50% double reward strategy

This is a discussion on 50% double reward strategy within the Trading Journals forums, part of the Reception category; It clearly wont work in the way you currently have it written down.If it did then we would all be ...

Reply
 
LinkBack Thread Tools Search this Thread
Old Nov 3, 2008, 2:53pm   #1
 
Lord Flasheart's Avatar
Joined Jan 2004
It clearly wont work in the way you currently have it written down.If it did then we would all be rich by now. Let me say first of all the market is not random. Heres some proof take one min volume spikes on the dow or russ2000 and if taken with trend they are well over 50%.Even without that volume moves the market so there is no randomness in time.The guy who wrote the book about randomness ends up saying that patterns are above 50%. The biggest problem you have with systems like that is the person who operates them. On paper you can build a system to work but it doesnt take into acccount our emotions which will always differ when we are trading at looking at charts in real time.What Zupcon says is right if you just took random trades you would end up with the Zero sum story before dealing costs.The biggest problem all new and many experienced traders have is that our brains are not acustomed to losing money which affects the way we operate any system. As a principle staking plans are very important,but I always ignore them if I see an opportunity that I feel is worth more.
Many many people have driven themselves mad looking for some Holy grail which includes a staking plan and R:R.Also the more indicators you add the closer and quicker you are to a zero sum game. At the end of the day I could sum up this post by saying that to succeed and get an edge you simply have to read the market and be above 50%.Oh and history repeats itself just like patterns
__________________
If you are serious about trading then you need to look at this link

http://www.youtube.com/watch?v=6CnAsdQiGzs
Lord Flasheart is offline   Reply With Quote
Thanks! The following members like this post: johnlvs2run
Old Nov 3, 2008, 3:42pm   #2
 
Lord Flasheart's Avatar
Joined Jan 2004
Lord Flasheart started this thread It clearly wont work in the way you currently have it written down.If it did then we would all be rich by now. Let me say first of all the market is not random. Heres some proof take one min volume spikes on the dow or russ2000 and if taken with trend they are well over 50%.Even without that volume moves the market so there is no randomness in time.The guy who wrote the book about randomness ends up saying that patterns are above 50%. The biggest problem you have with systems like that is the person who operates them. On paper you can build a system to work but it doesnt take into acccount our emotions which will always differ when we are trading at looking at charts in real time.What Zupcon says is right if you just took random trades you would end up with the Zero sum story before dealing costs.The biggest problem all new and many experienced traders have is that our brains are not acustomed to losing money which affects the way we operate any system. As a principle staking plans are very important,but I always ignore them if I see an opportunity that I feel is worth more.
Many many people have driven themselves mad looking for some Holy grail which includes a staking plan and R:R.Also the more indicators you add the closer and quicker you are to a zero sum game. At the end of the day I could sum up this post by saying that to succeed and get an edge you simply have to read the market and be above 50%.Oh and history repeats itself just like patterns
__________________
If you are serious about trading then you need to look at this link

http://www.youtube.com/watch?v=6CnAsdQiGzs
Lord Flasheart is offline   Reply With Quote
Old Nov 3, 2008, 3:46pm   #3
 
UKtradergirl's Avatar
Joined Oct 2008
Oh well, after debating different ways of doing this i will just give up and do something stupidly simple.

At 9am every morning, i will enter a trade on the FTSE100. I will only exit at either a 40 point loss or a 80 point gain. I use a 50 day simple moving average (don't ask why there is no reason). If the average is going up i buy, if it's going down i sell. The trade holds until either -40 or +80 is hit.

Assuming a starting account of £500 and trading at £1/point.

I will record the results here, good, bad and ugly.

Please don't actually trade this with real money people. Much better to bankrupt a demo account- will be satisfying knowing how much you have saved .


---

note: i don't actually trade this on my real-life account!
UKtradergirl is offline   Reply With Quote
Old Nov 3, 2008, 4:18pm   #4
 
£10kLoser's Avatar
Joined May 2008
One of the pitfalls with trading is to fall into a state where we are forever looking for a smart solution. Wasted months and years can go by looking for the 'right' system instead of learning to trade what you have. It can be a convenient excuse for not actually making a profit. Been there, done it. For years...


How come posts are jumpimg up to the begining? I posted this well down on the next page.
£10kLoser is offline Trading system vendor   Reply With Quote
Thanks! The following members like this post: johnlvs2run
Old Nov 3, 2008, 4:50pm   #5
 
UKtradergirl's Avatar
Joined Oct 2008
50% double reward strategy

There has been a lot of discussion on here of the possibilities and (supposed) easiness of being able to make money by doing the following:

1. Having a winning ratio of 50%
2. Having a reward twice that of the risk (Risk: reward ratio of 1:2)

Hence what follows will be a test of the above to see if it is possible.

Some possible problems:

1. A 50% winning ratio sounds good, but just as with flipping a coin, it is possible to 'lose' 20 times in a row, 30 times, or even more. A run such as this could have serious impact on the strategy and render it bankrupt.
2. How do you decide a simple 50% winning strategy for the purposes of this system. If you believe the markets are random then perhaps you can just decide to go long on every trade (or short).
3. We need to define an exact set of rules and stick to them without deviation (easier said than done).
4. By attempting to gain twice as much reward as we have risk, are we not reducing our chances of having a successful trade? Therefore, assuming that the markets are random, we actually reduce our 50% win ratio. In a truly random market i believe that 50% ratio could only be acheived by having a 1:1 risk:reward. (please note i'm not saying the markets really are random, i'm just simplifying for the purposes of this thread).

These points are just touching the tip of the iceberg of problems. I don't believe it is possible to conduct a totally correct, 'scientific' style test of the strategy rules.

Hence, i have taken a view and just chosen a very basic method of determining the general direction of the market at the time of placing a trade. Make of it what you will, add your own theories and current strategies into the idea if you wish to give it a go.

Please feel free to comment/abuse/shout/praise/hug me as you see fit I will post more on the strategy specifics i have decided soon.

p.s. just wanted to add that i'm not overly enthusiastic about this. i wouldn't want to inspire enthusiasm into unsuspecting newbies here... the reality is that i'm thinking this will fail.
UKtradergirl is offline   Reply With Quote
Old Nov 3, 2008, 5:36pm   #6
 
zupcon's Avatar
Joined Nov 2004
Quote:
Originally Posted by UKtradergirl View Post
There has been a lot of discussion on here of the possibilities and (supposed) easiness of being able to make money by doing the following:

1. Having a winning ratio of 50%
2. Having a reward twice that of the risk (Risk: reward ratio of 1:2)
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.
zupcon is offline   Reply With Quote
Old Nov 3, 2008, 5:38pm   #7
 
foredog's Avatar
Joined Oct 2007
A good example of a simple risk reward strategy is on this blog (Infiniteyield Forex)

The trader here is doing an experimant through this blog trying to turn $500 o $150k in 10 years, he's up over 200% already.

He's tweaked the concept slightly but all he was doing before was placing a OCO order in 5 different currency pairs a buy and sell stop 60 pips from the open at 7am Monday with a stop 110 points away, risking 1% of capital per trade and either exiting on Friday afternoon or getting stopped out

and


Placing an order to Buy/sell on Friday at the high of the previous 4 days (i think) and exiting monday morning.

Not complicated but look at the return......

an interesting read if nothing else
__________________
IF IN DOUBT GET THE **** OUT!

No need for a course http://www.trade2win.com/boards/gene...tml#post707344

Simple cable system http://simpledibs.blogspot.com/ http://www.trade2win.com/boards/trad...side-bars.html
foredog is offline   Reply With Quote
Old Nov 3, 2008, 5:49pm   #8
 
Depth Trade's Avatar
Joined Sep 2005
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.
__________________
"So what else is on your mind, besides 100-proof women, 90-proof whiskey, and 14-carat gold?"
-Lee Marvin/The Professionals
Depth Trade is offline Newsletter / tip sheet / trading advice vendor   Reply With Quote
Thanks! The following members like this post: gamma
Old Nov 3, 2008, 5:58pm   #9
 
zupcon's Avatar
Joined Nov 2004
Quote:
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
zupcon is offline   Reply With Quote
Old Nov 3, 2008, 6:16pm   #10
Joined Aug 2003
Quote:
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!
gamma is offline   Reply With Quote
Old Nov 3, 2008, 6:26pm   #11
 
UKtradergirl's Avatar
Joined Oct 2008
Quote:
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..
UKtradergirl is offline   Reply With Quote
Old Nov 4, 2008, 7:33am   #12
 
Lord Flasheart's Avatar
Joined Jan 2004
Lord Flasheart started this thread Im sure theres people on here who will be able to back test that for you. not me however
__________________
If you are serious about trading then you need to look at this link

http://www.youtube.com/watch?v=6CnAsdQiGzs
Lord Flasheart is offline   Reply With Quote
Old Nov 4, 2008, 12:24pm   #13
 
rols's Avatar
Joined Sep 2004
Quote:
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.
rols is offline   Reply With Quote
Thanks! The following members like this post: trendie , Grey1 , rawrschach , UKtradergirl , BSD , bizmanny , foredog
Old Nov 4, 2008, 1:00pm   #14
 
Grey1's Avatar
Joined Jun 2002
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
Grey1 is offline Commercial chat room   Reply With Quote
Old Nov 4, 2008, 4:18pm   #15
 
UKtradergirl's Avatar
Joined Oct 2008
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).
UKtradergirl is offline   Reply With Quote
Reply

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Similar Threads
Thread Thread Starter Forum Replies Last Post
A variation on the double top/double bottom n6394p Technical Analysis 2 Sep 4, 2007 10:35am
Patterns eg. Double Top / Double Bottom cshieldsx Technical Analysis 7 Aug 8, 2007 8:46am
Double or Zero clylbw The Foyer 23 Apr 13, 2004 5:26pm
FTSE double top? esiotrot Technical Analysis 3 Mar 29, 2001 10:21am
Risk & Reward Cigar Psychology, Risk & Money Management 4 Jan 7, 2001 8:22pm

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)