Risk:Reward & Drawdown - The questions new traders should be asking?

[LiamH]

Hello,

Ok, so some here might remember me and some not. It seems like I'm a slow learner. I've been interested in trading for 6 years but have been going away and coming back to it as I have kids & job etc

So... Before now I was pretty hung up on possibility rather than probability. I figured that if I had £1000 and risked I dunno, 5% per trade, that I would be a multi-zilloinaire within about 3 weeks. All I needed to do was follow someone elses **** hot strategy and boom, yeah baby.

But no. It really doesn't work that way. I've also played a lot of poker - This taught me soooo much about risk:reward, probability, bank roll management and variance. These things are the most important things to a poker player. And guess what? If you want to trade profitably long term, these are the things you should be trying to understand.

You see, all I used to care about was how much profit I could potentially make without considering losses along the way. I'd be like, well I can make 1000 pips per month, so on a £1K account at £1 per point I'd double through every month. OK, well firstly, making 1000 pips per month ain't that easy and certainly not with 10x leverage. Secondly, what, you think this profit is gonna be linear? You reckon your account will just head for the stars? What if you have 5 losing trades in a row for 5% a time? How will that make you feel? Once you've lost 25% in a week will you really have confidence anymore? Surely your position size will need to shrink too?

My questions to experienced traders are...

1) What % do you risk per trade?

2) On average, what is your risk\reward ratio?

3) On average, what percentage of your trades are winners?

4) What is the most losers you've had in a row?

5) What is the highest % drawdown you've seen on your account and how did you deal with it psychologically?


I would really appreciate it if some experienced traders could answer these questions for me. I think the answers will be hugely beneficial to new traders.

And, sorry if this has been done to death already (it should have!)... I've not been around here for a while!

Thanks

 

[Enzzo]

1) What % do you risk per trade?

2) On average, what is your risk\reward ratio?

3) On average, what percentage of your trades are winners?

4) What is the most losers you've had in a row?

5) What is the highest % drawdown you've seen on your account and how did you deal with it psychologically?

Hi Liam,

These are my views

1) I don't risk the exact same % in every single trade, as this would be me assuming that every single setup would have the same winning expectancy and they don't (here is where the statistics play their role)... so I vary between 1 and 3 %

2) My personal R:R is 1.3 on average...
This is very subjective and I don't give it that capital importance as many traders do, because R:R has to be balanced with the winning ratio... so it can be a R:R of 0.xx and be a winning method perfectly

3) Winning ratio is about 76%... (same said above in point 2 is applied here)

4) most losers where 5 in a row.... but that doesn't mean that they where full stop loses, as I tend to get out of a trade if I got some "clear" clues that I'm trapped and it is not performing as expected

5) The biggest DD, was long long time ago.... and it was like a 70% of the account at that time... the thing is that it was not that much financially speaking, and I was always lucky enough to never blow any account, nor even in that period where I was starting to trade... but some big DD was made from time to time, of course....
I always tried to get away from trading a few days, then come back and see things with objectivity, then get starting again trying not not make the same mistakes again (that not always was the case, you know)

In my opinion..... really, really helps immensely to set you a risk limit for the day, week, month... etc.. and if you reach this, be disciplined enough to stop trading for that period.... (this is really what most of the Pros in the sector do)
Time and time again the same pattern happened to me in these starting (and not that much starting) days.... it was like trading "quite good" for weeks or months, being profitable.... but all of a sudden in an horrible day of trading by my part, giving back almost all or even more with the impulsive/ revenge trading....

So the really important thing is knowing that tomorrow you will be able to trade again and be back in the game....

Hope it helps you a little

 

[the hare]

lulz

 

[DionysusToast]

My questions to experienced traders are...

1) What % do you risk per trade?

.15% is my norm.

2) On average, what is your risk\reward ratio?

Not sure how to calculate it. 4 tick stop is normal for me in the current market conditions. 4 tick first target, 8 tick second and the last will manage out. I can exit at any time, before any target or stop.

3) On average, what percentage of your trades are winners?

More than 50% - I am not going to give the exact number because it would cause a stir.

4) What is the most losers you've had in a row?

You mean now I am profitable or when I was jumping at shadows? If I get 3 in a row, I will stop for the day as I am obviously not reading it right.

5) What is the highest % drawdown you've seen on your account and how did you deal with it psychologically?

Never had a significant drawdown. I am only risking .15% per trade, so imagine how many ****ty trades I'd need to get in a row for a significant drawdown - I'd have stopped & re-assessed way before DD became significant.

I'm interested in the poker stuff to be honest - any chance you could elaborate?

 

[Pi3141]

Would you mind going into more detail as to how poker has helped you with trading? Are formulas like Expected Value in poker applicable to trading? - Id be interested to know what your thoughts are.

Thanks

 

[LiamH]

@ DT & Pi...

Well, poker and trading are very similar games. They're both about managing risk & reward. You can be the best poker player in the world and still lose to Bob the drunk irish man over 10k hands. This is because of variance - Over really quite large samples you can run below expectation and so you need many buy ins in your account to play any particular game - For me, I need 50 buy ins to a game for me to play it and I'm a pretty solid winner these days.

So that gives a strong understanding of how to manage an account. It helps realise how much you should risk. I mean, not all that long ago I thought 5% was an acceptable risk. In all honesty, now, on a significant trading account I would lean toward DT's risk strategy although my account is small because I refuse to lose thousands whilst I sort my strategy out. In poker you get involved in a lot of 50:50 situations and it's amazing how many times in a row you can win or lose these flips. Baring in mind that a solid trading strategy might only be right 50% of the time, this hammers home just how many losers you can have one after the other while still following what is, in the long run, a profitable strategy.

In poker, your opponents can see how many hands you play so if you only wait for Aces they will fold and you will lose money due to posting the blinds every orbit. In trading your opponents do not have this information and you do not pay blinds when you are not in a hand so you can wait for Aces every time and this is what I intend to do

In addition, if you're skilled enough to read the market you could and should base your risk % on your probability of success - Obviously, you would put more money into the pot pre-flop (initial risk) with AA than with 22 because with AA you're an 80% favourite but with 22 at best you're facing a flip 99% of the time. I'm not entirely sure that there are many traders skilled enough to do that though, I'm certainly not. I'm still of the opinion that the markets are essentially random and you're pretty much always facing a 50:50 so then RR ratio becomes the determining factor as to whether or not I can make any money.

 

[LiamH]

Would you mind going into more detail as to how poker has helped you with trading? Are formulas like Expected Value in poker applicable to trading? - Id be interested to know what your thoughts are.

Thanks

To answer this directly, I'm not sure that EV in poker is directly applicable to trading.

In poker I might know for certainty that my hand has X amount of equity vs my opponents range of hands in a particular situation. This comes from ability which has been amassed through a lot of study and playing over more than a million hands in the last 3 years. Also, the equity in poker is guaranteed, it's a definite figure that you can rely on.

For this to help in trading, you would need to be able to assign an exact probability of your trade winning for an exact profit vs your risk. I don't know that anybody can do this but if they could they would surely be the richest person in the world very, very quickly.

 

[new_trader]

@ DT & Pi...

Well, poker and trading are very similar games. They're both about managing risk & reward.

If this is the case why are you interested in trading? Why not just stick with poker especially if you are a solid winner as you say? I hear good Poker players can make a very decent living, even become millionaires. Even though I often read that poker and trading are are similar I have no interest in becoming a full time poker player so I can't figure out why poker players want to make the transition to trading. Do you think it's easier?

 

[LiamH]

If this is the case why are you interested in trading? Why not just stick with poker especially if you are a solid winner as you say? I hear good Poker players can make a very decent living, even become millionaires. Even though I often read that poker and trading are are similar I have no interest in becoming a full time poker player so I can't figure out why poker players want to make the transition to trading. Do you think it's easier?

Several reasons... I started out wanting to be a trader but was dilluded and had no money. I started playing poker to build an account for trading because I had heard that they were similar games.

I'm a winning player at NL50 - I make about £20 per hour playing poker... So, I'm a solid winner at respectable stakes but a millionaire I will never be. The difference between me and a player who can make millions is astronomical, they will be better in every respect, much like I'm relatively quick in a go-kart... I regularly finish in the top 5 in local races. Put me on a track with Lewis Hamilton and I get absolutely destroyed obviously. The comparison is the same. You can't say that just because I claim to be a winning player I should keep playing as you've heard people can make millions... The point is, at what level I'm winning. I'm good but not that good.

Poker is dying. It's a zero sum game and the players are getting better all the time. In the poker boom, before I started out, someone with my skill level probably could have made millions because there were so many terrible players playing high stakes. This is no longer the case and in fact, there are players who made a lot back then can no longer beat even the low buy-in games and have given up altogether.

Yes, in relative terms, trading is easier than poker. Definitely. I am certain that it'll be much easier to make millions trading than playing poker but I don't claim to have the skill to make millions doing either.

EDIT: I am certain that it'll be much easier to CONSISTANTLY make millions trading than playing poker... Practically anyone with 50K to spare could luck box a huge tournament and make a million or three quite quickly. This doesn't mean that person could do the same thing year on year.

 

[LiamH]

And, this thread has drifted off... new_trader, you're an experienced trader. Any chance of you answering my initial questions? I still believe that these aspects are where new traders fall over. At least, this is exactly where I fell over.

 

[Pi3141]

I dont mean to drift away from the topic even further, but I just wanted to say LiamH I totally agree with your thoughts that poker is harder than trading. For me, poker is harder because it involves more human emotions and psychology which becomes difficult to quantify. For example, how could you possibly work out the odds of winning against an aggressive player or adapt your edge/system to cope? There are too many qualitative variables unaccounted for, which for me makes it harder than trading.

Anyway, back on topic *ahem*

 

[VielGeld]

Ha, I took a look at Poker about two weeks ago and said the exact opposite: "Poker is easy as ****!"

Of course, that was with play money, and it turns out players have absolutely no respect for play money, so it is indeed incredibly easy to make "money" off them. Real cash tables are played very differently.

Anyway, that to say that the similarities between Poker and trading are there, though both differ in some respects.

The one major difference is that the playfield is not set like in Poker. There are no defined boundaries to trading. You also have to consider that some markets are better than others, and so are the times of day. You unfortunately can't trade anytime you'd like, like how you can just go online and start a game of Poker.

You also have to spend countless hours in front of the screen before grasping what the heck's going on, and more hours understanding it before being able to consistently profit. Some "get it" very quickly, others stagnate for a long time.

-----

Now, I believe the initial question is a bit flawed. Position sizing is quite important, but I've found the equation isn't mathematical at all. It is:

Low end: Not so low that you aren't taking advantage of your edge.

High end: Not so high that your emotions take you out of the game (some might add "or a significant DD", but I find emotions cause the DD in the first place).

What this level is, is different for everyone. It all depends on your tolerance and how hard you're willing to push. Generally speaking, a consistently rising equity curve that doesn't get you excited or hurts you when it hits a snag is just right.

As to the questions:

1) What % do you risk per trade?

2% right now. Of course, I'm poor.

2) On average, what is your risk\reward ratio?

About .5 to 1.5... so about 1?

3) On average, what percentage of your trades are winners?

N/A

Still developing myself as a trader. 50 - 60% seems to sound about right when I'm in the Zone, though.

4) What is the most losers you've had in a row?

30+

5) What is the highest % drawdown you've seen on your account and how did you deal with it psychologically?

About 75%.

I crashed and burned, and found this site. I found my salvation and came out of it sort of ok, lol.

I usually deal with loss by doubling up on research and study. Try to find out what went wrong, how to deal with it, then move on once I found a solution and the P/L starts creeping back up.

 

[tony1979]

My questions to experienced traders are...

1) What % do you risk per trade?

2) On average, what is your risk\reward ratio?

3) On average, what percentage of your trades are winners?

4) What is the most losers you've had in a row?

5) What is the highest % drawdown you've seen on your account and how did you deal with it psychologically?

Liam, your questions "assume" that the same system or method is being used by the individual for all of his trading, which is why I can't answer.

Vielgeld, no offence, but I don't think you're the target market for this thread - not in answering anyway.

 

[VielGeld]

Vielgeld, no offence, but I don't think you're the target market for this thread - not in answering anyway.

It's an open forum, bub. Just because I'm not consistent yet doesn't mean I can't meaningfully contribute. Take it or leave it.

 

[tony1979]

It's an open forum, bub. Just because I'm not consistent yet doesn't mean I can't meaningfully contribute. Take it or leave it.

I'm only respecting the OP's wishes...

Good day to you.

 

[VielGeld]

I apologize. You'd be right about that.

My point remains, however. He might find something useful in it.

 

[LiamH]

Liam, your questions "assume" that the same system or method is being used by the individual for all of his trading, which is why I can't answer.

Vielgeld, no offence, but I don't think you're the target market for this thread - not in answering anyway.

Hi Tony... You're right to a certain extent but my point isn't to compare trader results, if it was then of course everyone would need the same system. My point is that rather than how much a new trader can make, they should be concentrating on and understanding the money management side which is arguably the most important part of being a successful trader.

I know that money management is mentioned a lot but it's not really explained to new traders. Or at least, it wasn't fully explained to me until I started playing poker.

Money management > Psychology > Strategy in my opinion. There are a million profitable strategies out there if your money management and psychology are sorted. Without good money management and psychology there are no profitable trading strategies, just like poker... You can be the best in the world but if you tilt at 10 bad beats in a row or play higher stakes than your bankroll can handle you'll be broke very quickly.

And anybody is welcome to answer here

 

[tony1979]

Hi Tony... You're right to a certain extent but my point isn't to compare trader results, if it was then of course everyone would need the same system. My point is that rather than how much a new trader can make, they should be concentrating on and understanding the money management side which is arguably the most important part of being a successful trader.

I know that money management is mentioned a lot but it's not really explained to new traders. Or at least, it wasn't fully explained to me until I started playing poker.

Money management > Psychology > Strategy in my opinion. There are a million profitable strategies out there if your money management and psychology are sorted. Without good money management and psychology there are no profitable trading strategies, just like poker... You can be the best in the world but if you tilt at 10 bad beats in a row or play higher stakes than your bankroll can handle you'll be broke very quickly.

And anybody is welcome to answer here

My point is, that many experienced traders (i'm including myself) are trading multiple systems for equity curve smoothing purposes, therefore it's impossible to answer your 5 questions with a single definitive response for each. You did ask traders to respond, so this may be why you're not getting any answers...

I should add though, that this topic, which you've brought up, is exactly what new traders need to be thinking about - so i agree with your reasons for posting it.

 

[piggybridges]

I know that money management is mentioned a lot but it's not really explained to new traders. Or at least, it wasn't fully explained to me until I started playing poker.

maybe you could expand on what 'money management' means to you in terms of trading with some examples?

 

[LiamH]

maybe you could expand on what 'money management' means to you in terms of trading with some examples?

Essentially, it means maintaining a trading account in such a way that you're highly unlikely to go broke whilst maximising your potential profits. The maximising potential profits bit is difficult because you can't assign a reliable probability to a particular trading result.

It doesn't matter what examples I have - And I do have a lot. I'm not yet proven.. I've been through patches where I've made money and more patches where I've lost it but something that has stuck for quite a while... My trade reasoning, apart from in my first 6 months or so, has always been pretty good. My position and money management has been shocking and hence I'm a net loser.

I'd like to point out that I'm not looking for advice for me with this thread - I'm looking for advice for others.

I had a pretty stupid view of account management when I started and for a good while after because all I could think of was possibility rather than probability. Yes it's possible to risk 5% per trade and double up every month until you're the richest dude in the world but it's highly improbable. I mean, 10 losing trades in a row will definitely happen to you over a large enough sample and the probability of that happening now is the same as after you've been trading for 10 years, even if you have an 80% strike rate. What's more, the probability of having another 10 losing trades in a row is exactly the same straight after 10 losses as it was before. Could you handle 50%+ drawdown? I think not. This is what I didn't understand and I think new traders should really put some thought in to what this means.