Post
Hi Nowler,
The answer to your question is a combo' of what your trading plan dictates and what you're comfortable with.

Trading Plan
This is arrived at through extensive testing, demo trading and, ultimately, trading live with the smallest amounts possible. For this, I recommend a micro account that let's you trade at just £0.10p per point. The point of doing this is that it'll generate your key stat's along with how many consecutive losing trades your methodology is likely to produce. For the sake of argument, let's say it's 10. Part of your plan will dictate what action you'll take if you get 11 or more. Fingers crossed it doesn't say to Martingale on the grounds that the 12th trade will be a runaway winner!
Lol, nope. No Martingale systems here

I can actually trade with less than a cent per pip with my current broker.
Typically my trades are €0.01 pp but might vary a little bit. This has been very important to me when it comes to testing new things out. I had a much smaller psych barrier as a result. I threw another little bit onto my account today in an attempt to combat my laxness which has been creeping in. I moved from a demo account to a mini account of €20 six months ago in order to work on my trading psychology, and it was greatly beneficial but I just cannot fully shake viewing this account as a glorified demo. I am trying to take this with 100% seriousness...to treat it as a business, or my families future but looking at a balance of €10 x 50:1 levers is kinda frivolous...kinda. Then again, I now I am not ready to move to a full live account...


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Comfort Zone
This is important because you have to think of the emotional state you'll be in after an extended losing streak. If you start to doubt yourself, your trading plan or anything else that will impact your performance - then you're risking too much. That's why I like darktone's approach as he trades in such small size that he doesn't give a flying toss if that trade is his 12th consecutive loser (in the context of this post) - or not. It's also the reason retail traders need a success ratio >50% and, preferably, >60%. Yes, it's possible to make money with a success ratio <40% but the psychological toll will be huge. Under these circumstances, sticking to your trading plan like poop to a blanket will be extremely tough. Too tough for the vast majority of retail traders.

It's a pity myfxbook don't give me a stat for my consecutive lose/win rate.
I can see however that my win rate is currently 42%, which is decent when coupled with the right risk/reward ratios. This is not where I want to be though. At the very least, I want to get to a 50%. I can reevaluate once I get to that target. I don't get too stressed over a few consecutive losses, but I certainly do feel it. I have on a number of occasions questioned whether I have what it takes to succeed with trading, but I know this is quite a common thought in more than just trading. I just try to ensure each new trade is a fresh start, free from the result of the previous one...but that's not so easy at times

I am all for risking as little as you can (like Darktone) but at my level of capital it would take me forever to build up to anything worth getting excited over. That doesn't mean I will recklessly risk my account, but it does mean I have to take the elevated risk if I want to get to my target. I have already thought about this and what I came up with was to be careful and reduce risk as my account grows. Then again, 2% per trade is no 20% per trade. 2% still gives me breathing room but a 42% win rate makes it more stressful than it needs to be.



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To conclude, following the herd and doing what most people do or at least recommend - is probably wrong. That includes the Sticky I referenced (and wrote btw - thanks for the kind comment). Start with 1% per trade when testing, but don't feel you have to stick to that because that's the figure most commonly discussed. Who knows, perhaps for you, trading from your mobile mid way along a high wire 10000 feet up and going all in on every trade may be well within your risk tolerance.
Tim.

My risk tolerance is not that high. We'll leave that to the invincible youngins

But yes, I'll move things around so that I get a tighter fit to my personality.
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Old Dec 3, 2017, 10:31pm   #18
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I think that maximum drawdown should be added to this conversation as it also has a bearing. If you are risking 2% and you have 10 consecutive losers then drawdown will be around 20% plus costs. In the sphere of personal tolerance you also need to identify your own max DD level before taking some sort of action (stop the strategy).

Also linked is the win rate, if you know the probable win rate and you launch into a strategy that has consecutive losers then you may have launched just as the strategy hits a drawdown period, what action do you take then?

It can get more complex than this, but these are all basic items for a trading plan.
Good points mate.

My drawdown is currently 56% or something... I had lost 60+% of my account at one stage. I would like to get back to breakeven so that DD figure isn't so high. It's depressing to look at.

Losing 10 straight trades is very possible for me and 20% drawdown from 10 trades is a lot! I can't actually remember the last time I lost 10 in a row though... but it's smart to based my plan off how much I would be ok with losing should I hit a 10 trade losing streak. I think I might reduced it to 1% and only add on pullbacks. My current win rate is 42%, but this is muddied by all the losses in the first 2 months when I had less of an idea of what I was doing. I have no "last month" tab on my account stats but I do have a "this month". However, it's the 3rd of Dec, so a bit too early to use it


EDIT: I can actually see how much the difference between last and current month. So I actually had a 34% or so wn rate last month... oops
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Old Dec 3, 2017, 10:42pm   #19
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Cheers Tim. Im a big fan of focusing on notional size and how it relates to your account when it comes to risk, and really thats about it. I dont like the standard view of RR, % per trade measured from entry to stop etc for a couple of reasons.
i) The standard 'wait for confirmation-take a position-stop out' executes on the side of pa that I dont want to be on.
ii) A stop is where you hope to get out not where you will get out. Any slippage is negative and if youre big enough at the wrong time it can be a killer.

If we take a £10k acc buying a 10k market, at a size that equal £1pp, I see that as 1/1 with a notional trade value of 10k, ignoring costs and reqs for the moment itd take the market to move to 0 for the acc to be wiped out. At £4pp I see that as 4/1 with a notional trade value of 40K. At this size it would take a 25% drop for the account to zeroed. I tarde dax at anything from sub 1/1 up to a max of 4/1. Anything over 3/1 for me is for very short periods, usually managing a position. Most often im 1/1 - 2/1.

If we take the average player who believes big is good and biggers better, hes got his signal and hits the short at £10pp the in the 10k market with his £10k acc. Initial stop is 10pts out (£10ppx10pts = £100... 1% of 10kacc), the first move was favorable so stops to BE and let profits run like a good trader should. The position briefly goes +150 but is still inside the channel hes marked perfectly on his charts, dont wana move stops up too soon like we did last time so gives it room to breath. As the market retraces he consoles himself knowing that the trade is risk free with stops at BE and win some lose some. It shaves the stop and turns back down, "Phew, maybe itll go my way after all".. then whamo, some fat finger-bomb found near christmas market-NPPR surprise bullsh!te-no reason on Gods green earth that I can goes down. He doesnt know where he is cos his screens have froze.. time passes time passes.. tick tick,, opens up his blotter to find -£1900 staring back and the real risk of the trade is revealed.

It doesnt have to be this dramatic ^ and of course it can be a sh!te pile worse, but far more likely the steady accumulation of neg slippage x size can consistently turn that '1% risk' into '1% + a bit more/quite a lot more/are ye feckin serious more' loss.

Jeez, what were we talking about again? Ill put my soapbox away
Thanks for the explanation mate

Do you or any of the rest of you know what the average slippage size is in fx? And how often slippage occurs, on average for say...the major pairs only, if that makes it easier.
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Old Dec 3, 2017, 11:06pm   #20
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Good points mate.

My drawdown is currently 56% or something... I had lost 60+% of my account at one stage. I would like to get back to breakeven so that DD figure isn't so high. It's depressing to look at.

Losing 10 straight trades is very possible for me and 20% drawdown from 10 trades is a lot! I can't actually remember the last time I lost 10 in a row though... but it's smart to based my plan off how much I would be ok with losing should I hit a 10 trade losing streak. I think I might reduced it to 1% and only add on pullbacks. My current win rate is 42%, but this is muddied by all the losses in the first 2 months when I had less of an idea of what I was doing. I have no "last month" tab on my account stats but I do have a "this month". However, it's the 3rd of Dec, so a bit too early to use it


EDIT: I can actually see how much the difference between last and current month. So I actually had a 34% or so wn rate last month... oops
I think most traders would consider 60+% DD, 42% or worse 34% win rate to be a very poor strategy and not worth trading.
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Old Dec 3, 2017, 11:11pm   #21
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Hi Nowler

I wouldn't assume its your win rate which is the main focus. Its the combination of win rate and risk/reward which generates positive expectancy (which you know). Perhaps its easier for you to improve your R/R than it is to improve your win rate. Just a thought...

Last edited by Kaeso; Dec 3, 2017 at 11:21pm.
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Old Dec 3, 2017, 11:34pm   #22
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I think most traders would consider 60+% DD, 42% or worse 34% win rate to be a very poor strategy and not worth trading.
Agreed.

Most of that drawdown occurred in my first 3 months of learning to trade.
It's not indicative of a particular strategy, but rather everything I have tried and tested.

Lets see if I can bring those numbers up over the next few months
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Old Dec 3, 2017, 11:38pm   #23
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Originally Posted by Kaeso View Post
Hi Nowler

I wouldn't assume its your win rate which is the main focus. Its the combination of win rate and risk/reward which generates positive expectancy (which you know). Perhaps its easier for you to improve your R/R than it is to improve your win rate. Just a thought...
I agree, its a combination of both.

I will try to increase both over the next month, just to see what I can actually do. No exploratory trading. I stick to a limited number of strategies
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Old Dec 4, 2017, 7:18pm   #24
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Most of that drawdown occurred in my first 3 months of learning to trade. ...
Calling your account loss from the beginning "drawdown" is slightly confusing things, and being a bit hard on yourself. Its just initial losses from when you first started, were newbie etc, and this "being underwater" may continue for some time..no probs

Think about "drawdown" only over a period where you have made money i.e. to assess how much "drawdown" was necessary to achieve that return - then its meaningful.

I hope that doesn't sound pedantic, i'm just trying to help if i can!
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Old Dec 4, 2017, 7:57pm   #25
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Calling your account loss from the beginning "drawdown" is slightly confusing things, and being a bit hard on yourself. Its just initial losses from when you first started, were newbie etc, and this "being underwater" may continue for some time..no probs

Think about "drawdown" only over a period where you have made money i.e. to assess how much "drawdown" was necessary to achieve that return - then its meaningful.

I hope that doesn't sound pedantic, i'm just trying to help if i can!
Yeah the stats are muddied by the initial period, but then again, I did only have a 34% win rate last month. This month I am 0 from 3 I'm optimistic I can turn that around by the end of the month.

I should probably update my intentions to the journal
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Old Dec 4, 2017, 9:11pm   #26
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Yeah the stats are muddied by the initial period, but then again, I did only have a 34% win rate last month. This month I am 0 from 3 I'm optimistic I can turn that around by the end of the month.

I should probably update my intentions to the journal
Yeah if you think about it, having more losers than winners means after you've taken a loss the next trade is still statistically likely to be another one, so don't be surprised about consecutive losses

Some traders say one should focus on the losses more, and in situation of less than 50% win rate ones trading is literally mostly dealing with losses, although sufficient R/R can mean you've made money still, maybe that's what they mean.

Last edited by Kaeso; Dec 4, 2017 at 9:17pm.
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Old Dec 4, 2017, 10:14pm   #27
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Yeah if you think about it, having more losers than winners means after you've taken a loss the next trade is still statistically likely to be another one, so don't be surprised about consecutive losses

Some traders say one should focus on the losses more, and in situation of less than 50% win rate ones trading is literally mostly dealing with losses, although sufficient R/R can mean you've made money still, maybe that's what they mean.
Of course

I've traded quite a lot in the last 2 months, so using the first three months of losses as a reason for the 42% win rate etc... is rapidly becoming less relevant. The drawdown stat sucks but the likes of win/loss rate I should be able to correct in the short-mid term. Let's see
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Old Dec 27, 2017, 7:47pm   #28
 
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If you trade following all the strategy rules and MM without breaking them then you'll manage to drammatically reduce the risks.
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Old Mar 2, 2018, 10:42am   #29
 
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Strict following money management rules and strategy certainly reduces risks a lot. However, there is no guarantee that your trade will be successful.
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