Money Management: Scaling Strat

[trendie]

OK. You have a system. It seems to work.
You have quantified your system. Its consistent.

Next step is scaling up.
I dont get this increasing each trade by a small fraction, ie, by a fraction of a £pound per pip. It looks great on a spreadsheet, but realistically, you may decide to only increase trade size by a full £pound per pip.

So, whats wrong with the following thought process?!

Starting account: £1,500. (arbitrary value)

You trade £1 a pip until you nett 600 pips overall. (that is, your account size has to grow to £2,100).
NB: You are risking 20-30 pips per trade. Lets say 30. You are risking 2% account size per trade.

If you achieve your 600 pips, you now increase your trade size to £2 a pip, and go for another 600 pips. (ie, to get a nett increase of 600 pips, £1,200).

If you are risking 30 pips per trade, and your account has grown by £600, you can tolerate 20 consecutive losses before you fall back to your initial £1 a pip.

So, in general terms, increase the amounts per traded per pip by £1 for every 600 pips netted.
This allows you the tolerance of around 15 consectuive losses before having to drop your trade size by £1 a pip.

(for example, if you were trading £5 a pip, you would have to make £3,000 (600 pips x £5) before you moved up to £6 a pip. If you are now trading £6 a pip, this allows you over 15 consecutive losses (30 pips risk x £6 x 15 = £,2700) before having to give up your gains from £5 a pip, and having to return to trading at £5 a pip.)

I believe this to be conservative, allowing you the room to trade well before building up to the next level, and then, allowing you time to build up the next level before having to fall back to previous level, so no yo-yo-ing between levels. This should allow you to ride through market cycles without getting spooked.

Whats wrong this thought process?

 

[Hotch]

Surely what's wrong is that you're not risking a consistent percentage of your account.

I could understand £1 pip for 1500pips, then £2 or another 1500, continually risking 2%.

Aren't you just going to be upping risk every 600 points?

 

[jiggly]

whats wrong with this process? answer : there is nothing wrong with it, at the end of the day it all boils down to risk and how you employ your capital. it is a function of your tolerence and how you go about managing your business.

but something to consider :

you have a nominal account balance of £1500, you risk 1-2% of it per trade = £30 at most.
depending on how you trade, if you are taking trades in isolation, i.e only having 1 open position at a time. you have a lot of unproductive resource = inefficient business = not maximising your gains.

it is like saying that a fruit and veg trader has £1500 to buy stock for the next 2-3 days, and he just buys a box of apples for £30, once they are sold he will go back and buy more, or even buy oranges instead for the next 2-3 days, hopefully he will sell enough to offset against those that he didnt sell and that have perished to waste. he will make a small net profit, sometimes maybe not. but over time, because of his conservative approach to resource allocation, he will make money over time. but maybe not. he is only looking to preserve his capital, not maximise it to its full potential.

now lets take another example.

you have a high street retailer like boots. they have £100,000 to buy stock, they dont just buy tooth brush's, they have practically anything you need within home/health/comsmetics/etc. they have thousands of products and items to sell. although not perishable, many things are seasonal, and follow trends, others are consumables and fast moving. when you walk onto the shop floor, it is evident that they have a lot of working capital employed and a variety of items to maximise the likelyhood of selling something, and to make a net profit. they can also offset items which dont sell against the gains of items which do sell. they can then slashes prices and make sales to entice more consumers from their unproductive product lines and shift them. they will probably make a net profit once it has all been done. they stock back upto par, and repeat the process by keeping a running tab on their balance and stock control.

both examples are trading business's with different products, but both employ different money managament techniques and approaches to risk.

The point I am trying to make is, you should be aiming to get as much of your equity down as margin, spread over various trades and instruments as possible, this will maximise your gains without worrying too much about increasing your size per pip/tick per say.

you have £1500, you need to allocate all of that in margin over 10 trades say, the pip/tick value will deal with itself, otherwise you are just playing indirectly with leverage.

as it grows, you keep working that capital, you have more margin, always having 10 trades as you are only putting 10% of your available margin down at a time

if it shrinks you work the same principle, you just have less margin to allocate across 10 trades say.

this is how I approach trading, you need to get as much of it riding a trend as possible to maximise your gains. and to constantly have a pipeline of business. I would rather operate like a large retailer, to improve my odds and to maximise my gains by adding to positions and trading various markets.

decreasing margin is a function of poor decision making and probabilities, overall.

you have only got £1500, so you only have that amount to allocate as margin ultimately. leverage can be dangerous.

 

[shadowninja]

The thinking behind accounts is that you risk eg 1%. But why risk even that until you're consistently profiting? So, if you have £100k, why put £1k on each trade when you haven't got a clue? Risk £1 per trade (if you can't bare to demo), then when you have proved you can trade whatever the market conditions, ramp it up and risk £10... £20... £50... £100... The eagerness to earn big bucks will have you asking, "Would you like fries with that?" much sooner than you think.

 

[trendie]

Hotch: yes, I will be upping the risk, but it will be "paid for" from previous levels profit. If a string of losses do occur, the trade size will get scaled back.

jiggly: agree. there may well be multiple 2%er trades on hopefully non-correlated markets.

SN: I am looking for a more aggressive scaling method. Please take as read I have a nett positive system.

Is there a more advanced method of scaling up, other than the boring and tedious "percent of capital" method?

I mean, when we invest, we are offered "safe" and "aggressive" unit trust investments. If you have built up some profit, I am looking to trade more aggressively on a portion of profits. The larger, ordinary fund, can grow more sedately, but a smaller percentage can be traded aggressively, and I accept the equity-curve may well be spikey.

All I am looking at is perhaps a more exponential curve. Admittedly, when it falls, it will fall more sharply, but when it grows, it grows more sharply as well.
As long as the system is nett positive, it should have a tendency to go up more than down.
Thats why I went for 600 pips at 30 pip risk. It would have to have 15 or so consecutive losses before I drop just 1 level.

Come on guys, a more advanced MM method must surely exist?

Also, it wont be continuously additive. I would withdraw funds and scale back at start of each month, and it would be capped at some point.

The only reason I started this was the apparent absurdity of trading at £x.zz, where zz was a fraction of a £pound.
The granularity of increasing at £pound multiples seemed sensible.

 

[shadowninja]

Well, assuming you've identified a direction and you're not scalping, when you see another signal/opportunity to trade in the same direction, then add to the position. Because they're two separate signals, you could argue they are two different trades even though they're overlapping. Another way is to average down while your first trade is still not wrong (ie you haven't hit your stoploss yet), if you see an opportunity/signal to trade again in said direction. You set the stop at the previous stop's level so you risk less. It can work if you're paying close attention to what the market's doing.

 

[Hotch]

Hotch: yes, I will be upping the risk, but it will be "paid for" from previous levels profit. If a string of losses do occur, the trade size will get scaled back.

I made the assumption that the trading isn't improving over time, because then everything goes to hell anyway.

Risk is "paid for", and sure a string of losses and you'll go back, but it still seems bad to me. Assuming your trading doesn't change, then the amount you want to risk should stay the same. It might be more or less, but I see no reason to increase it/decrease it from the level you are comfortable at without there being a change in your trading.

Is the idea that the chance of you going below your original £1500 after you level up once is still low while increasing your bet size? Assuming you're not the perfect trader, you'll get to a point where your account doesn't increase, and possibly the level before that (or somewhere in between) is your Kelly. Could be interesting.

Imo, you should be risking an amount, and it shouldn't change because you have more money.

 

[jiggly]

I mean, when we invest, we are offered "safe" and "aggressive" unit trust investments. If you have built up some profit, I am looking to trade more aggressively on a portion of profits. The larger, ordinary fund, can grow more sedately, but a smaller percentage can be traded aggressively, and I accept the equity-curve may well be spikey.

then what you are proposing is one of the ways to go about it.

another alternative is to compound 50% of the profits from one trade into the risk of the next

basically you first risk £30 on a trade with a 1:2 risk/reward and come good, you now have increased your account by 4% (£60), you can then risk say 3%(£45) on the next trade, if it fails, you go back to risking 2% but your account is still up overall by the initial 1%(£15), and keep repeating the process. you can theoretically scale your lot size faster this way that scaling your lot size after an equity gain of say 50%, but obviously a quicker road to ruin as well. depends on your win loss ratio.

the most agrresive way is to compound 100% of the gain, i.e £60 along with your initial £30 risk, for a total risk of 6%, but you have to be 100% correct on every trade, otherwise 1 screw up and your back to where you started. theoretically you wont get anywhere trading like this in the long run regardless, you will not have enough equity to cover the margin in a short space of time either.

you have got to find a happy medium, what you are proposing is a faster way to build more equity than risking a set percentage of equity, always. but also with its drawbacks as you may already be aware of such as erratic spics in your equity curve.

 

[Ingot54]

One method?

Hotch: yes, I will be upping the risk, but it will be "paid for" from previous levels profit. If a string of losses do occur, the trade size will get scaled back.

Is there a more advanced method of scaling up, other than the boring and tedious "percent of capital" method?

All I am looking at is perhaps a more exponential curve. Admittedly, when it falls, it will fall more sharply, but when it grows, it grows more sharply as well.

Come on guys, a more advanced MM method must surely exist?

Hi Trendie

This is a question that has irritated me (positively) for a long time. Why not put profits to work in a higher risk way? If a trade "fails" you have only given back earlier profits while preserving bank-roll capital. On the upside, if the trade "succeeds" then you have executed a multiplier factor on earlier profits AS WELL AS YOUR CURRENT risk % per trade.

Based on what you have said, that you have a nett positive expectation, such a strategy "should" quickly boost your balance. There are other ways - (Google for "Ryan Jones: The Trading Game: Playing by the Numbers") The trading game: playing by the ... - Google Book Search but I have not tried them, so cannot recommend or otherwise. Jones discusses Fixed Ratio trading and Fixed Fractional trading.

You could also consider this strategy: Money Management

I reproduce the rationale below:

We use a unique system of money management. We feel it’s a very conservative way to aggressively pyramid your profits! It uses the amount of profits you have made to date, to determine the number of contracts you can enter on each subsequent trade. We call this determining factor the “Tsunami-trade delta”. The delta is the amount of profits you will have had to have made trading one contract to increase your contract size on future trades. Likewise it’s the amount of draw down you can experience before reducing contract size. Taking a system’s greatest possible drawdown and dividing it by 2 commonly determines the delta. By using this formula, we now know that if we were to suffer the greatest possible draw down in any trading system, we would drop our traded number of contracts by 2.

Let’s consider the draw down of a simple trading strategy of a coin flip. Heads you win, Tails you lose. In a random series of 100 flips, starting with a theoretical $5000 account using for this example 1-point stops and 1 point profit targets and $4.80 round turn commissions, we had 49 winners and 51 losers and ended up with $4900. During this series of trades however, surprisingly we had a maximum draw down of $448 ($400 in trading losses plus $48 in commissions).

It is said that if your sample size is relatively small (100 is small compared to 1000 flips), double your experienced draw down to get the largest possible draw down if we were to continue this method of trading forever. That gives us a maximum draw down for our coin flip trading strategy of $896. We can round that off to $1000. Doubling that figure to be extra conservative, gives us a maximum possible draw down, if you were just flipping a coin to trade, of $2000. Halving 2000 gives us $1000 for our delta. That means to increase contract size by 1; we have to make $1000 in profits per contract. Conversely, if we lose $1000 per contract, we would drop our number of contracts by one. As an example, if you were trading 5 contracts, you would have to make $1000 X 5 = $5000 in profits before you can increase your trading size to 6 contracts.

Initially the goal of any trader should be to just stop losing! After that, making 2 points per contract per day can be a very handsome income! That’s the importance of a Complete Trading System and proper trading education! (See the below hypothetical illustration)

THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE THE PROFITS OR LOSSES SIMILAR TO THOSE BEING SHOWN.

Is this really possible?
Probably not, since this scenario assumed no losing days which should be considered almost impossible for any system. The math however certainly does speak for itself and is intriguing!

Good luck with it.

While I recommend neither of the above, I submit them to stimulate discussion, and perhaps extract some comment from those who have also looked into them, or indeed, who may have utilised them at some time in their own trading experience.

 

[Splitlink]

Starting with a low capital base it is inevitable that a lot of traders will risk well over 3% to get started. We all know the posters who have boasted of 100% profits. The reason is obvious. They have little capital and they need to get started. 1 + 1 =2 is not the same when playing with 100,000, because 1 pound will not buy a newspaper these days..However, once one gets their account to a healthy state, capital risk must be reduced as soon as possible.

 

[SvenFoster]

you could:
1) trade more often other pairs etc and try to achieve growth that way, if you have +ve expectancy then the more trades to do the closer to the mathematical stats you should get.

or
2) Trade more of your profit, I know of some one that risks 2% of their capital but they risk 5% of their profit. you would need to decided when and what is considered profit and in what %ge

e.g
10k capital, 2K profit, 200 notes from capital and 100 notes from profit. ~2.5% of total pot.
10k..., 5k..., 200....250notes fromprofit, ~3% of total pot.

its essentially a Fixed fraction method but increases the risk as you move further away from your "starting capital". which could be daily, week or month, heck even yearly. This ramping effect has some appeal although the %ges need to be something you've worked on.

..get the spready out

 

[Ingot54]

Putting Profits to Work is good MM

you could:
1) trade more often other pairs etc and try to achieve growth that way, if you have +ve expectancy then the more trades to do the closer to the mathematical stats you should get.

or
2) Trade more of your profit, I know of some one that risks 2% of their capital but they risk 5% of their profit. you would need to decided when and what is considered profit and in what %ge

e.g
10k capital, 2K profit, 200 notes from capital and 100 notes from profit. ~2.5% of total pot.
10k..., 5k..., 200....250notes fromprofit, ~3% of total pot.

its essentially a Fixed fraction method but increases the risk as you move further away from your "starting capital". which could be daily, week or month, heck even yearly. This ramping effect has some appeal although the %ges need to be something you've worked on.

..get the spready out

I personally prefer point (b) as a strategy to increase profits.

It has been said that it is best to diversify investment as a way of mitigating risk. I don't think this should apply to an occupation such as active trading, because YOU are the one in the driving seat. YOU are in control, not a fund manager, or the price of a commodity. Trading is inherently DIFFERENT from other forms of investment, in that decisions can be made ON THE SPOT.

Therefore imv it is better to put all your eggs in one basket, and WATCH THAT BASKET. Or ... in terms of good risk management, put some of your eggs in one basket only - leave the rest of the eggs in the nest. That may be a better strategy than having several baskets with a few eggs in each.

Because Trendie is proposing the better use of capital/profits using a method with a POSITIVE EXPECTANCY, I therefore see little risk in putting profits to work. In fact, I see great merit. The multiplier effect on profits using such a strategy should compound the bottom line handsomely.

What I would like to hear now is from someone who is actively trading this strategy. Applying a profit-churning strategy to a method with a Positive Expectancy, should ..."should" ... compound the annual return.

What say you, Trendie?

 

[Hotch]

Money is money is money.

Your profit, is just as valuable as your initial capital. I'm sure "way of the turtle" puts it better, but there's pages getting this point across (not saying it's correct, just somewhere to read up).

The only reason for profit to be worth less then original capital is greed/fear.

What's being suggested is just rather illogical. If you're OK with risking a higher percentage of profit, then why not risk a higher percentage of original capital? Bar that when you start you're not sure if your strat will work.

The premise seems to be that you're less scared of losing profit then you are of losing your initial capital. Why? Logic suggests that your bank won't grow if you don't look after your profit as well as you do your initial capital and you'll stay at the same balance.

 

[Ingot54]

Another view of money

Hi Hotch - I'd like to present another perspective - and that is that not all money is created equal - some dollars are more valuable than others.

It is all in the perspective.

If you have a job that brings enough income to pay the rent, groceries and utilities, plus enough for a family outing to the movies ... you can be happy. Essentally, that is the situation Trendie is describing with his nett positive expectaton. He is saying that his method WILL overall, produce this profit.

To continue the analogy: A conservative person might say: "Let's not go to the movies. Let's save the money for the rent in advance, in case I have a few days off, and come home with less pay next week." But we know the rent is already covered (positive expectation).

A more active investor might say: "I want to use the positive expectation to grow my account faster, rather than having the money sit there idly. I want to put my money to work in the most efficient way possible."

What Trendie is proposing, is a better way to utilise profits, rather than simply accumulating dollars in the account.

If your account is small, you will NEVER become financially independent without taking some calculated risks. That's what this thread is about - how to take an educated, calculated risk, with a method which already has a positive nett outcome.

As long as you preserve your starting account, you can take some aggressive risk with your profits. By using percentages, you can ALWAYS add-back larger wins, and STILL grow your acount - only faster. If you simply let the profits sit there, and continue to invest 2 cents out of every 100 cents in your account, growth may take a very long time indeed.

Without trying to be patronising, can I propose alternatives to your approach?

Money is money is money.

Your profit, is just as valuable as your initial capital. I'm sure "way of the turtle" puts it better, but there's pages getting this point across (not saying it's correct, just somewhere to read up).

No - profits have a MORE valuable status than seed capital, because they give you the freedom to leverage returns without additional a/c risk.

The only reason for profit to be worth less then original capital is greed/fear.

Again, profit is NOT worth LESS than capital, but MORE, because of the freedom given to leverage. Remember, the method has a POSITIVE expectation - you will leverage your wins, while minimising risk to a/c as per normal money management rules.

What's being suggested is just rather illogical. If you're OK with risking a higher percentage of profit, then why not risk a higher percentage of original capital? Bar that when you start you're not sure if your strat will work.

We are already starting from a point where we KNOW the strat works - (positive expectation again). It is the opposite of "illogical" - it is RATIONAL. If an error is made - ie the trade makes a loss (they will still occur) - then you have done no damage to your a/c seed capital. As well, only a PART of your profit has been given back - not all of it. Being able to use profits sensibly to leverage-up your meagre seed capital, is a highly efficient way to put the money to work.

The premise seems to be that you're less scared of losing profit then you are of losing your initial capital.

Exactly my point. Only instead of "less scared" I would turn this around to read: "more respect" for profits, because of their ability to truly financially liberate a trader when used in this way.

Why? Logic suggests that your bank won't grow if you don't look after your profit as well as you do your initial capital and you'll stay at the same balance.

Hotch - this is why so many traders never get past first base - if they continue to do what they have always done, then the results will continue staus quo. I have no clue about the size of traders' accounts, or about how many of these traders have blown up their accounts, but I'd estimate the number might be in the 80% region (guess only).

Trendie is trying to get us to think outside the norm, and to come up with something to speed the growth of an account, once a profitable method is found.

And that is the key phrase here: "ONCE A PROFITABLE METHOD IS FOUND."

I suggest there would be another benefit here.

If traders utilise this strategy, I would imagine they would be less prone to impatience, impulsiveness and greed. If you and I can see our accounts growing nicely, above and beyond what the standard 2% risk would allow, then I for one, can say I would be very pleased with how my trading is going.

I am not saying that we have nailed the staking plan with the suggestion to use part-profits to boost the size of a position, but I will say that this is definitely on the right track.

I like your insight and appreciate the thought and experience you put into that post above, but I just think traders have to do something more aggressive - with less risk to seed capital - if they are ever going to break out of the doldrums with their trading.

I am sure there are traders who are profitable with mini/micro accounts, who are presently just pottering along, growing their account slowly, by essentially meaninglessly in terms of dollars. These are the traders who stand to benefit from the approach proposed in this thread.

I wonder if someone with experience in back-testing and drawing of equity curves, could factor in a % of profits to their testing for us.

The comparison of equity curves might be useful in this discussion.

Best wishes

Ivan

 

[trendie]

(thanks for last lot of replies)

I think Ingot54 has really nailed it:

The assumption is you already have a nett positive system. (I would never suggest trying to make a borderline system work through throwing money at it)

I like his anology of money being put by for rent and bills, and a second amount for luxuries. that perfectly sums up my mindset.

To summarise my original post:
You have a positive edge.
I am contemplating building the account to a certain size, then using the profits more aggressively. eg, if you start with £10,000, and trade 2% until the account is £15,000. You now split the account into a £10,000 core account, with a £5,000 aggressive account.
You continue to build the core account using 2% (for "rent and bills" etc), but you can now trade 5% of the aggressive account.

I am exploring the best methods of increasing the account only;
a: once you have a defined and proven positive edge; and
b: only once you have accumulated a reasonable profit
(for example, representing 12 consecutive losing trades. eg, if you trade with a 30-pip loss, you dont create the aggressive account until you have enough to take 360 pips loss over 12 trades.)

traders may at first struggle to get any meaningful edge, but once you have one, a trader needs to really get the most out of it by leveraging the edge with a better money management rule-set.

look forward to any other ideas.

 

[Ingot54]

On exponential curves ...

If you have built up some profit, I am looking to trade more aggressively on a portion of profits. The larger, ordinary fund, can grow more sedately, but a smaller percentage can be traded aggressively, and I accept the equity-curve may well be spikey.

All I am looking at is perhaps a more exponential curve. Admittedly, when it falls, it will fall more sharply but when it grows, it grows more sharply as well.

As long as the system is nett positive, it should have a tendency to go up more than down.

Trendie, I have emboldened the bit that intrigues me. I am sure if you think about it, you may realise that is NOT necessarily the case.

I realised years ago, when looking back at the growth curve of an Australian stock - Zinifex (ZFX - now merged) that what appears to be an exponential growth is simply an illusion related to your perspective. (ZFX went fro $1.20 to $21 in about 18 months, from memory)

Looking back at any growth curve, you can see where price seems to "take off" at some point, and indeed the angle of ascent IS quite markedly steeper than earlier meanderings. It only appears this way because of the effects of time, and time scale used to view this curve.

When the curve is viewed in its entirety, yes - some exponentiality does exist.

But when you "zoom-in" to a small segment of this "exponential" section of the spike, it can be seen entirely differently. There are indeed higher- highs and higher-lows. But within this growth is the pull-back and ranging so familiar with any stock which appreciates.

The longer the time-frame viewed, the steeper the curve appears, and conversely, the closer-up the perspective, the flatter the curve.

My point in all of this is to say that while growth may SEEM exponential when viewed in the context of the starting a/c size, or even as a % of start-up capital. in essence, every day is a new day, and any profits or losses are no more exponential than the day before.

Essentially, every trade is a new beginning.
Amount risked will be re-calculated, based on both of these:

a) Seed Capital base (which may comprise start-up + portion of profits)
b) Profits (of which a % only will be used for any individual trade)

Any "fall" in your profit curve will be relative ONLY to today's account and profit risked. Yes, it may appear to be an exponential move, but the reality is that when compared to today's balances, it is no more or less "exponential" than any other activity on the account. It only appears thus if viewed from the perspective of your original seed capital.

Similarly, any "growth" will be relative to current account size, plus the influence of re-invested profits.

I hope I have not confused anyone here.

The 2 attachments below illustrate my point:

The first chart, is a section of th AUDUSD viewed on full zoom-out, on the DAILY chart.
The second is a full zoom-in of the same chart, same TF.

Huge difference in slope - yet they are the same.

It is far easier to describe the first zoomed-out view as exponential when compared to its identical time-period, the zoomed-in view.

Clearly, it is all a matter of perspective, time and time-frame.

With best wishes

Ivan

 

[Hotch]

Firstly Ingot, I'll trade you one of my more valuable dollars for 2 of your less valuable dollars anyday.

I am not saying that we have nailed the staking plan with the suggestion to use part-profits to boost the size of a position, but I will say that this is definitely on the right track.

{/IMO}

To be blunt, no.

It's not right at all.

There is the right % of your account to risk, it does not change with account size if your aim is to grow your account.

{/IMO}

I know I am still probably not getting my point across (or understanding yours for that matter-my failing). However, luckily I have the solution.

It's a very simple mater to program your idea into excel to give random equity curves. Can put in whatever growth strategy you like, and I am quite sure that it won't do as good as just chucking in Kelly most of the time, either way it will clear it up.

Sound good?


EDIT:

Upon re reading that, it seems rather arrogant etc. Just got a bit frustrated as I spent 20 mins trying to put points across before giving up and thinking testing it would be the best way. No disrespect was intended and I'm quite happy to be proved wrong as it would obviously help all. Just frustrated as not being able to put my point across, so resorting to maths.

 

[Ingot54]

You're on!

Firstly Ingot, I'll trade you one of my more valuable dollars for 2 of your less valuable dollars anyday.

Gladly Hotch. But first let me take 50 cents from my dollar and leverage it up in my next few trades. With a positive expectation I can do this all day, and become a lender gratis to the world.

The $1 you give me will STILL be worth more at the end of the year than the $2 I exchange with you, to trade with under the "correct" rules. A "leveraged profits" staking plan, will out-perform a politically correct 2% plan any day of the week. The only proviso is that the system must have a positive expectation to begin with, and this is what I am basing my bold statements upon.

To be blunt, no.

It's not right at all.

There is the right % of your account to risk, it does not change with account size if your aim is to grow your account.

Who says there is a "right" % of a/c to risk? Text-books? Van Tharp? Why is it 2%? Why not 1.85% or 2.37% or 3.06%? The fact is, these authors are bound to use ethereal figures which will roughly suit the account size, expectation, skill level and Risk:Reward of the majority of their readers. They can not tailor a % of account to any individual trader from the pages of a text book. They have to know the bones and results of your method.

This is why a lot of traders fall over - they are risking "2%" because the books say so" without having a clue that there are optimum % for their particular method. It may be 1.5% for them, or 5% ... it needs to be calculated on merit.

I say it STILL depends on the expectation of outcome of your method. Even a poor expectation can out-perform a high expectation, if the poorer one delivers a greater expectation overall. Similarly, a high-performer can still show a loss, if the few losses wipe out all previous profits.

I am not sure why you are having difficulty understanding that a higher amount on average staked on a method with positive expectation, will ALWAYS out-perform the same method using the text-book 2% rule. (2 x 4) is not greater than (2 x 4.5).

I know I am still probably not getting my point across (or understanding yours for that matter-my failing). However, luckily I have the solution.

It's a very simple matter to program your idea into excel to give random equity curves. Can put in whatever growth strategy you like, and I am quite sure that it won't do as good as just chucking in Kelly most of the time, either way it will clear it up.

Sound good?

Yes Hotch - that should adjudicate this difference in views nicely enough.

As I have consistently said - if the method is showing a positive expectation, then an improvement in the amount staked can only serously boost profits.

This is the scenario - (a template, not an actual plan):

With an arbitrary 2:1 Risk:Reward, and an account size of $10,000 the amount at risk will be initially $200. If the trade is successfully closed out, the profit will be $400, and the account balance will be $10,400.

For your next trade, your risk will be 2% of $10,400 = $208

For my next trade, my risk will be 2% of $10,400 + (10% of $400) = $248

If the trade loses, your a/c balance will be $10,192, and your next trade will risk +/- $204.

My a/c balance will be $10,152, and my next trade will be ($203 + $40) = $243.

In order to break even, with a 2:1 RR, I will need to win 33% of my trades.
With a 3:1 RR I only need to win 25% to break even.

My positive expectation already gives me this assurance, and more. During a run of losing trades, my account will deplete slightly faster than yours, but when the statistical balance resumes, my account growth will exceed yours.

Now I do not "know" this for certain - but I feel it in my water!

That's not good enough, however, for my bank manager, who demands figures and bottom line numbers. So on that basis, I am content to submit to the equity curve test. I am not so belligerant as to think a certain sequence of losing trades won't do more damage to my account than to yours. A random equity curve test will expose that, I believe.

I will leave it up to Trendie to tell us what his RR is for his method, plus the strike rate (positive expectation), and the amount he wishes to risk from his profit pool. My figures above are a random scenario to illustrate the way in which this roughly works.

If I have to eat humble pie, then let me have a big piece!
And my wife says that I always look much better with fresh egg on my face!

I'm glad you have not melted from the discussion, Hotch - this has really got me digging deep to discover a result.

Thanks for that.

With best wishes

Ivan

 

[Ingot54]

EDIT:

Upon re reading that, it seems rather arrogant etc. Just got a bit frustrated as I spent 20 mins trying to put points across before giving up and thinking testing it would be the best way. No disrespect was intended and I'm quite happy to be proved wrong as it would obviously help all. Just frustrated as not being able to put my point across, so resorting to maths.

Not at all Hotch - I am very glad of the stimulus provided by decent discussion (finally) on this forum. You came across as neither arrogant nor disrespectful. This is a great thread, and the outcome can only benefit the reader and participant.

I only wish I was mathematically able to test this as well as understand statistical analysis, in order to know if the probability of a bad run would do more harm to the more aggressive staking method.

Hopefully someone out there reading this will refer the thread to a resident expert in the field.

Thanks for sticking with it .

With best wishes

Ivan

 

[Hotch]

Maths decides what number you should risk. Personally I like Kelly. As I mentioned before, if you continue to up your risk of your profit, I think you would be able to find your Kelly off a graph, not thought too much on it though.

Anyway, if someone comes up with win rate, and risk/reward, you come up with a theorised strategy (is there a maximum of how much profit you risk?). Then I'll try to plug it into excel.