Risk portfolio

[TheBramble]

MODS NOTE: This thread has been created from the How would you improve this trend following system?

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Henry, Money Management never stops being important.

If your Pw is less than 100% - you do need money management or you will lose it all. Simple as that.

The application of probability theory based on your Pw is a good place to start. Of course, that rather demands you have a reasonable track record in order to have a good shot at stating what your Pw is. And that is the hardest bit - getting to OK.

Safer by far to go the cautious route in the beginning at least and stick to a max risk of 1% of trading capital per trade.

 

[techst]

Well said bramble, I'm known as a gunslinger risking 2% of capital per trade! "position sizing won't make any difference in the long term" <<-------- thats scary to me! Henry, go to the www.iitm.com site download the Secret of the Masters trading game by clicking on 'Newsletter'. Play that game til you win level 3, then come back and tell me that position sizing and money management aren't that important. It's not my game its developed by Market Wizards own Van K Tharp.

 

[henry766]

i stand by what i've said bramble , yes if your idea isn't profitable betting less helps , but it will never make a profit , and as i've said so many times as long as you don't bet 100% in one go, (90% is fine as long as you can still bet) ,bad money management won't make you lose money , and doesn't make much difference to one in the end , for example if you win 3 out of 4 you'll soon be ahead ( if you win 3 out 4the chances of losing say 10 in a row are minute , the chances of being behind after 10000 bets infinitly small) , look at it another way , casinos use no money management on roulette, thats up to the client , they still win, not just sometimes , but everyday!! which comes back to my point , trading is 99.99% about having your trades over the profit loss/ line , and the .001% ? forget it , it don't matter , just win .

 

[techst]

Brambles a full time trader are you Henry? I might try that, 90% of my account risk per trade. What do you think bramble, willing to give that a try?

 

[TheBramble]

Henry, to avoid the risk of 'running this one on' if you fancy moving this to a new thread I'm game, but let me pose a few quick questions for you using your example data.

1) If you have a 0.75 Pw and you're doing 90% of your total trading capital each time, how many losses in a row will it take to wipe you out?

2) How many consecutive losses can you expect at some point with a Pw of 0.75?

3) What would good old Kelly recommend for a system with a Pw of 0.75?

 

[henry766]

with betonmkts a couple of grand is a lot less likley to go directly bust than 100:1 and chances are you'd be ahead after first trade( fact) .75 gets you ahead very fast , what are the chances of being behind after a couple of dozen trades winning 3out 4 trades? whatever the odds are i'll take em!!

 

[TheBramble]

with betonmkts a couple of grand is a lot less likley to go directly bust than 100:1 and chances are you'd be ahead after first trade( fact) .75 gets you ahead very fast , what are the chances of being behind after a couple of dozen trades winning 3out 4 trades? whatever the odds are i'll take em!!

It will only take 5 consecutive losses to wipe you out at 90%.

You can expect 5 consecutive losses every 1024 trades with a Pw of 0.75.

Kelly reckons 50% MAX for a system with a 0.75 Pw.

0.75 doesn't get you ahead very fast if your first 5 trades are losers.

Maybe I put too much faith in probability and maybe I trade too cautiously. I guess it's really horses for courses Henry.

 

[henry766]

arn't 5 consecutive at 3:1 over 100:1?and 3to 1 is plenty fast , you should be so lucky, maybe your cautiouse cos you don't win enough!!! so tell me the return over a couple of dozen trades winning 3/4 quarters betting 90% a throw starting with a couple of grand .

 

[TheBramble]

I thought I just did.

 

[henry766]

nope you didn't bramble , it's millions thats the return!!! 100::1 on losing it ,but more often than not making millions by forgetting money managment and concentrating on the only thing thats important , being profitable,you stick to your money management bramble , i'll stick to winning.

 

[FTSE Beater]

Hi All

Please continue this discussion in this thread.

Thank you

 

[TheBramble]

A puzzled frown as I see "Risk Portfolio" on the new threads list with my name against it...I think Henry really deserves the honours as I was initially responding to a post of his, but however....

so tell me the return over a couple of dozen trades winning 3/4 quarters betting 90% a throw starting with a couple of grand .

Based on 5 (well 4 actually - I got bored) consecutive losing trades:-

Trade# Total Trading Cap. 90%Risked
1 , $2000 , $1800
2 , $200 , $180
3 , $20 , $18
4 , $2 , hello......

I think you can see where I'm going. Of course, this doesn't have to be the first 5 trades, it can at any point in your Pw 0.75 system using a 90% risk of your trading capital.

If you want to paint a rosier picture you can have your first 10 trades all coming up winners and winning double your risk each time. Let's do that - THEN hit a losing patch just to show how it works out...

You're starting out on trade #21 having worked your $2000 into $1.2 Million

Trade# Total Trading Cap. 90%Risked
21 , $1226213 , $1103592
22 , $122621 , $110359
23 , $12262 , $11036
24 , $1226 , $1104
25 , $123 , $110

OK...so you could get back from here doing $2/pt on binary bets and cleaning loos in your spare time, but trading isn't trading without money management.

I will also totally agree with you that my risk aversion is ENORMOUS and therefore my returns will not look anywhere near as good as a trader with a higher returns requirement. But as I trade for myself and don't have to satisfy anyone other than myself on my performance AND having been taken out of the game a few times playing that other (higher risk) way - I now choose this way.

The other part of your question - the Probability of 5 consecutive losing trades is 0.0009765 (just under a tenth of a percent - but it IS there. Remember the Black Swan).

 

[FTSE Beater]

Hi All

I have to agree with TheBramble on this one.
Think of it this way. If you have a losing trade where 90% of your trading account, is gone. You need to make a trade with a 1000% return, just to get back to where you were. Trading based on a 90% risk profile, is betting that the 1 in 10 losing trades won't happen. Purely by the law of averages, it'll only take you 10 trades to have that big loser, so the winning 9 trades had better be VERY LARGE indeed.

My personal risk on any one trade is 2%, which techst@ has already stated, is high risk trading.

 

[TWI]

I generally risk about 3% based on where I cut out in worst case. That feels quite enough when you have to take it. It is also how much I will be happy to take out of a position in Profit.
As far as I am concerned risking anythiing like 10%+ is only appropriate when you have a very small account as often in this case you have little choice.

 

[SvenFoster]

I don't trade profitably at the mo so my input may be of little use but looking at the table below even i can see that 90% risk is a bad idea. Most people suggest 1-3% and never more than 5%

I recon a decent living could be eeked out at those levels and you won't place undue pressure on yourself that 90% will.
Even if your system is entirely mechanical you are still v.likely to get burnt in the long run.
If your discretionary or even placing your trades manually what will happen to you pyscho-ma-lodgically when you lose 90% of your capital. Are you sure you'll be able to continue that PW 0.75??

I'm not so sure.

[/font]
[font=Courier New]Risk Return[/font]
[font=Courier New]1% 1.01%[/font]
[font=Courier New]2% 2.04%[/font]
[font=Courier New]3% 3.09%[/font]
[font=Courier New]5% 5.26%[/font]
[font=Courier New]10% 11.11%[/font]
[font=Courier New]20% 25.00%[/font]
[font=Courier New]30% 42.86%[/font]
[font=Courier New]50% 100.00% <== hmmm loose half, double it to get back [/font]
[font=Courier New]

 

[henry766]

you've all missed the point , winning 3 times out of 4 wins as i've said you'd probably ( far higher than even chance)make millions in just 2 dozen trades from 2 grand and the chances of going bust are over 100:1. you can waffle all you like but a better than fifty fifty chance of making millions from 2grand ?, you guys will never make it!! and i believe i'm in good company as soros won a billion on black wednesday and i suggest that was betting slightly more than 3% , but then he probably did win 3 out 4 , but feel free to criticise his go hung attitude to money management , i suggest the next time you get a better than fifty fifty chance to turn 2 grand into millions you take it!!

 

[FetteredChinos]

ok henry.. since we now have the infallible system.

care to divulge how we are going to get this 75% system?

 

[TheBramble]

Henry, I think I'm pretty much all done on this topic with the current data.

However, if you were to come up with your Aw we could play with some more figures and run it through a MonteCarlo and see what pops out.

Can I just ask if you're actually trading a system at the moment that looks anything like the one we're hypothetically discussing?

 

[TWI]

Thanks Henry, I will bear this in mind for tomorrows open. I wish I had thought of this sooner.

 

[tech/a]

Questions
(1) whats the return on each win?
I cant see it anywhere in this new thread sorry!
(2) if your first trade is a 90% loser how many consecutive wins do you need to return to even.
(3) how many if you have 2 consecutive first trades lose 90% each.
(4) with this 75% win method what is the greatest number of both consecutive losses and consecutive wins.Do you know?
(5) how many turn from say 20/30/50/80% losses to an eventual profit?
(6) after an initial loss of 20% wouldnt the reason either technical or fundamental for taking the trade in the first place be well and truely proven wrong?

Henry this is a hypothetical arguement isnt it!?

Is this a Forex/futures method or stock,sorry Ive come in late?