50% double reward strategy

This is a discussion on 50% double reward strategy within the Trading Journals forums, part of the Reception category; The bottom line is, you still have to know which direction the market is moving. If your on the wrong ...

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Old Nov 3, 2008, 4:49pm   #8
 
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The bottom line is, you still have to know which direction the market is moving. If your on the wrong side, there's nothing you can do right.
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Old Nov 3, 2008, 4:58pm   #9
 
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Originally Posted by Depth Trade View Post
The bottom line is, you still have to know which direction the market is moving. If your on the wrong side, there's nothing you can do right.
Surely there's loads of things you can do dependant on methodology

a) sit like a rabbit caught in the headlights and panic, not recomended, but its an option
b) close the trade and take the loss
c) cost average and start building a potentially longer term position

you either have a plan, or you dont, I'd argue that is far more important than market direction
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Old Nov 3, 2008, 5:16pm   #10
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Originally Posted by zupcon View Post
Surely there's loads of things you can do dependant on methodology

a) sit like a rabbit caught in the headlights and panic, not recomended, but its an option
b) close the trade and take the loss
c) cost average and start building a potentially longer term position

you either have a plan, or you dont, I'd argue that is far more important than market direction
I agree you should have a plan , But should your plan not also include market direction
I know Mine does!
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Old Nov 3, 2008, 5:26pm   #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, 6:33am   #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, 11:24am   #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, 12:00pm   #14
 
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Quote:
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

grey1
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