Efficient Trading

[SOCRATES]

Good effort Soc but....

A trader that loses 10% of his capital 5 times consecutively does not end up with 50% of his original capital. Similarly, a trader that gains 10% of his capital 5 times consecutively does not end up with 150% of his original capital ! You might try to turn your “basic arithmetic” into something slightly more advanced by studying the effects of compounding and exponential growth, including the base of natural logarithms.

This is not personal, I assure you.

Your reply is a prime example of what I mean by an inability to confront.

You seem not to have read my post correctly and in its entirety.

Now read it again, and let us see if the message lands this time round.

 

[Profitaker]

I agree capital preservation is vital. But you need to get a handle on the maths. Nothing personal you understand.

 

[SOCRATES]

You had an opportunity to contribute constructively.I suggest it’s because you cannot rather than will not. It makes no difference to me.

I am 100% certain that Charliechan will not mind me replying on his behalf and I am also 100% certain he will agree with the two things I am about to say to you.

1. You are under a misconception. The misconception you are under is that experienced battle hardened and proficient traders are here for your benefit and to explain to you their edges, which have been acquired over a long period of time at great personal cost and that in any event, would take so long for the OSMOSIS effect (thank you Jerry) tp take effect that the effort is not worth it, from any point of view whatsoever.


and


2. None of us have anything to prove to you for any reason.You ought to be grateful for what you are aready getting from us, which is already quite a lot. It is for you to understand it and benefit from it and not for us to benefit for you to benefit. We are not you and what is more are happy to be ourselves.


Now sit down and reflect upon these two statements.

 

[Profitaker]

Soc

I’m sure he (CC) wouldn’t mind you replying on his behalf either. In fact, since he couldn’t answer my question himself I’m sure he’d be rather relieved if you did it for him. That way he could pretend he knew the answer all along.

But you haven’t replied on his behalf, have you. You haven’t answered the question that he couldn’t, have you.

You’ve given your standard reply when pushed to the limits of your knowledge - namely that you will not reveal your “edge”. That you do not understand compounding and exponential growth is clearly demonstrated above by your crass attempt to highlight the importance of capital preservation. So I would suggest that any "edge" you claim is a fantasy of your own imagination and nothing more than that.

The misconception you’re under, actually one of many, is that anything you do or know, would be of any use to me, in what I do – trust me when I tell you it wouldn’t.

Now do us all a favour – re-read the title of this thread, and post up something relevant and worthy of discussion, or don’t post anything at all.

Thanks in advance.

 

[dbphoenix]

Good effort Soc but....

A trader that loses 10% of his capital 5 times consecutively does not end up with 50% of his original capital. Similarly, a trader that gains 10% of his capital 5 times consecutively does not end up with 150% of his original capital ! You might try to turn your “basic arithmetic” into something slightly more advanced by studying the effects of compounding and exponential growth, including the base of natural logarithms.

Actually, PT, the losses aren't consecutive, nor are the gains, at least the way Bertie puts it. In Bertie's example, each loss is followed by a recovery (if, on the other hand, he is simply not explaining it well, you are correct and his figures are wrong). I suggest that anyone who can take that kind of loss and follow it up by that stunning a recovery is probably not doing all that badly.

Magee explains all of this much better, of course, in his General Semantics of Wall Street.

 

[frugi]

Socrates has not mentioned in what order or number the losses and wins need to occur, merely the simple percentage gain on account required to get back to even after a certain percentage loss. This could be after 1 trade or 100. The fact is if one loses 50% of one's account then a 100% gain is required to restore it and this is a daunting task, especially for a novice. Of course this 100% gain could be a compounded return over 100 trades or done in one crazy gamble that pays off, but that is irrelevant.

All he is saying is that the more one loses compared to account size, the harder it becomes to get back to even. Hence he advises the use of tight stops so the novice who is likely to make a lot of mistakes keeps his account in, say, the 90-100% range while learning the ropes, as coming back from 90% is far, far easier than coming back from 50%. The novice who manages this will have the later luxury of considering compounding and exponential growth (which are interesting topics too) but at the start of his/her career preservation is a rather more important consideration.

 

[dbphoenix]

Socrates has not mentioned in what order or number the losses and wins need to occur, merely the simple percentage gain on account required to get back to even after a certain percentage loss. This could be after 1 trade or 100. The fact is if one loses 50% of one's account then a 100% gain is required to restore it and this is a daunting task, especially for a novice. Of course this 100% gain could be a compounded return over 100 trades or done in one crazy gamble that pays off, but that is irrelevant.

All he is saying is that the more one loses compared to account size, the harder it becomes to get back to even. Hence he advises the use of tight stops so the novice who is likely to make a lot of mistakes keeps his account in, say, the 85-100% range as coming back from 85% is far, far easier than coming back from 50%.

If you like math games, yes. But this form of "lying" with percentages is not much different than "lying" with statistics or graphic displays (as with line or bar charts).

If one has $100 and loses 10% of that, he ends up with $90. He's lost $10. In order to get back to $100, he has to earn/find/steal $10. $10=$10. Can you prove that it is more difficult to gain $10 than it is to lose $10?

 

[Splitlink]

I agree capital preservation is vital. But you need to get a handle on the maths. Nothing personal you understand.

What I think is meant is that say, i.e., you start off with 100 points to play with, each trade is opened with a ten point risk. In my reckoning five losing trades means that 50 points have been lost. That is 50%, right? If you end up with less than 50 points, then you have gone over your 10% loss per trade, somewhere. It doesn't take rocket science to work that out.

Efficient trading is working like that.

If you can't work with 10% then work out whether what you are doing will allow you to get your money back with whatever percentage that you decide to lose and reduce your trading size so that you do not run out of money before the experiment, or system, has run its planned course.

When I started I split my allotted trading into ten parts and, after backtesting, used a tenth part
per system so that I had money left to try something else if I failed- which I did, several times.

If you don't do that, then what else is there once the capital has gone?

I trade FTSE stocks and found that with practice, I was usually out of bad trades before I lost 10%, but indices are a different animal and, perhaps, are more risky.

Split

 

[superfly]

Experience

If one has $100 and loses 10% of that, he ends up with $90. He's lost $10. In order to get back to $100, he has to earn/find/steal $10. $10=$10. Can you prove that it is more difficult to gain $10 than it is to lose $10?

Yes I like math games
If one has $100 and loses 80% of that, he ends up with $20. He's lost $80. In order to get back to $100, he has to earn/find/steal $80. $80=$80. With only $20 starting-capital.

 

[jimbo57]

Socrates has not mentioned in what order or number the losses and wins need to occur, merely the simple percentage gain on account required to get back to even after a certain percentage loss. This could be after 1 trade or 100. The fact is if one loses 50% of one's account then a 100% gain is required to restore it and this is a daunting task, especially for a novice. Of course this 100% gain could be a compounded return over 100 trades or done in one crazy gamble that pays off, but that is irrelevant.

All he is saying is that the more one loses compared to account size, the harder it becomes to get back to even. Hence he advises the use of tight stops so the novice who is likely to make a lot of mistakes keeps his account in, say, the 90-100% range while learning the ropes, as coming back from 90% is far, far easier than coming back from 50%. The novice who manages this will have the later luxury of considering compounding and exponential growth (which are interesting topics too) but at the start of his/her career preservation is a rather more important consideration.

As ever frugi a great exposition of what Socs says, funny old world eh?

The point is that socs chose to talk %s so everything PF has said is factually correct and unarguable. Further, and I suspect because socs is unfounded in maths to any extent, he chose to dismiss at the end of his piece the maths of it in any case - nice get-out clause.

It comes back to volatility and understanding the same.

Which is more volatile, a market that daily trades a 100 point range and finished unchanged every day, or a market that trades a 100 point range daily, and closes up 10 ticks every day? And which is easier to trade.

Don't get sucked into re-inventing the wheel.

 

[jimbo57]

and on that subject- why endlessly push someone else's chariot around - he'a got his own horses.

I use the analogy, temporally at least, deliberately!

 

[superfly]

Thesis

And while where at it, adequate tight stops are useless on a stand alone basis.
They have to be seen in relationship with superior timing.

 

[frugi]

Is it harder to make $10 from $90 than $10 from $100?
To make the example extreme, is it harder to make $10 from $10 than from $1000?

Common sense says yes, but it's difficult to prove, I grant you db. I shall go to the gym and break the extreme tedium of the treadmill by pondering it. Still, there are other considerations.

If the trader continues to use the same position sizing regardless of his capital then his risk of ruin increases as his capital decreases until such a point when the risk of ruin is inevitable. Thus a drop from $100 to $90 will make finding that $10 that bit more risky than it was.

If he reduces risk commensurately (and thus potential reward) to take account of the lower capital base then he will take longer to make the $10, which is a time cost.

 

[dbphoenix]

And while where at it, adequate tight stops are useless on a stand alone basis.
They have to be seen in relationship with superior timing.

You're too fast for me (I was going to respond to this when it was part of your previous post)

But, yes, the percentage example has been used for decades and makes no sense at all. The ease with which one gains or loses depends in large part on the market and sector themselves, though the list of pertinent factors is considerably longer.

Most anyone who's ever tried winning via tight stops in and of themselves has a deeper-than-usual appreciation of what is meant by "death by a thousand cuts". If one has a thoroughly-tested and consistently profitable strategy, he might and probably can get away with tight stops that would make most traders blanch. Otherwise, he may as well convert his trading capital to $100 bills (or the equivalent in euros) and set them on fire, one by one.

 

[dbphoenix]

Is it harder to make $10 from $90 than $10 from $100?
To make the example extreme, is it harder to make $10 from $10 than from $1000?

Common sense says yes, but it's difficult to prove, I grant you db. I shall go to the gym and break the extreme tedium of the treadmill by pondering it. Still, there are other considerations.

If the trader continues to use the same position sizing regardless of his capital then his risk of ruin increases as his capital decreases until such a point when the risk of ruin is inevitable. Thus a drop from $100 to $90 will make finding that $10 that bit more risky than it was.

If he reduces risk commensurately (and thus potential reward) to take account of the lower capital base then he will take longer to make the $10, which is a time cost.

You're adding a number of qualifiers here, which in and of itself is a plus. But none of it has anything to do with whether it is easier to make ten dollars or lose ten dollars, other than to emphasize the fact that "it depends".

Tight stops are not a quick fix. There is a great deal of work that must be done before tight stops are a practical reality.

 

[zupcon]

Hi DB

I dont think anyone ever suggested that using tight stops was a quick fix.

Soc's is arguing that new traders, due to lack of experience will, on average generally lose more trades than they win, REGARDLESS of the size of stop they employ, and Im sure that we'd all agree with that. If theyre going to lose anyway theyre better off losing smaller amounts whilst gaining much needed experience.

For most of us losing 80% of our starting capital would have a devastaing effect on our phychology, and consequentially on trading performance.

Personally Id argue that new traders should be demo trading, or trading extremely small amounts in order to get the experience, and THEN work on the psychological aspects and problems that live trading brings as a seperate problem.

The answer to your question is of course that its equally as easy to make or lose $10. For anyone who doubts this, open a demo account, and take trades randomly based on the toss of a coin, with a variet of risk reward ratio's. Do if for a couple of years and see the result, you'll break even minus transaction charges !

regards
mick

 

[dbphoenix]

Hi DB

I dont think anyone ever suggested that using tight stops was a quick fix.

Soc's is arguing that new traders, due to lack of experience will, on average generally lose more trades than they win, REGARDLESS of the size of stop they employ, and Im sure that we'd all agree with that. If theyre going to lose anyway theyre better off losing smaller amounts whilst gaining much needed experience.

For most of us losing 80% of our starting capital would have a devastaing effect on our phychology, and consequentially on trading performance.

Personally Id argue that new traders should be demo trading, or trading extremely small amounts in order to get the experience, and THEN work on the psychological aspects and problems that live trading brings as a seperate problem.

The answer to your question is of course that its equally as easy to make or lose $10. For anyone who doubts this, open a demo account, and take trades randomly based on the toss of a coin, with a variet of risk reward ratio's. Do if for a couple of years and see the result, you'll break even minus transaction charges !

regards
mick

Those who've read my posts for a while know that I'd back up before the demo trading and the trading small lots and first develop a consistently profitable strategy via backtesting, forward-testing, and paper-trading in real time, THEN demo the trades if the platform is still unfamiliar and then begin trading for real with small lots.

But that takes us back to the same old argument over free-wheeling it vs testing and preparation.

As for losing more than one wins, the win:loss ratio is largely irrelevant. What matters more, generally, is the profit:loss ratio, but I say "generally" because beginning traders are better able to handle the trades if the winning trades outnumber the losing. They can't know what to expect, of course, without the abovementioned strategy development.

Bottom line, though, is that if one truly wants to trade efficiently, focus on the entry, not on the stop. If the entry's right, the tightness (or width) of the stop -- other than a catastrophe stop -- is immaterial.

 

[turtle trader]

Good effort Soc but....

A trader that loses 10% of his capital 5 times consecutively does not end up with 50% of his original capital. Similarly, a trader that gains 10% of his capital 5 times consecutively does not end up with 150% of his original capital ! You might try to turn your “basic arithmetic” into something slightly more advanced by studying the effects of compounding and exponential growth, including the base of natural logarithms.

For heavens sake will you lot stop bickering! Why is everyone caught in arguments over %ages & $ amounts and basic maths when the principle is clear:

Larger losses make larger dents in your account than smaller losses & are consequently harder to recover from. They leave you less to deal with so that to regain your original account balance you have to achieve proportionately larger wins, and they are harder to deal with psychologically. Surely that isn't so contentious that it requires several pages of squabbling before we can move on to looking at how we can possibly reduce those losses!

Whilst it is perfectly valid to suggest that tighter stops can reduce system performance & consequently lead to 'death by a thousand cuts', surely it is still desireable to reduce your required stop size as far as possible and it would be worth exploring any way of achieving this?

If anyone feels the need to attack me over this then please do so privately so that this potentially interesting thread doesn't get derailed even further.

Having said that, i'm now off for a few days, I just hope that when I get back there aren't 10 pages of sniping to get through before I find anything interesting.

Happy Easter

 

[dbphoenix]

For heavens sake will you lot stop bickering! Why is everyone caught in arguments over %ages & $ amounts and basic maths when the principle is clear:

Larger losses make larger dents in your account than smaller losses & are consequently harder to recover from. They leave you less to deal with so that to regain your original account balance you have to achieve proportionately larger wins, and they are harder to deal with psychologically. Surely that isn't so contentious that it requires several pages of squabbling before we can move on to looking at how we can possibly reduce those losses!

Whilst it is perfectly valid to suggest that tighter stops can reduce system performance & consequently lead to 'death by a thousand cuts', surely it is still desireable to reduce your required stop size as far as possible and it would be worth exploring any way of achieving this?

I suppose "everyone" is "arguing" about it because the principle is not quite as clear as you claim. You say, for example, that large losses reduce your equity more than small ones, or words to that effect, and this is true. But you go on to say that large losses are more difficult to recover from, and this is true only within the context of how one "feels" about the losses. There is no "consequently" here.

You say further that to regain your original account balance, you have to "achieve proportionately larger wins", but this is the case only if one is trading by percentages.

As far as reducing the "required stop size as far as possible", that may have a psychological benefit, but it has nothing to do with the probability of a successful trade, and may actually reduce that probability by increasing the chances of the stop being hit. Again, there's more to it than simply reducing the size of the stop.

 

[SOCRATES]

Hi DB

I dont think anyone ever suggested that using tight stops was a quick fix.

Soc's is arguing that new traders, due to lack of experience will, on average generally lose more trades than they win, REGARDLESS of the size of stop they employ, and Im sure that we'd all agree with that. If theyre going to lose anyway theyre better off losing smaller amounts whilst gaining much needed experience.

For most of us losing 80% of our starting capital would have a devastaing effect on our phychology, and consequentially on trading performance.

Personally Id argue that new traders should be demo trading, or trading extremely small amounts in order to get the experience, and THEN work on the psychological aspects and problems that live trading brings as a seperate problem.

The answer to your question is of course that its equally as easy to make or lose $10. For anyone who doubts this, open a demo account, and take trades randomly based on the toss of a coin, with a variet of risk reward ratio's. Do if for a couple of years and see the result, you'll break even minus transaction charges !

regards
mick

May I comment ? It happens that you have included a key idea that is worth expanding on.