Dr. Toad's Journey to Bankruptcy or Financial Freedom

This is a discussion on Dr. Toad's Journey to Bankruptcy or Financial Freedom within the Trading Journals forums, part of the Reception category; Originally Posted by tomorton 5 charts only? can that be a sufficiently broad model for a strategy? I agree with ...

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Old Jul 27, 2015, 11:05am   #9
Joined Jul 2015
Dr. Toad started this thread
Quote:
Originally Posted by tomorton View Post
5 charts only? can that be a sufficiently broad model for a strategy?
I agree with you on this one. Can't really base a strategy off such a small sample. Two problems arise for me when checking this one in particular though.

1. I don't have historical F scores for companies.
http://www.investopedia.com/terms/p/piotroski-score.asp

If anyone has a source for this, I would be grateful if you could direct me to it.

To this effect, I am not sure my current check of the strategy as I have posted is even valid since I do not know if the companies I am currently watching had high F-scores 2 years ago. I would imagine it takes time for a company to gain (and lose) a high F-score though which is how I am justifying using the current "good" companies as my test set. Also, the fundamental idea of the strategy in my mind is sound. Invest in a good company when they are continually making higher highs.


2. I do not have a good way to automate the testing of this particular strategy since the criterion for my trailing stop I have developed is somewhat complex. I have seen various tools such as StrataSearch used for backtesting, but I really am very new to this and use excel for most of my backtesting currently. Suggestions for software to backtest strategies are welcome, especially if you believe something like the trailing stop criterion I have developed can be easily implemented.

I did actually take a quick look at the other 15 companies currently on my radar, and it looks like they all have either fairly large profits or small losses/break even with this strategy. I will be looking closer at the remaining this week and do a more formal test of my strategy...will probably summarize it in tabular form at some point rather than annotate all the charts. I realize though that 20 is not much better than 5 with regards to testing a strategy.

Quote:
Originally Posted by tomorton View Post
is there really justification for treating higher priced stocks in a different way? Respecting a price threshold like $50 per share is not something seen in systems other than US stocks but is it really valid?
I was thinking this very thing after I posted the strategy. Actually what I have been seeing is typically the opposite of this. Lower priced stocks (under about $10) typically need more breathing room. They are subject to more dramatic moves than higher priced stocks. I will take a closer look at this when evaluating the remaining charts and may look back at the ones I have already done since I also question the validity of this.

Quote:
Originally Posted by tomorton View Post
surely price behaviour can evolve, and the way a chart behaves this year can not be assumed to be the same next year: does the model have enough flexibility to respond itself to this or would it take a rather a manual re-set?
I really have no idea.
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Old Aug 3, 2015, 4:52am   #10
Joined Jul 2015
Dr. Toad started this thread Activity for the week of 7/27/15 – 7/31/15:

Opened Positions:
TGT 07/27/15 – Pangolin-Z
SPR 07/29/15 – Aroon Cross

Closed Positions:
SYKE 07/28/15 – Aroon Cross
KBAL 07/28/15 – BB Squeeze
IART 07/28/15 – BB Squeeze
WUBA 07/28/15 – BB Squeeze
DHI 07/29/15 – Pangolin-Z
AET 07/30/15 – Pangolin-Z

My current open positions are:

Click the image to open in full size.

BB Squeeze preliminary testing conclusions:

All the BB Squeeze positions closed at a loss this week. While live testing this one I realized there are some holes in my current trading system. The main one being I don’t have a good plan for how to play stocks that gap. My general thinking is that if a stock gaps without any real news, the gap will fill. Not sure of the validity of this, but my plan going forward is to monitor stocks that gap without news and are not still rapidly moving against the direction of my position. If they are moving against my position I will sell immediately and if not, I will re-evaluate my initial strategy for the trade to see if it is still valid or if it needs changed. Although I do not like deviating for the plan I set at the start, I think stocks that gap are a bit of an exception and thus require individual consideration rather than a blanket strategy. By not trading during earnings, hopefully I can avoid this for the most part.

Another realization I had is that I don’t do well with systems that do not have specific targets. I keep my positions open to long and don’t take profits when I should. In addition to this, I should not trade systems that do not make intuitive sense to me. Although the BB Squeeze system seems to work (from backtesting), I do not completely understand why. For these two reasons, I am going to put the BB Squeeze system on hold for now and will not be testing it until I re-evaluate it and understand it completely.


Aroon Cross Re-evaluation:

On further evaluation of the Aroon Cross system, I realized that I was trying to curve fit my strategy to much. The trailing stop I had devised did not work well in stocks that steadily increased without much correction and then fell off a cliff quickly. In addition to this, I realized that by waiting for the stock to drop after the signal, I was missing the boat about as often as I was getting a better entry. For these reasons I simplified the system to the following:

- Consider only stocks with F scores of 7 or greater
- Enter on either a 100 day or 50 day crossover provided the crossover results in a new high and the 100 up is above the 100 down (for 50 day crossovers)
- Use a trailing stop set 8% below the highest low
- Close the position when a 20% profit is reached (or I am stopped out)

The only deviation to the immediate entry will be if the stock is clearly trading in a range when the signal occurs. If this happens, I will target my entry at the low point of the range after the reversal and if I am wrong with the range the buy will occur the day after it breaks the upper level of the range or I will pass on the trade and wait for the next signal. I added this one after observing the clear trends in SYKE and reading though:

http://www.trade2win.com/boards/tech...ul-trader.html

The results of my more extensive testing of the “improved” Aroon Cross strategy are as follows (note that this is with entries immediately after the signal).

Total trades: 30
% win: 53.3%
Average profit on win: 13.5%
Average win duration: 87 days
% lose: 46.7%
Average loss on lose: -6.4%
Average lose duration: 44 days

So, basically, the system has a 50/50 win to lose with the wins generating twice as much as the drawdown from the losses but over twice the length of time. Not something that will make me rich quick, but still something worth putting to a live test I think, and something simple enough that I know it was not over fit.

There are a few flaws with my backtesting though. One of which is since the stocks I used all have F scores of 8 or 9 now, it stands to reason that they have in general been in an upward trend to get there. So, the results may simply be a self-fulfilling prophecy based on what I selected to test it with. A second major flaw is with the limited sample size. Finally, all tests were run over the period of about October 2013 to present during a market trending up. Although this is the case, I feel I have done my due diligence on this one and can run it live with some confidence.

The sequence of closed trades from this system in the backtesting was as follows:
W W L L L W W L W W L L W L L W L W L W L W W L L W W W L L

With the following sequence of profit/loss on the trades:
+20%, +6.99%, -9.03%, -7.16%, -6.56%, +20%, +0.13%, -8.41%, +20%, +1.46%, -6.76%, -10.17%, +20%, -3.28%, -1.72%, +5.04%, -9.79%, +20%, -8.26%, +20%, -3.23%, +2.13%, +20%, -8.31%, -5.42%, +20%, +6.07%, +20%, -8.01%, -0.43%

Drawing solid conclusions on such a small data set is almost pointless, but it does look like it is unlikely to have a string of losers (or winners) in a row exceeding 4. So, if I observe this in live testing I may need to evaluate the system further and make sure it is still working.

Since the maximum risk of loss on these trades is approximately 10% (8% + the range of the signal day), and I want to put 0.75% of my trading pot at risk for these initially, my position size on these will be approximately 7.5% of my trading pot. This means I will have about 3 – 4 of these open to keep my longer term investments not much greater than 25% of my total available pot. Realistic worst case is I end up with a 3% decrease in my trading pot (4*0.75%) before realizing gains from the system, which I can live with. Also, since I entered a couple of these before I had the system fully developed, my position size is a little larger than this currently so I will only enter in one more of these until an open one closes (or I increase my trading pot size).


Channel Strategy:

While going through this exercise, I noticed that one of the stocks I am monitoring appears to be rangebound in an upward trend. The stock I am looking at is ESRX and the range is approximately 9%.

Click the image to open in full size.

After reading through the “if you can draw a straight line…” thread linked to above, I thought this technique is simple enough to try out. My intent it to buy in if/when the stock reverses around the bottom of the range and sell when it nears the top. It looks like it will be reversing sometime next week. I will manage this by selling immediately if the stock drops 1% below the lower range after starting the trend back to the upper range. I will sell when the stock is within 1% of the upper range line as I do not think I am smart enough quite yet to determine when the stock is reversing and this will net me approximately 7% profit. If it continues up past the upper range line, oh well, I will still have profit. If it drops back down before reaching, still no big deal as I will be exiting without much/any loss.

One other stock I will be trying this with is BMY which has a range of approximately 11%.

Click the image to open in full size.

This one appears to have reversed so I will be buying in on Monday with a target sell of 70 for a target profit of approximately 6%. Both of these examples seem to have a range duration of approximately 1 month so I will seek out a few that have smaller range sizes but shorter durations to get more practice with this technique and see if it is a viable option for me.


End of Month Summary:

I will be putting summary charts and tables in my first post but the basic summary for my second month of trading is I had what I would say significant improvement. My first month with no system in place I saw a net loss of approximately $200. This month I saw a net loss of approximately $100. A small price to pay for learning the ropes in my opinion, but as a result, my goal for this month will stay the same which is to have a net profit on the months closed positions at the end of the month. Also to put a silver lining on the loss, I saved more this month than I lost in both months through my small lifestyle change of cooking more. Onwards I say.

Edit:

On further inspection it appears you lose the ability to edit posts after a certain length of time....hmmm...this does not jive well with me since I was planning on keeping my initial post updated with my strategies as they evolve...I will add my summaries to this post for now...hopefully I am just overlooking something with regards to editing older posts...

Click the image to open in full size.

Click the image to open in full size.

Last edited by Dr. Toad; Aug 3, 2015 at 5:00am.
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Old Aug 10, 2015, 5:40am   #11
Joined Jul 2015
Dr. Toad started this thread Activity for the week of 8/3/15 – 8/7/15:

Opened Positions:
BMY 08/03/15 – Channel
ESRX 08/03/15 – Channel
MDSO 08/05/15 – Channel
FIT 08/06/15 – Channel
PDLI 08/06/15 – Channel
NAV 08/06/15 – Line (Short)
WLL 08/07/15 – Line (Short)

Closed Positions:
BMY 08/07/15 – Channel
MDSO 08/07/15 – Channel
FIT 08/06/15 – Channel
PDLI 08/06/15 – Channel
NAV 08/07/15 – Line (Short)


This week I started testing the channel strategy as well as the line strategy. The channel strategy was previously described and the line strategy is essentially the same but is more for a stock that is trending strongly in one direction with little variance.

The channel strategy proved unsuccessful this week, but I believe this was due to errors on my part rather than a flaw in the strategy logic. My errors were as follows:


1. I set my limit entries to high  I need to be more selective with my entries. The main one with this error was BMY. My other entries were a little high, but not excessively so.

2. I set my stop losses to close to the channel lines I drew  I need to allow myself more margin for error until I have more practice using this technique. BMY, MDSO, and PDLI were all stopped out. I believe my stop was the low for the day with PDLI and very nearly the low for BMY and MDSO. If all three of the turn up then I will take this as a positive sign, even though I got stopped out this will at least show I have a pretty good idea of the probable price action. I will see as the coming week progresses.

3. I should not try to use this strategy with stock that have high volatility. At least not until I have more practice with it. The FIT, BMY, and MDSO trades had this problem.


I think I will concentrate more on the line strategy for now since the stocks I will consider for this as a rule will have much lower volatility. Once I have mastered this, I will then relook at the channel strategy. I will be more selective with my entries as well as set my stops further away, so I should have a bit more success this week than I did last week.
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Old Aug 16, 2015, 3:38am   #12
Joined Jul 2015
Dr. Toad started this thread The High Probability Trade:

My strategy testing to this point for the most part has been abysmal most likely due to Murphy’s Law kicking me in the face at the outset rather than gaping holes in my logic/strategies. Although I know that you can’t judge a strategy from limited testing and strings of losses will occur, I did not thoroughly vet all the strategies I live tested, partially due to the strategies not being very practical to thoroughly vet other than by live testing (or demo account testing). As a result, for many of the strategies I am testing, the expected win/loss is a large unknown which is not something that should be an unknown when trading.

I decided to live test the strategies with only partial exposure to my planned full trading pot so although the drawdown exists, it is not a major concern of mine at this point. My main frustration at this point is that it seems that I read the market completely wrong most of time. I will be going back and looking at my channel and line trades next weekend to see if I was indeed wrong most of the time, or if I just need to be more mindful of where I enter and set my stops. This should give the stocks sufficient time to progress so I can see if the trend I was following was broken or proceeded on without me due to bad stop placement.

This string of bad luck though prompted me to reconsider and thoroughly investigate some things I have had an aversion to doing from the start. Namely, the day trade. My aversion to this type of trading is that you are placing a large chunk of your capital into one item. It is also difficult to execute when you have a full time job.

In order to make a day trade strategy practical for me, or anyone that works full time, I need to know exactly when I will go into a trade and exactly when I will exit a trade before the market even open. I can’t sit staring at a chart looking for a signal, but I can take a minute to check something every 20 minutes or so. This prompted me to devise a system based purely on statistical probability which is something I have been kicking around for a while now.

The basic outline of my system is this:
  1. I find stocks that for a long period of time have reached a daily high a certain small percentage above the open with a daily low not absurdly far away from the open. As I have found there are a large number of these and they tend to be either: stocks that typically do not move much during the day (e.g. PCL), and stocks that have been in a prolonged uptrend (e.g. FL).
  2. I determine for the particular stock the drop that occurs approximately 60% of the time during the day.
  3. I determine for the particular stock the drop that occurs approximately 5% of the time during the day.
  4. I enter in a trade if:
    1. The percent daily high from open has not been exceeded
    2. The stock has dropped the amount it does 60% of the time
    3. The stock has not dropped the amount it does 5% of the time
    4. It appears that the stock is beginning an uptrend. This last criteria is subjective and really only added in so that I can let a stock drop as far as possible before entering in which minimizes my risk and increases my potential reward. By the very nature of the system being the stock is highly likely to reach the set percent above the open, getting this wrong every time will not be the end of me which I will go into later.
  5. I exit a trade when either:
    1. The stock has reached the percent daily high from open it does most often and appears to be reversing. Again this is subjective but as long as I do not allow much drop from this point it will not be the end of me.
    2. The stock drops the amount is does 5% of the time
    3. It is within 15 minutes of close

This system allows me to take about 10 potential stocks to trade (could increase upwards without sacrificing much probability on the trades). On opening I look at the open of the first one on my list and calculate the typical high of the stock. If it is exceeded I move on to the next because this is no longer a trade within my system. I do this for all of them on my list and then determine the entry point I am looking for the ones that have not exceeded the high. When an entry point is met and it appears the stock is reversing, I enter, set my stop loss at the drop the stock reaches 5% of the time, and set an alert for when the stock nears the percent above open it often reaches.

The procedure I have been following to make this practical with my job is to do the preliminary check which takes about 5 minutes after open and set alerts on the stocks that do not exceed on open for when they are nearing either target. When I get an alert I monitor the stock periodically if it is near an entry and once I enter I only need to periodically check when I get an alert for my sell. No real staring at charts needed.

Through live testing I can only see one potential flaw with my system. I will be able to determine if this flaw makes the strategy useless or not through my live testing phase. The flaw is that, during the development of this strategy, I did not account for the phenomena of the relatively large price flux at the beginning of the trading day seen on occasion. As a result, some (or potentially all) of the stocks I am following on this may only be on the list because they are prone to these fluxes daily. This essentially makes these stocks untradeable for my strategy and artificially raises the probability of success I am ranking these stocks on.


With that in mind, I am now going to attempt to fully vet the strategy by first looking at a very pessimistic theoretical outcome if the system performs as designed (i.e. the potential flaw is in actuality not much of a flaw), a conservatively optimistic theoretical outcome if the system performs as designed, and a highly optimistic theoretical outcome if the system performs as designed. I did an abbreviated version of this for the Aroon Cross strategy outlined previously, and feel it is vital to establish this in order to gain confidence in trading it (at least for me).

In order to determine the theoretical outcomes of the system, some parameters need to be set. The parameters that will be used to determine the theoretical outcomes of the system are as follows:

For all systems:
The current trade statistics of my system will be maintained at similar levels always. I have not tried to optimize by determining the absolute best stocks to follow too much yet so I can very likely achieve better than I am using for this study. Also, if this strategy works now it will very likely always work due to the sheer number of available stocks to do this with.

For the pessimistic:
  1. Half of trading capital is used for each trade
  2. 12 trades a month (essentially 3 trades a week). Pessimistic since there is likely at least one possible trade a day that I would see in time.
  3. All winning trades close out based on the signals. Pessimistic since no better entries and no better exits.
  4. All losing trades have a loss based on the stop out criterion. Pessimistic since the stop in theory will only be reached 5% of the time, and thus it will rarely be triggered.

For the conservatively optimistic:
  1. 2/3 of trading capital is used for each trade
  2. 20 trades a month (effectively 1 a day)
  3. Better entries and exists yield on average 20% better gains than system statistic indicate. Better entries are fairly easy to manage, better exists less so.
  4. All losing trades yield on average 50% of the system dictated stop loss. In reality, the system dictated “losing trades” may actually result in gains since a losing trade in this study is any time my low entry trigger is hit but the high exit trigger is not. Thus, the stock may end higher than my entry so this is (very) conservatively optimistic. Similarly, by getting better entries, the losses will be further minimized.

For the highly optimistic:
  1. All of trading capital is used for each trade
  2. 20 trades a month (effectively 1 a day)
  3. Better entries and exists yield on average 30% better gains than system statistic indicate.
  4. All losing trades yield on average 25% of the system dictated stop loss. See comments on this above.

The pertinent statistics of the stocks I am watching currently are as follows:
  • The average target gain = 0.72%
  • The average stop loss = 0.82%
  • The average probability of both the entry and exit targets being hit is 75.56%. By the very nature of the system setup, I will only be entering if the high exit target has not been hit yet, so this can be taken as my positive outcome probability as well (this is where the potential system flaw manifests itself).

Pessimistic theoretical outcome:
Using the pertinent statistics of the stocks as well as the pessimistic parameters outlined, the expected monthly increase in capital would be:
12*[0.72%*50%*75.56% - 0.82%*50%*(100% - 75.56%)] = 2.07% gain per month (27.87% annually when compounded monthly)

Conservatively optimistic theoretical outcome:
Using the pertinent statistics of the stocks as well as the conservatively optimistic parameters outlined, the expected monthly increase in capital would be:
20*(120%*0.72%*67%*75.56% - 50%*0.82%*67%*(100%-75.56%)] = 7.42% gain per month (136.06% annually when compounded monthly)

Highly optimistic theoretical outcome:
Using the pertinent statistics of the stocks as well as the highly optimistic parameters outlined, the expected monthly increase in capital would be:
20*(130%*0.72%*100%*75.56% - 25%*0.82%*100%*(100%-75.56%)] = 13.16% gain per month (340.87% annually when compounded monthly)


That all looks fantastic to me, but in order to survive a patch of losers, I need to dive a bit deeper into statistics. It has been quite some time since I looked at and used statistics at the level I will attempt to now, and I never was too good at it. With that being said, if someone sees some glaring errors in my calculations or assumptions please point them out!

For the next set of calculations I will assume that all my capital is used for each trade, the target gain is reached on a success, and the stop is reached on a failure. This is an absolute worst case assumption for drawdown. For the trading statistical assessment, I have assumed a binomial distribution. There are two possible outcomes for each trade as I am considering it with outcomes constant and independent of the trial number:
  1. A win constituting a gain of 0.72% with a probability of 75.56%
  2. A loss constituting a decrease of 0.82% with a probability of 24.44%

I will look at probabilities based on a sample size of 20 trades which is effectively 1 month of the strategy. The following table shows the probabilities of the number of outcomes as well as their impact on my trading capital.

Click the image to open in full size.

In developing this table, the following formulas were used:

To calculate the probability, P, of exactly s occurrences of a loss in n = 20 trials with a p = 24.44% of occurrence, P = {n!/[s!*(n-s)!]} * p^s * (1-p)^(n-s). Or for those of us who like to simplify life a bit, the excel formula of ‘= binom.dist(s,n,p,FALSE)’.

To calculate the compounded end balance, B, with s losses of x = 0.82% and n – s wins of y = 0.72%, B = (1+y)^(n-s) * (1-x)^(s)

The following table shows the cumulative probability of each end of month result obtained simply by summing the exact occurrence (i.e. minimum of 5 includes 5 to 20 losses).

Click the image to open in full size.

So, from this I see that a month with 10 or more losses would be statistically speaking exceptionally rare. This is effectively the descent into negative returns territory for the strategy so the conclusion I am making from this is that if I have a month with negative returns using this strategy (barring any instances of my stop being gapped over and filled exceptionally lower), it is likely not working as designed. If I have two months in a row of negative returns it is almost certainly not working as designed and I need to re-evaluate it or dump it (the expected rate of occurrence for this would be right around 1 in 370,000). Although these are the conclusions that I get from the results of this study, it looks absurd to me so I fully expect there is an error somewhere in my logic or math.


To be honest, I will be happy if the system performs as well as the pessimistic theoretical outcome since this will allow me to meet my original goals for financial freedom in about 3½ years if I add to my trading pot as outlined in my original post. I expect the system to fall between the pessimistic and conservatively optimistic range but will be ecstatic if it performs at or above the conservatively optimistic range. If it performs as well as the conservatively optimistic I will meet my original goals in about 1 year.


This study shows to me that there is absolutely no need to play with more than 2/3 of my capital trading this since when using that with some fairly conservative assumptions, I would be making stupid amounts of money. It also shows that even with risking all my account on each trade, the system is safe by conventional money management standards and the only way the system will fail is a black swan event or a series of large intraday gaps in a row both of which are low probability. Note that with using all my capital for a trade I am only subjecting myself to a risk of 0.82% (my account is not leveraged). So, to my understanding this would be in line with proper risk management. Please correct me if I am wrong on this though, as getting this wrong would be very bad indeed.

Due to the large positions sizes that will be used, I feel I need to look at intraday gaps and black swan events when sizing the positions of these trades. In order to hedge against a black swan and large gap initially, my plan is to trade between 50% and 67% of my account using this strategy. Once/if I reach financial freedom, I will reduce my trade size to further hedge against a black swan event and allow my lifestyle and trading to continue on in the event of one. When/if I get there, I will need to look at this in more detail.

For now I need to get an idea of how often intraday gaps occurs and how large they are typically. I think through the very nature of the developed strategy, the stocks I will be going in on are less likely to have intraday gaps than others but perhaps this is my own naiveté.

With all of that said, I remain skeptical of my developed strategy and will likely remain so until I have traded it over 100 times with results on the order of magnitude that will occur in theory. Simply put…if it was this easy, everyone would do it and it wouldn’t work, but now that I have thoroughly vetted it I have the confidence to trade it and I will know without a doubt when it is not working.


As a bit of an aside, I did enter in two trades using this to test the waters a bit on last Thursday and Friday. Both were successful, but that really proves nothing similar to the ability of swimming a lap in a pool does not prove one’s ability to swim the English Channel. The trades entered are shown below. The first one was entered with 1/3 of my current trading pot and the second was entered with ½ of it. Approximate entry and exit points are noted.

Click the image to open in full size.

PGR netted a 0.715% gain which is higher than the target percent gain of this particular stock (0.65%) even though it is technically classified as a fail in the system. This is due to a better entry than needed and a pure uptrend during the day ending where it started.

Click the image to open in full size.

For some reason yahoo finance doesn’t have the first candle of the day for this one, but it dropped straight from the open so the high wasn’t exceeded. I took an exit slightly below the target (41.49) on this one since it had already been hit and the stock appeared to be headed back down at that point. I didn’t exit sooner since the price action was indicating an uptrend. How would other people have played this one as far as exiting? Was my exit justified or premature?

This PCL trade netted a return of 0.607% which was essentially the target for this stock of 0.63%. This trade was a “success” under the system but yielded a slightly lower outcome due to a marginally better entry and a marginally worse exit.



So my main question with regards to all this hypothetical mumbo-jumbo is simply: Am I truly managing my risk appropriately with this strategy if I put 2/3's of my account (which is not leveraged) into each trade with a stop loss approximately 0.82% away. To my understanding this would give the trade a risk on my account of approximately 0.55% which is well within the parameters of good money management.

Whether or not it actually works will become evident during live testing which I will continue provided I am not overextending myself with regards to risk.
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Old Aug 16, 2015, 5:56am   #13
Joined Jul 2015
Dr. Toad started this thread In the interest of continuing a discussion from a different thread (see http://www.trade2win.com/boards/psyc...wan-event.html), the follow string of text is what I would like to continue:

Quote:
Originally Posted by Dr. Toad View Post
my plan is to risk no more than 2/3's my account on these trades.
Quote:
Originally Posted by alexaherself View Post
My own plan for them would probably be to risk no more than 2.5%.
Quote:
Originally Posted by Dr. Toad View Post
One point you do mention though is that you would risk no more than 2.5%. Is this to say that if your account is $100,000, you would trade no more than $2,500 worth of the item in question or that you would set your stop so you would lose no more than that amount. If it is setting your stop then perhaps my initial post wasn't very clear since we are actually talking about the same order of magnitude of risk. I would be risking approximately 0.67% of my account (2/3's of my account with a 1% stop on the trade).
Quote:
Originally Posted by alexaherself View Post
No. It's not a simple as that.

With $100,000 in your account, to risk 2.5% of your account on each trade means that if you lose as much as is possible on the trade, it can't possibly cost you more than $2,500. Things like leverage also have to be factored in.

I am a bit confused by my example not being as simple as I stated, but I believe this is mostly my fault and I think I see where you are coming from. SO, let me try to better explain myself and hopefully we will be in agreement then .

Technically you are correct in that if my account is $100,000 I truly only have $50,000 of my own since the current leverage of my account is 2:1. I think this is where the confusion on my part is coming from. When I think of my account, I only think of the money I actually have, not the money I have access to through leverage. I do not (and do not intend to ever) use leverage to access more funds than I actually have. This I believe is a vital money management technique to allow financial survival of a black swan event.

In fact the only reason I have enabled margin on my account is so I can short sell stocks on occasion but I never have short sells and long trades active that exceed my actual funds. I am aware that by the very nature of short sells I am exposing myself to infinite risk in a black swan event but I believe an upside black swan is probably close to unheard of with regard to stocks. If the strategy I outlined above proves practical, then really I will have no need for short sells, so I can mitigate even this hopefully.

So when I am saying I am risking 2/3's of my account with a 1% stop, I mean to say that I am risking losing 0.67% of money I have (which in actuality would technically only be 0.33% of my account). For simplicity sake, whenever I refer to my account and the risk I am taking on it, just consider my account to have no leverage....makes life a lot simpler I think.

This bring me full circle to the vital question. Am I managing my risk correctly?
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Old Aug 16, 2015, 7:27am   #14
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In the interest of continuing a discussion from a different thread (see http://www.trade2win.com/boards/psyc...wan-event.html), the follow string of text is what I would like to continue:








I am a bit confused by my example not being as simple as I stated, but I believe this is mostly my fault and I think I see where you are coming from. SO, let me try to better explain myself and hopefully we will be in agreement then .

Technically you are correct in that if my account is $100,000 I truly only have $50,000 of my own since the current leverage of my account is 2:1. I think this is where the confusion on my part is coming from. When I think of my account, I only think of the money I actually have, not the money I have access to through leverage. I do not (and do not intend to ever) use leverage to access more funds than I actually have. This I believe is a vital money management technique to allow financial survival of a black swan event.

In fact the only reason I have enabled margin on my account is so I can short sell stocks on occasion but I never have short sells and long trades active that exceed my actual funds. I am aware that by the very nature of short sells I am exposing myself to infinite risk in a black swan event but I believe an upside black swan is probably close to unheard of with regard to stocks. If the strategy I outlined above proves practical, then really I will have no need for short sells, so I can mitigate even this hopefully.

So when I am saying I am risking 2/3's of my account with a 1% stop, I mean to say that I am risking losing 0.67% of money I have (which in actuality would technically only be 0.33% of my account). For simplicity sake, whenever I refer to my account and the risk I am taking on it, just consider my account to have no leverage....makes life a lot simpler I think.

This bring me full circle to the vital question. Am I managing my risk correctly?
1- You risk 1% or whatever of your account this has nothing to do with leverage . Lets say you have 100K in funds and you want to risk 1% , then you risk 1K in one trade period

2- " I believe an upside black swan is probably close to unheard of with regard to stocks" : Who told you that ? What about MA activity ? A stock can jump 20-40% overnight easily .
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Old Aug 16, 2015, 7:58am   #15
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1- You risk 1% or whatever of your account this has nothing to do with leverage . Lets say you have 100K in funds and you want to risk 1% , then you risk 1K in one trade period

2- " I believe an upside black swan is probably close to unheard of with regard to stocks" : Who told you that ? What about MA activity ? A stock can jump 20-40% overnight easily .

Positive Black Swans might be an essential part of share-holding profitability long-term. There are certain stock types for which they are more likely. The downside is that its impossible to time a Black Swan so you would have to be continuously exposed by holding for long periods. This ties up capital and increases exposure to negative Black Swans too, as well as normal price erosion.

Types of stocks that might be more prone to positive Black Swans -
oil explorers / drillers
software developers
TV programme developers
biotech research labs
small caps in sectors which are in a consolidation process (M&A)
tiny firms competing for contracts with major governments or large cap commercial customers

There may be others too but I don't really follow shares these days.
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Old Aug 16, 2015, 8:11am   #16
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Positive Black Swans might be an essential part of share-holding profitability long-term. There are certain stock types for which they are more likely. The downside is that its impossible to time a Black Swan so you would have to be continuously exposed by holding for long periods. This ties up capital and increases exposure to negative Black Swans too, as well as normal price erosion.

Types of stocks that might be more prone to positive Black Swans -
oil explorers / drillers
software developers
TV programme developers
biotech research labs
small caps in sectors which are in a consolidation process (M&A)
tiny firms competing for contracts with major governments or large cap commercial customers

There may be others too but I don't really follow shares these days.
He's thinks that shorting is safer hence there are no black swans to the upside .

And yes for biotechs !
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