50% double reward strategy

This is a discussion on 50% double reward strategy within the Trading Journals forums, part of the Reception category; Originally Posted by zupcon It wont work Open up a 1 minute chart of anything your interested in trading and ...

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Old Nov 3, 2008, 6:26pm   #11
 
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Originally Posted by zupcon View Post
It wont work

Open up a 1 minute chart of anything your interested in trading and take a bunch of demo trades over the next few weeks, perhaps opening trades every hour or so, and letting them run for a couple of hours. Dont set stops, and dont set targets Once you have a few hundred trades, calculate the profit / loss for each trade on the close of each bar.

Roughly speaking you'll find a 50% win rate, and 80% of the trades just sort of meander between positive and negative territory either resulting in a small win, or small loss. 10% of the trades will result in large gains where you where lucky enought to catch a trend, and 10% will be large losing trades, where the trend went against you.

Thats the benchmark that a complete moron with absolutely no trading experience should be able to achieve, pretty much break even minus transaction costs +/- a degree of "noise" (and I'll quite happily bet my shirt most reading this wont be able to beat that )

The next step is repeating the experiment, but specifying targets and stops to give you a variety of reward to risk scenarios. What you'll find is that the 1:1 reward:risk ratios will result in pretty much the same outcome, a 50/50 win loss and break even minus transaction costs.

If you half the risk, (or double the reward), your win rate will simply decrease, although you should achieve pretty much the same break even scenario.

if you double the risk, or half the reward, your win rate will increase, but you'll end up with the same break even - transaction cost scenario.

Before anyone starts claiming the 1 minute timeframe is noise, you'll get the same outcome on any timeframe you care to try this on.

This is as good a starting point for developing a trading strategy as you are likely to get, and it allows you to start asking questions such as can you limit losses ? can you let winners run ?, can you perhaps time the entry ?, does timing the entry actually result in smaller stops for winning trades ?, whats a suitable size for a stop ?, are trades taken with the trend more successful than those taken against the trend ? (and what is a trend, and how do you measure it), do indicators help ?, do candle patterns help ?, whats happening in other timeframes ?, are the number of consecutive gains or losses effected by your strategy ?, what elements of TA are useful ? support / resistance ?, do fibs work ? are oscillators useful ?, does divergence work ?, can you optimise a staking plan or money management strategy ?

The only way you'll ever know if you have an edge is to measure the distribution of gains and losses from your edge against the distribution from a random sample.

Ironically by the time you've spent a couple of years staring at charts to answer these sorts of questions, you'll have gained enough exposure and screen time to develop an instinctive feel for price action, and formulated the other 1001 questions that need to be considered.

Great points and very right.

I wonder if using a very simple strategy following a trend (for instance, following a simple moving average) would provide a great enough edge to allow the %win rate to become 50? I suppose the answer to that depends on the strength and longevity of the trend. In a strong & long trend prices will move much more and hence one is much more likely to have many winning trades in a row. (and factoring in a trailing stop loss would help too).

I understand totally all your are saying. I have traded for a few years and have never been able to find the right balance between risk:reward, and have had strategies that are 80% correct yet have a higher risk value.

Are we all really just playing a zero-sum game?! Does it really matter what the risk:reward is as long as it is relative to the % winning rate of the strategy? I believe it is not zero-sum, as a simple strategy with say a 60% winning rate can be perfectly capable of producing a 1:1.5 risk:reward ratio or more.

I'm thinking... that following a support/resistance line strategy, can provide low risk entries, hence have a lower risk, and potentially keep the same reward as the trade i would have entered with a 1:2 ratio. My preference is to trade for a ratio of 1:4 with a win rate of 40% or more. I am uncomfortable with losing half as much as my potential win for this strategy- i feel it is way too much and would usually know very quickly if my trade was wrong.

Anyway, the experiment continues... most likely going to be based on a simple moving average- hmm, sounds crazier the more i think about it. I would love to do this experiment with Support/Resistance lines but i would never have a 1:2 ratio for this kind of trade.

Well i'm confusing myself now and my head hurts..
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Old Nov 4, 2008, 7:33am   #12
 
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Lord Flasheart started this thread Im sure theres people on here who will be able to back test that for you. not me however
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Old Nov 4, 2008, 12:24pm   #13
 
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Originally Posted by UKtradergirl View Post
Great points and very right.

I wonder if using a very simple strategy following a trend (for instance, following a simple moving average) would provide a great enough edge to allow the %win rate to become 50? I suppose the answer to that depends on the strength and longevity of the trend. In a strong & long trend prices will move much more and hence one is much more likely to have many winning trades in a row. (and factoring in a trailing stop loss would help too).

I understand totally all your are saying. I have traded for a few years and have never been able to find the right balance between risk:reward, and have had strategies that are 80% correct yet have a higher risk value.

Are we all really just playing a zero-sum game?! Does it really matter what the risk:reward is as long as it is relative to the % winning rate of the strategy? I believe it is not zero-sum, as a simple strategy with say a 60% winning rate can be perfectly capable of producing a 1:1.5 risk:reward ratio or more.

I'm thinking... that following a support/resistance line strategy, can provide low risk entries, hence have a lower risk, and potentially keep the same reward as the trade i would have entered with a 1:2 ratio. My preference is to trade for a ratio of 1:4 with a win rate of 40% or more. I am uncomfortable with losing half as much as my potential win for this strategy- i feel it is way too much and would usually know very quickly if my trade was wrong.

Anyway, the experiment continues... most likely going to be based on a simple moving average- hmm, sounds crazier the more i think about it. I would love to do this experiment with Support/Resistance lines but i would never have a 1:2 ratio for this kind of trade.

Well i'm confusing myself now and my head hurts..
Hi there

The road to making consistent returns is a long one (for me it was) and I see the point you have reached. This stage is where the trader tries to achieve intellectual control over trading decisions by finding a set of criteria that yields an edge.

In my experience there will be no purely intellectual edge that lasts long enough to give
consistent results - even though often the process of optimization and curve fitting can make it seem possible.

Why is this?

Because firstly we are dealing with a market driven by subjective human emotions. Secondly there are too many factors/variables which change on a daily basis (known and unknown) for us to possibly quantify as if X and Y do this then do Z. A little like the billiard ball analogy.

If you hit a billiard ball hard enough that it will bounce 56 times, in order to accurately predict the position of the ball at the 56th bounce you would need to know the position of every single elementary particle in the universe. An electron 10 billion light years away would effect the ball sufficient to put your calculations off significantly. And that doesn’t even involve free will.

OK given all of this then how do the so called 10% make it? First of all on a purely Darwinian basis they have learnt to survive by preserving their accounts and cutting losses quickly.

Also, maybe there is a curious reversal going on.

I believe success in trading (more so day trading) is the ability to feel the market with the intellect and analyse it with the emotions.

Think with emotions, feel with intellect!?

Example, has anybody noticed the below;

Quite often the best trade entry feels the most painful and the the worst trade entry feels comfortable.

Pain is caused by the direct conflict between logic and emotions. Logic doesn't 'feel.' Therefore if the emotions are hurting it may be fair to assume the logic is correct?

Perhaps this is the process of intuition that successful traders have. A trader's intuition may be a secret arithmetic of the soul unknowing of the fact that it is counting.
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Old Nov 4, 2008, 1:00pm   #14
 
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Originally Posted by rols View Post
Hi there

The road to making consistent returns is a long one (for me it was) and I see the point you have reached. This stage is where the trader tries to achieve intellectual control over trading decisions by finding a set of criteria that yields an edge.

In my experience there will be no purely intellectual edge that lasts long enough to give
consistent results - even though often the process of optimization and curve fitting can make it seem possible.

Why is this?

Because firstly we are dealing with a market driven by subjective human emotions. Secondly there are too many factors/variables which change on a daily basis (known and unknown) for us to possibly quantify as if X and Y do this then do Z. A little like the billiard ball analogy.

If you hit a billiard ball hard enough that it will bounce 56 times, in order to accurately predict the position of the ball at the 56th bounce you would need to know the position of every single elementary particle in the universe. An electron 10 billion light years away would effect the ball sufficient to put your calculations off significantly. And that doesn’t even involve free will.

OK given all of this then how do the so called 10% make it? First of all on a purely Darwinian basis they have learnt to survive by preserving their accounts and cutting losses quickly.

Also, maybe there is a curious reversal going on.

I believe success in trading (more so day trading) is the ability to feel the market with the intellect and analyse it with the emotions.

Think with emotions, feel with intellect!?

Example, has anybody noticed the below;

Quite often the best trade entry feels the most painful and the the worst trade entry feels comfortable.

Pain is caused by the direct conflict between logic and emotions. Logic doesn't 'feel.' Therefore if the emotions are hurting it may be fair to assume the logic is correct?

Perhaps this is the process of intuition that successful traders have. A trader's intuition may be a secret arithmetic of the soul unknowing of the fact that it is counting.
An excellent post

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Old Nov 4, 2008, 4:18pm   #15
 
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Great posts thanks.

But why do people keep saying it's as simple as having the right reward:risk ratio and the right % winning rate? I keep thinking i'm stupid and just not getting the point of it all- comments like this all over the place makes one take a step back from trading and think "why am i working so hard at making it so complicated?"

No matter how much everyone goes on about making trading 'simple' i don't think it can be defined in a set of strict rules. What was said previously regarding emotions and trading makes a lot of sense- i know when i have entered my most profitable trades i have been my most afraid.

Incidentally, if you had been stupid enough to follow my strategy you would have lost 40 pips today. Be grateful- i could have come up with a strategy that was both silly AND didn't have any stops at all. (in which case you'd be screaming with rage and plotting to murder me).
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Old Nov 4, 2008, 6:07pm   #16
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Great posts here, I agree.

First, let me reiterate that my thread with the on average 50% win rate and 1:2 risk:reward was intended as one example of how a simple expectancy system can make outstanding returns, no more, no less.

My intent was merely to show that to earn outstanding money you do not need a 90% win rate, nor 5:1 risk:rewards, that you can fall far short of those lofty albeit non-success relevant ambitions and yet make excellent and above all compoundable money on a risk adjusted net basis, and the latter is all trading is about.

You could in fact just as easily go on to make outstanding money with a trend following system that is right on average no more than 33% of the time, but with risk:rewards of 1:3 you will still have an excellent and compoundable money printer.

What needs to be seen is that these examples are just averages, meaning the latter system for example will not exit all profitable trades with 3 R's, in many cases you will take profits earlier, in some cases you will have far far larger profits, and it is only over hundreds of trades that you will on average end up with such stats of profits being 3 R's.

And that is what I mean when I say trading is simple, just think of the Turtles very elementary system that still works to this day, so coming up with a simple system is absolutely not the difficulty, what is difficult is the actual trading of a low hit rate Turtle type trend system, taking small loss after small loss after small loss without throwing the towel in, while waiting for the few mega trends to surface that will much more than make up for all your prior losses.

That's where trading is most definitely simple enough, but equally definitely not always easy.

But we aren't here to feel comfortable, we are here to earn money, and a simple trend following strategy was all it took to have turned Richard Dennis's 400 dollars into hundreds of millions, and many many hedge funds - including algo funds - today still trade simple longer term trend and shorter term momentum strategies, those two strategies are among some of the best and most net lucrative of them all.

Doesn't matter if you only trade price or with indicators or with fundamentals or with algo's, basically all you can do in trading is buy low and sell high, ie either try and catch reversals or wait for pullbacks, OR buy high and sell higher, eg buying breakouts.

Those two are the only possibilities to make money trading outrights, and that is what I mean when I say that trading shouldn't be made more complicated than it is. (Thats excluding certain options stuff where you can also bank on markets doing nada etc ).

There are so many examples on this board of great and robust stuff that works and that is simple, eg Dan and his moving averages and CCI, Grey and his CCI, trader Dante and his pinbars at certain levels, Captain Currency and his age old system of MA's, newtron bomb and his range breakouts with pullbacks, wasp and his trend lines, BBMAC has just posted a comprehensive system that sound like it mnakes lots of sense, etc etc.

People still lose money at trading and overcomplicate it because they can't believe how simple is best, because they run their losses and cut their winners short, because they want excitement not profits, and because they cannot handle losing as the mere cost of doing business that it is.

All that is needed is accepting that all one requires is a good, simple and robust system attuned to the cycles and waves in which markets always have and always will move, accept that everything goes through good and not so good patches and trade it through them accordingly with no loss of discipline or desire for revenge that only harms ones own brokerage account and nobody else, and not go looking for the next holy grail after the first string of 3 or 4 successive losses, eternally switching from method to method, and inevitably always at the worst time.

That at least is my take.

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Old Nov 4, 2008, 6:35pm   #17
 
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Another good post! In a nutshell, it boils down to psychology and sticking to the plan.
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Old Nov 4, 2008, 7:01pm   #18
 
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Originally Posted by BSD View Post
just think of the Turtles very elementary system that still works to this day, so coming up with a simple system is absolutely not the difficulty, what is difficult is the actual trading of a low hit rate Turtle type trend system, taking small loss after small loss after small loss without throwing the towel in, while waiting for the few mega trends to surface that will much more than make up for all your prior losses.


BSD

The above post is one of the best post I have seen on this BB for years . Can I suggest that all traders read BSD's post few times as there is a lot of wisdom in every single word

Well done

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Old Nov 5, 2008, 10:34am   #19
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Muchas gracias

One thing I really wanted to say that is great about this board is that here we have some people actually WALKING THE WALK, real traders making a great living from TRADING ITSELF, and NOT from selling courses or whatnots ABOUT trading.

And Grey is just one such Market Wizard of our very own here who from time to time trades in front of others explaining exactly what and why he does what he does, FOR FREE because he makes his money from TRADING, live and in real time and with absolute honesty where others actually record their own entries and exits as measure of the overall trading day success, printing money every single time he does that for himself and those who are trading with him at the time !!!

Hat of and absolute respect for that, not only for your very obvious success, but also your willingness to share your very profitable method with others.

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