returns with spreadbetting

[meanreversion]

Though if you lose 50 trades in a row you're doing something wrong.

The schoolboy arithmetic presented on this thread is irrelevant at best, misleading at worst.

No-one ever lost 50 trades in a row, so this sort of calculation is pointless. What is more meaningful is when a strategy wins 2, loses 3, wins 1, loses 2, etc., i.e. equity curve is inexorably heading lower. So for example, after 40 trades at 3% a time, there are 15 winners and 25 losers (in no particular order), the trader is now -20% or so.. what is the appetite to continue with this particular strategy or style of trading?

I would think most people start to get cold feet at -30% (unless they really know what they're doing).. the strategy is then changed/abandoned, or bet size is increased, to "make the money back", and THIS is what causes problems.

The solution is to start off with a smaller stake size until you're comfortable with what sort of drawdown your trading style might produce. 3% per trade will almost certainly lead to DD in excess of 30% - if you can live with that, fine, then go with it. But it is impossible to arrive at this number by simply typing 0.97^20 or similar into an Excel spreadsheet.

 

[SanMiguel]

3% per trade will almost certainly lead to DD in excess of 30% -

It depends on the system, if your worst run in a row / equity curve suggests you could get a 10% DD in one go then you'd adjust for your comfort level.
The solution is to start off with a smaller stake size until you're comfortable with what sort of drawdown your trading style might produce. - agreed

Also, the maths so far is probably the type of newbie account management control, ie a newbie probably will lose a hell of a lot in a row or revenge trade so it's not necessarily a bad thing as this risk control reduces the stake but whether it's good for the equity curve? We've already seen that if you lose your first trade and then continue to go win 1 lose 1 win 1, no matter that your system is 50:50, the equity curve is actually reducing because you reduce your stake size each time.

 

[meanreversion]

So 1% inevitably leads to a drawdown of 10% at some point does it?
It depends on the system, if your worst run in a row / equity curve suggests you could get a 10% DD in one go then you'd adjust for your comfort level.

It does depend on the system.. furthermore, there is a difference between drawdown on open equity (e.g. you started with 100, got to 120 then dropped to 100 because the market suddenly reversed), and drawdown from day one, e.g. start with 100 then lose 5 each week.

The answer is considerably more complex (i.e. requires more work) than has been presented here. ODT (RIP) was similarly obsessed with the ^ function, he would make claims that if you made 20 pips a day, then compounding would make you 10,000% in a year, or some such b0ll0cks.

 

[SanMiguel]

It does depend on the system.. furthermore, there is a difference between drawdown on open equity (e.g. you started with 100, got to 120 then dropped to 100 because the market suddenly reversed), and drawdown from day one, e.g. start with 100 then lose 5 each week.

The answer is considerably more complex (i.e. requires more work) than has been presented here. ODT (RIP) was similarly obsessed with the ^ function, he would make claims that if you made 20 pips a day, then compounding would make you 10,000% in a year, or some such b0ll0cks.

ODT left did he? or maybe one of his 40 systems messed with his imaginary equity curve

 

[meanreversion]

Funnily enough, I was in Puerto Banus at the weekend.. I actually thought of ODT as I know he has a very large yacht moored there. Or not, as the case may be.

 

[upacs]

No probs! Turns out from 5k to less than 1cent/pence is 432 trades!

Hoorrah! finally the atrocities made to maths came to an end.

From 10k to total loss, defined as an ending equity of 0.01, with a 3% loss on each trade, is the solution to ln(10^-7) / ln(0.97) = 453.57 trades

(EDIT) in my hastiness I forgot to add that this is a purely theoretical number, as you'd have to take into account that you cannot trade fractions of a cent. Since this is purely an academic exercise, I leave it up to "the reader" to work out the exact solution

 

[nunrgguy]

+ why is it always assumed that the road to ruin is x loosers in a row..imo that's nonesense

 

[LiamH]

+ why is it always assumed that the road to ruin is x loosers in a row..imo that's nonesense

Nobody actually said that it is... in this thread at least. The discussion re number of losing trades till destruction was just hypothetical. It came more from the fact that I thought 50 losing trades at 3% would wipe the account when it's quite a few more than that.

 

[Black Swan]

Hoorrah! finally the atrocities made to maths came to an end.

From 10k to total loss, defined as an ending equity of 0.01, with a 3% loss on each trade, is the solution to ln(10^-7) / ln(0.97) = 453.57 trades

(EDIT) in my hastiness I forgot to add that this is a purely theoretical number, as you'd have to take into account that you cannot trade fractions of a cent. Since this is purely an academic exercise, I leave it up to "the reader" to work out the exact solution

LOL, imagine placing that very last trade...

 

[nunrgguy]

Nobody actually said that it is... in this thread at least. The discussion re number of losing trades till destruction was just hypothetical. It came more from the fact that I thought 50 losing trades at 3% would wipe the account when it's quite a few more than that.

Fairy muff, just something I get the impression of from across teh interwez rather than just this as you say.

 

[6am]

We've already seen that if you lose your first trade and then continue to go win 1 lose 1 win 1, no matter that your system is 50:50, the equity curve is actually reducing because you reduce your stake size each time.

If we assume that the strategy randomly with probability 50% wins or loses the stake then this is incorrect. The expected value of change in balance is zero. Check out martingale article at wikipedia for more information http://en.wikipedia.org/wiki/Martingale_(probability_theory)

 

[upacs]

If we assume that the strategy randomly with probability 50% wins or loses the stake then this is incorrect. The expected value of change in balance is zero. Check out martingale article at wikipedia for more information http://en.wikipedia.org/wiki/Martingale_(probability_theory)

Sir (or Madam), the assumption isn't a 50% probability of win or loss. Contrary to a martingale process, the probabilities in this scenario are conditional on the previous event, such that the pattern is 50% gain, 50% loss, 50% gain and so son.

The stake is also defined as a constant % of equity.

Let x be the number of trades, and y the % stake. The ending equity, E(t), assuming the above process would be, for initial equity of E(0)

E(t) = E(0) * (1+y)^(x/2) * (1-y) ^ (x/2) = E(0) * (1-y^2)^(x/2)

as (1-y^2) < 0, the end equity E(t) is less than the starting equity E(0). Moreover, as x tends to infinity, (1-y^2)^(x/2) will tend towards zero, making E(t)=0 in the extreme case.

And that, of course, takes this thread completely and totally off topic

 

[6am]

Contrary to a martingale process, the probabilities in this scenario are conditional on the previous event, such that the pattern is 50% gain, 50% loss, 50% gain and so son.
The stake is also defined as a constant % of equity.

In that case I agree with you. The strategy is able to predict the win/loss with 100% accuracy. This is a really useful strategy if it exists because all one should do is trade in another account and make large bets when the strategy predicts the win. :clap:

 

[upacs]

In that case I agree with you. The strategy is able to predict the win/loss with 100% accuracy. This is a really useful strategy if it exists because all one should do is trade in another account and make large bets when the strategy predicts the win. :clap:

or make y a function of the expected gain/loss

not that this mental diarrhea is useful in the real world or anything, I'm just a bit anal like that

 

[KinsaleForex]

Nobody actually said that it is... in this thread at least. The discussion re number of losing trades till destruction was just hypothetical. It came more from the fact that I thought 50 losing trades at 3% would wipe the account when it's quite a few more than that.

Whilst I was disagreeing with you at the start of this thread, I agree with this.

We were talking hypothetically.