More trades means more risks ?

frugi

1
1,827 126
Question: If it's 50% likely to rain this Saturday, and 50% likely to rain on Sunday, what is the chance of it raining this weekend?

Answer: 25%

Does this help?

If you were deciding whether to bring an umbrella it wouldn't.
75% might do though... ;)
 

Glenn

Experienced member
1,040 118
Grey1 said:
Glen,


Systems with positive expectancy are defined by the equation below.. The number of trade does not make the system less expectant..

Expectancy is defined by a simple formula = ( Average win* probability of win - Average loss* probabilty of loss )

If this value > 1 then we have a Pos expectancy system other wise we have a negative expectancy system

So if you had a coin system which would pay even amount then

Expectancy would be = (1*1/2 -1*/1/2 ) = 0

How ever if you had a Coin system which would pay a little more than even if you won ' then the MORE you trade the system the more you win ,,

Regards

Gey1
So a positive expectancy means that the chances are more than 50% that each trade will be profitable.
This is how I figure the maths:-
Lets say we have two systems, both of which have a positive expectancy of 60%.
One system is short term and averages 10 points per trade, the other is longer term and averages 50 points per trade.

To keep things equal, lets say that the longer term trades last 5 times as long as the short term trades and we will take a fixed time period to make a comparison and both have the same percentage stop loss.
So we do 10 short term trades and 2 long term trades.
[Prob(A and B and C) = Prob(A) x Prob(B) x Prob(C) etc.]
The chances of all 10 short term trades making a profit is
60%x60%x60% .....x60% 10 times i.e. 0.36% chance of 100 points profit
The chances of the 2 longer term trades both making a profit is 60%x60% i.e. 36% chance of 100 points profit

This suggests that fewer bigger trades have more (10 times more) chance of winning the same amount in the same time period.

Glenn
 

Trader333

Moderator
8,655 981
Glenn,

So a positive expectancy means that the chances are more than 50% that each trade will be profitable.

Not exactly as it will depend on the reward you get compared to the loss. For example if you have a 40% success rate but get 2 back for every 1 lost then you still have a positive expectancy.

For an example of 100 trades your results would be:

(40 x 2) - (60 x1) = + 20 profit which is still a positive expectancy even though your percent of successful trades is less than 50%

The example above was for coin flipping which we all know is 50%


Paul
 

Grey1

Senior member
2,186 178
Glen,

Quote "So a positive expectancy means that the chances are more than 50% that each trade will be profitable ",

Not my friend. I did not say that.. The coin example I gave you was the most straight forward example one could give because we all know a Coin system is a long term 50/50 system....
 

MikeW

Junior member
29 0
A risk profile can also be helpful to highlight expectancy & small %possible large negative outcomes which you need to deal with emotionally (& that's assuming your assessment of outcome are reasonable):
e.g.
Expected Outcome % Probability
+20 5
+10 10
+5 80
0 3
-10 1.5
-100 0.5
total +5.35 100%

EMV= (20x5%)+(10x10%)+(5x80%)+0-(10x1.5%)-(100x0.5%)

BUT you still need to ask yourself if you're comfortable about the v. low assessed % risk bad outcome. Obviously these figures are made up for illustration purposes but hopefully you get the drift.

(not sure when I post the relevant %'s do not appear beside the outcomes just read from top down i.e. +20=5% & so on)

Regs.
Mike
 

Glenn

Experienced member
1,040 118
Gre1 & Paul
I understand expectancy and it's formulae - there are others too. Optimising expectancy is important - paramount even.

However I think that we are on different tracks here. You are talking about the expectancy from each trade (i.e. what the return is expected to be, compared to the amount risked).
What I am talking about is the probability of being able to repeat that in a number of short term trades compared to fewer long term trades when they both have the same expectancy per trade.
(Incidentally, I'm not taking a particular side in this debate, just exploring the numbers and keeping an open mind)
So going to the formula from Grey1.
"Expectancy is .. ( Average win* probability of win - Average loss* probabilty of loss ) "
Using my numbers from before -
The short term trade expectancy is:-
(10 x 60% - 2 x 40%) = 6-0.8) = 5.2 i.e. for every £2 we risk, we stand to gain £5.20
For the long term trade the expectancy is :-
(50x60% - 10x 20%) = (30-4) = 26 i.e. for every £10 we risk we stand to gain £26.

So the two methods have the same expectancy (2.6 times the amount risked). This means that historically on average over a long period, both systems have returned £26 for every £10 risked.

Now let's look at the probability of the 'expected' return happening over a number of future trades.
Take the short term figures. For every £2 we risk, we stand to gain £5.20.
The chances of that happening are on each trade are 60% (the probability of a win).
Over a number of trades the expectancy per trade stays the same.
The chances of achieving that expectancy outcome on every one of 10 trades in a row and achieving 100 points profit is 0.36%.
With the longer term system, with the same expectancy per trade, the chances of the two trades producing 100 points is 36%

On that basis, the larger trades seem the best option.

In addition, the variables which the maths doesn't account for are:-
1. The commissions, as Grey1 has already said.
2. The human side - The skill, discipline and attention of the trader. If it is harder to correctly manage a larger number of smaller trades, then there is more risk.
3. Flat trades.

Glenn
 

Grey1

Senior member
2,186 178
Glen,

Thank you for your initial post and your further replies .. T2W is the place to be for coaching and educating our traders..

Few points..

1) Optimising expectancy is different thing to your original question .. Your initial post was more Trade means more risk and I disagreed. and gave you the reasons ..

2) Optimising the expectancy score can be done through Money management to take advantage of the edge , which has been discussed in here before by myself and others..

3) The average win is a net gain after the slippage.

4) a system with a negative expectancy such as roulettes can pay off in short term ( Luck ) but will beat the punters in long term no matter what .. So you wont be able to optimise the roulette system to your favour by Money management ..


Lets get back to the original question .. DOES MORE TRADE MEANS MORE RISK ... Answer is NO .. It means Over trading that is all..


PS:-- Just realised did not address the probability of the expected return you meantioned in a short term ... Any thing is possible in short term including getting 4 heads in a row to give us a 100% false win rate it is called LUCK .. Now If i ask you the probability of getting 4 rows you would tell me is (1/2)Factorical 4 which is 1/16 and not 100% only because you just had 4 heads in the row.
 
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wysinawyg

Active member
186 1
Grey1 said:
A quiz for our Traders...

If I had a system with negative expectancy would an excellent money managment system make me a winner ?

Depends exactly on the system, and your Vegas example gives the possibility when it can be true.

Blackjack is undoubtedly a negative expectancy for the punter. Even counting cards I think the game remains a negative expectancy taken as a whole (on the basis that you can't decide which hands to play without people getting suspicious). However by betting larger on the hands where you have the edge you can turn an overall negative expectancy game into a positive one, purely through the money management.

wysi
 

BBB

Experienced member
1,071 3
wysi - Isn't that a beutiful thing! The flexibility of thought and application.
 

Glenn

Experienced member
1,040 118
Grey1
I understand what you say, and have to say I'm not convinced by your line of thinking.

In this statement you appear to contradict yourself:-
"DOES MORE TRADE MEANS MORE RISK ... Answer is NO .. It means Over trading that is all.."
By overtrading do you mean trading too often, so that you spoil your rate of success ? If so, then you appear to suggest that more trades is a bad thing.

Looking at a long term situation (as long as you like), there will be 5 times as many small trades as big ones.
For every 100 larger trades you need to do 500 smaller ones to get the same profit. That's a lot more to get right.
It may be that you personally are quite capable of correctly managing so many trades. But would it nonetheless not be easier and therefore less risky to do it with less ?

Glenn
 

Grey1

Senior member
2,186 178
Glenn,

By over trading I donot mean spoiling your rate of success.. There are scalpers who trade 200 times a day and scalp 10C in every trade.. Since they have a postive expectancy system then their over trading or if you like trading 100's of times aday just generates more profit..

Quote "
For every 100 larger trades you need to do 500 smaller ones to get the same profit. That's a lot more to get right.

A system which trades 100 large trade could have a negative or lesser expectancy score than that of a system which trade 500 a day

A trader could trade 1 millions times a day and still be a winner ( I know this is far fetched ) because his system is profitable or has a Positive expectancy

Another trader could trade just 20 times and be an over all loser for the day , simply because he has no edge or he his system has a negative expectancy

Hope I am clearer this time..
 
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Glenn

Experienced member
1,040 118
Grey1
"Hope I am clearer this time.." Erm, no - you appear to be moving the goalposts :)
My earlier comparison was between two systems with the same expectancy. If they have different expectancies then it's a lot more complicated to make a comparison.

If we stay with two systems which have the same expectancy but different timescale/frequency, then I think we can reach agreement eventually :)

Glenn
 

Grey1

Senior member
2,186 178
Glen.

Your post was "more trade was more riskier" and I replied to that based on simple expectancy formula which we both agree on it.. The formula does not have ""frequency " as a variable in it .. so your statement was in accurate..

You then said about optimising expectancy and I replied that is Money managments job.

Now you are telling me what if we have two system with similar expectancy which one would trade 500 times and the other 100 times the first system is riskier..

Have I got you right ? if yes then can you explain why

regards
 

Glenn

Experienced member
1,040 118
Hi Grey1
Quote "Your post was "more trade was more riskier" and I replied to that based on simple expectancy formula which we both agree on it.. The formula does not have ""frequency " as a variable in it .. so your statement was in accurate.. "

Whilst I agree the principle of expectancy, I don't think that it is the answer to this question.

Expectancy just tells you whether you have a method which will produce a profit over time.
Just because a system has a positive expectancy, that is only theoretical. The trader still has to correctly manage every trade in order to achieve it in reality. Question is, is that harder with more frequent, smaller trades ?

What I am trying to do is compare two systems which have the same expectancy but different time periods and frequencies, and ask the question 'Is one riskier than the other ?'

The risk comparison can be anecdotal or mathematical - whatever people want to discuss. (Although there aren't many of us discussing it :) )

I mentioned optimisation of expectancy only in passing, just to show that I am aware of expectancy and how it works, not to bring it into the discussion. My mistake.

Quote "Now you are telling me what if we have two system with similar expectancy which one would trade 500 times and the other 100 times the first system is riskier."

Well, not telling you actually, just suggesting it as a possibility, which is the point of the thread. I have explained why one method appears to be be riskier, using some maths and anecdotal thoughts.
I think that you disagree with the anecdotal thoughts - fair enough. We can agree to differ on those.
As for the maths (probabilities) I don't think that you have made a case yet.

Hope that explains.
Regards
Glenn
 
 
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