If 70% chance of winning per trade, how much risk to take?

[secondary]

zz

 

[Paul71]

Hi,

I guess this is more of a maths question.

If a trade is likely to be successful in 70% of the time (studied for 20 years, signal generated 10-20 times a year) , how much capital would you risk, and why ?

Please provide mathematical reasoning.

Thanks

Were the signals all generated on one market? Let's say they were, and let's say your market was bull for 2 years or whatever, in that two years which signals failed the most ie. the bear or short signals. How many long signals failed in any bull phase? It's not a trick question by the way.


Paul.

 

[pedro01]

You aren't supplying enough information in order to make an informed decision.

For instance - size of winners vs size of losers would be pretty important.

 

[Hoggums]

You cannot work that out unless you know what the expected return from a successful trade is versus the expected loss.

 

[secondary]

zz

 

[Hoggums]

No use. Need to know the average points for each winning trade and the average loss per losing trade.

Also have you factored in interest charges and spreads and rollover costs (assuming you are holding long term SB positions here)?

Also - you need to factor in what margin is required for each position - for an 83% success rate my guess is you are holding onto losers - which will eat up margin in your account - this will affect the trade sizes too as you can only trade against available margin. Too large a size and you will run out of margin and blow your account.

 

[Paul71]

One Market, all long signals total gain 80000 points in 20years, actual success rate 83%.


Let's say this was a gambling system in casino, then how much would u bet each time to beat the casino ?

There's only you can answer that question, i wouldn't like to say without seeing your set-up. On the face of it though you've got a winner, fill yer boots!

 

[secondary]

zz

 

[pedro01]

Without knowing the average size of winners & losers, your question cannot be answered.

If you don't know the average size of winners & losers, it's probably not a good idea to trade it.

Also - what was the maximum number of losers in a row & what drawdown did that produce ? You should consider at least doubling that when planning to move to live execution.

 

[Hoggums]

That's why people fail at trading - they think it's a simple case of if it's more likely to win then I'll make money. Simply not true.

As pedro said - with a 30% chance of loss you only have <1% chance of 4 losers in a row - but you backtest will tell you how many losers you had. And if you had 30 losers in a row, then you need to trade that differently to 5 losers in a row.

And to be honest - you sound like you have a highly curve fitted system if it's generating 80k points. What happens if you plug in S&P 500 data into the same system - does it make a profit? If not that's a big red warning sign - you've overfitted your system to the FTSE past data. Future data will probably not work out so well.

 

[Paul71]

Don't hold on to loosers. this is an index trade which I hold for 2days only.

Nevermind, I thought this was a simple probabilities question.

Thank you all for your inputs.

No probs. Look, on here (t2w) everybody is always right, and you are no exception to the rule. Forget %s, just make sure at the end of the day your boots are brimming with wads of dosh. Get the biggest pair of waders you can find and start ramming them full of readies everyday with the help of your set-up.



Paul.

 

[Schixm]

- for an 83% success rate my guess is you are holding onto losers - which will eat up margin in your account -

Hi Hoggums, do you mean an 83% success rate is not good? I would have thought that was really good. May I ask what you mean by 'holding onto losers'? That's a bad thing, obviously, but if I were still getting an 83% success rate, I wouldn't mind hanging onto a few losers!

edit: apologies, think this may already have been answered since posting

 

[Hoggums]

The only systems I've seen with >80% success are the ones that hold onto losing trades in the hope they turn profitable later - all the while cashing in tiny profits on the winners.

>80% does not mean profitable. It only takes 1 big losing trade to wipe out your profits.

I could give you a system with >98% success rate. It will increase the capital in your account steadily everyday. Looks great provided you can ignore the unrealised loss it runs throughout. Wouldn't be profitable though in the long run. Eventually your account gets blown a year or two down the line.

 

[secondary]

zz

 

[arabianights]

Google Kelly Criterion

 

[Schixm]

Hence the importance of trade management (e.g. physical/mental stop losses, targets, position sizing, etc).

I guess the OP could figure out the maximum stop (risk) required to achieve the 70-80% gain over the 20yrs, and realise that it's not simply a case of being able to fund for e.g. £100k worth of trades (incl. 20% loss) because even if 20-30% of trades are losers, the maximum stop required to achieve the winners x 20-30% (of the total trades) could result in much lower profitability over all i.e. maybe the same system would actually only have a 40% or less profitability even with a win/loss ratio of 7:3 (or 8:2)? And that's before the cost of trading (spreads/commissions) is accounted for. Not so?

As has already been suggested, I guess the question really is - what do you mean by 'success rate'? Win:loss ratio does not equal the same profitability ratio.

p.s. this has nothing to do with Kelly Criterion (as we all know, the main difference between gambling and trading is that with trading you can get (edit: in and) out any time you like - with gambling once you place your bet, that's it)

 

[pedro01]

ok, I take it back. As I realise the benefit of learning this is greater than the risk of inadvertantly revealing the method.(trying to think like a real trader, hahaha

I'm on the move now, so have no access to data but will provide the necessary details in the evening. I back tested using MS Excel & yahoo finance, so didn't bother populating those figures.


Thanks

You do not need to reveal the method. Just more metrics.

 

[virtuos0]

Hi,

I guess this is more of a maths question.

If a trade is likely to be successful in 70% of the time (studied for 20 years, signal generated 10-20 times a year) , how much capital would you risk, and why ?

Please provide mathematical reasoning.

Thanks

The answer, of course, is 'whatever you are comfortable with'.

 

[GladiatorX]

The answer, of course, is 'whatever you are comfortable with'.

Correct. You've got to remember that in the end trading is always going to have the risk of going bust; your system may have experienced a maximum drawdown of 10% assuming 1% risk... Doesn't mean it cannot eventually have 100% drawdown - In fact the longer you trade, the higher the probability of this occuring.

Also, with options, futures, leverage and shorting you are always going to have massive risks and no matter how much you reduce your exposure through money management and position sizing; the risks will always be there - This is trading and this is what we must accept... With long only non-leveraged securities... Ofcourse your always going to have the risk of it going to 0 overnight... Although this isn't unlimited risk in that respect atleast.

Go with what your are comfortable with and what is logical; the higher the risk, the higher the gain and the higher the risk of going bust.... Balance it all out.

 

[pedro01]

Well - if he has 70% winners but his average winner is 10 ticks & his average loser is 50 ticks, he should try to avoid 10% of his capital per trade regardless of how comfortable he is.