An Apparent Veneer of Structure over Random Chaos

[Sigma-D]

The answer to the original question is quite simply that most people cut winners short and let losers run and that is all there is to it.

Is that all there really is to it? It sounds simple enough to be true. But presumably that's what it's ALL about - getting to a point where you can differentiate the two well enough or often enough to turn a reasonably consistent profit.

 

[Sigma-D]

I didn't comment on letting winners run and cutting losers short. What I said is that doing the reverse makes most people lose over the long term. Many people let losers run and run hoping the trade will come back into profit until "forced awareness" makes them have to close the trade with a much greater loss than they should have incurred. By the same token I have seen many people get a small way into profit and close the trade for fear of it reversing when there was no indication that it would do. Much of real success is to do with risk management and position sizing appropriately for the level of risk calculated at the entry of any given trade. If you get this aspect correct then profits will come.

Thank you. my post above made before I read this.

Risk management and position sizing. Not staying in unless there is continued belief in the viability of the trade and not getting out unless there is insufficient belief in continued viability of trade. These sound like skills to be developed rather than just methods to be applied.

 

[NVP]

Is that all there really is to it? It sounds simple enough to be true. But presumably that's what it's ALL about - getting to a point where you can differentiate the two well enough or often enough to turn a reasonably consistent profit.

yes - cutting your losers early and letting your profits run is the holy Grail

we are not magicians .....we cannot predict the future .......so we control what we can with experience , discipline, structure and patience .........and let long term probability deliver the profitable results

may the force be with you .....
N

 

[timsk]

No, I was initially responding to Trader3333’s comment about cutting losers and letting winners run. If it is as simple as that then presumably there is a method to differentiate the two?

Hi Sigma-D,
Yes, I realise you were replying initially to Trader333's post - hence my penultimate post about probability.

When one enters a trade, there's no way of knowing it will turn out to be a winner or a loser. As T333 says, all we can do is to manage our risk by endeavouring to cut the losers quickly and let the winners run. Sadly, that's not as easy as it sounds! If you've not seen it already, you might find this FAQ helpful - especially the section about positive expectancy: Essentials Of 'Risk & Money Management'
Tim.

 

[Forexmospherian]

Hi Guys

There are still a lot more points to develop here - and more "thinking out the box" - ie flexibility - on everything - ie not exact fixed stops - unless you are already under 5 pips - never fixed targets - different levels - never all in - or all out - unless you are happy with your profits and the all out is only if in a negative - and going back to start - I would not want either trades - ie a 10 pip stop and 10 pip target - or 100 pips stop and 100 pip target - as both RR's are not enough - and one is more inefficent - because of time - not costs

Later on after tea - will give you my ideas or versions on trading flexible on what i have just mentioned - sorry it will be quite long in detail


Regards


F

 

[Devilicus]

Have Shakone, Random and the_Hare all left trade2win?
They could put a lot of meat on the bone in threads such as this.

 

[Forexmospherian]

The 10 pip stop and 10 pip target is nonsense. The logic of smaller targets relative to current price makes sense I think, but where the spread represents such a large percentage of the stop on entry, it's like the zero on the roulette wheel. That's probably a large part of why we do less well than random chance. We need to make the stop (and target) very large with respect to operational costs. Which is in direct opposition to the point I was making about keeping the targets small. There are more swings and roundabouts in trading than at Alton Towers.

Hi SD

If you have a system in say FX trading that as a win ratio of over 65% - ideally 70% + - and I mean on hundreds or thousands of trades - not just 20 or 50 - then if you transaction cost in included in you stop size and a very small percentage of gains on a ECN - then you should take more trades - not look just at costs in isolation

I have said this many times - I would far sooner pay a broker say $10k a month and earn - net ( after his costs and losses) say $30k a month - than only pay a broker just 1 k per month - ie 9k less - but still only make $17k net

So the % costs on the $17k net - are really small - and on the $30k net - what I paid to the broker was nearly a third of what I owned - but in my language - I prefer $30k net - even with more work - than just $17k net - ie nearly half as less

Loads of traders cannot see this

Its not just what it costs - it what it can make you

You as a trader want to shop and negotiate the best deals ( yes negotiate - dont just accept) but then if you are paying out more - to earn more that's OK

So if one trader is paying his broker only $200 a month and another trader is paying out $5k a month - normally the guys paying out the $5k - will be making more net money - but he is having to work for it - and I don't mean 50 trades every day - 5 - 15 should be ample


Regards


F

 

[Forexmospherian]

Back to this question - which is best -

One trade at 10 pips target and 10 pips stop - with say cost of 3 pips in there - or - one trade with 100 pip target and 100 stop - with still a 3 pip net cost ?

So many factors to put into the equation

First of all - neither trades are ideal - ie the risk to reward ratios are really just under 1 . If the stops were half the size - at 5 pips and 50 pips - then both could be looked upon as good trades ( RR's of 2) and then if the 100 pip target could be achieved with a 30 pip stop - really good a RR of genuine 3+ after costs

One of those trades a day - and you would be happy - ie RR of 3 - even on 1 % stake - then account up 3% in a day and on a 2% stake ( not suggesting more) then capital up 6% in a day.

But - would you make a 100 pip win trade every day ?

Would you make 1 of them two or 3 times per week ?

Might you really - if you are are fortunate only make 3 or 4 a month ???

Now on a 10 pip trade - 5 pip stop with 3 pips costs in it - not bad - ie of 2 - that's ok - do 2 or 3 a day - you would be delighted

But you are only going to compete with the larger size - 100 pip trade on a RR of 3 - if your costs are under 1.5 pips - spreads and commissions ??

So difficult

Whats my answer ???

Why not a 100 pip trade with a stop of 5 -10 pips ???

Now that would be very good - as RR would be 10 -20 - lets say 15 average

Just do 1 a week - and with a 1% stake you put your capital up 15% per week - very nice - no not going to suggest 2% - and I think you all know why

But how do you get a 100 pip win from a 5 -10 pip ??

Well for a start - you need to be experienced - and you need to think "outside the box again"

I mean is this like a winning the lottery trade - ie odds of 19 million to one or what ever on happening ??

How many go's are you prepared to try and not keep losing 5 pips cost or !% of your capital - 2 or 4 or even 10 ????

Well before I tell you how to do it - and there will be many experienced members here know - I look forward to your suggestions and if you think it is possible - and how ????

All suggestions welcome - other than calling me senile ( lol only been called that once today - so it been a really good day


Regards


F

 

[Sigma-D]

Hi SD

If you have a system in say FX trading that as a win ratio of over 65% - ideally 70% + - and I mean on hundreds or thousands of trades - not just 20 or 50 - then if you transaction cost in included in you stop size and a very small percentage of gains on a ECN - then you should take more trades - not look just at costs in isolation

I wasn’t looking at costs in isolation. And number of trades is irrelevant. If your operational costs represent 50% of your gross profit, you will make less money over the long haul than if your operational costs represent 5% of your gross profit.

I have said this many times - I would far sooner pay a broker say $10k a month and earn - net ( after his costs and losses) say $30k a month - than only pay a broker just 1 k per month - ie 9k less - but still only make $17k net

But there is no basis under which this becomes and either/or scenario – your example is hypothetical. Your costs are your costs. Your win versus loss ratio is what it is. Your return/risk – adjusted for costs – is key. A 70% win rate with X trades per period of time will yield a more profitable outcome than a system with an identical win rate with 10 times X trades per same period of time. Spread gets factored one tenth on the former. Notwithstanding the energy and focus required to run 10 times as many decision scenarios over the same period of time.
I’ve come to the view that I’d rather enter and manage one position rather than 10 and make the same, or better, profit in the process. TBD

 

[Sigma-D]

I've just finished looking at all my trades today and wonder why I took some of them. But those that I did take that I am happy to have taken would have been all the better for (a) a 20 pip stop that wasn't shunted to b/e at the first opportunity and (b) taking profit before a convoncing indication they weren't going where I wanted.

I'll remedy that tomorrow.

Thanks to Trader3333 for the raising of my awareness on why we tend to do worse than random chance suggests we should at this random game of trading.

 

[Forexmospherian]

I wasn’t looking at costs in isolation. And number of trades is irrelevant. If your operational costs represent 50% of your gross profit, you will make less money over the long haul than if your operational costs represent 5% of your gross profit.

But there is no basis under which this becomes and either/or scenario – your example is hypothetical. Your costs are your costs. Your win versus loss ratio is what it is. Your return/risk – adjusted for costs – is key. A 70% win rate with X trades per period of time will yield a more profitable outcome than a system with an identical win rate with 10 times X trades per same period of time. Spread gets factored one tenth on the former. Notwithstanding the energy and focus required to run 10 times as many decision scenarios over the same period of time.
I’ve come to the view that I’d rather enter and manage one position rather than 10 and make the same, or better, profit in the process. TBD

Hi SD

Yes your costs are you costs - but think about it .....

If your turnover or gross pips or profits are increased by having larger costs - then you are still better off

For example - $100 a 5% cost is $5 and a 50% cost in $50 - a lot higher

But by increasing your trades over a month to say 200 trades - will - or should with a winning system make you a lot more money than just taking 20 trades

So say on 20 trades you turnover is say $1000 and your cost are 5% then you make $950 net

But by taking 200 trades your gains are not pro rata - as you have more trades with better RR's - your win ratio should even be better - ie easier to get 10 pips than 100 pips and you should have a net win higher pip count leading to not a $10k turn over ( ie 10 time more ) but more likely $15 k turnover

So then a 50% cost on $15k is $7500 and you are left with $7500 - a lot better than just 20 trades and a $950 net

So your cost base is yes a lot higher - but its because you generate more profits or returns - you pay your broker more - but you still have more in your pocket

i appreciate its not just simple to follow - but ask any top accountant - and they will say dont drive your cost base down and down and end up with less turnover and less net profit

ie a company with 100 staff - might be able to operate with good profits and even maintain them with just 80 staff

But really reduces cost to say a fifth of the staff bill and drop to only 20 staff - then you have a lot less turnover - lot less staff costs - but probably worse off - with no profit.

ie don't restrict you costs just for the sake of it - its what the costs generate for you what is really important and for me i prefer an higher net income - even with more work and more costs - because to me - its worth it

(ie when it business I was used to 50 -70+ hrs a week including occasional weekend work away from home - nowadays - 25 -40 hrs a week trading is like part time )
Regards

F

 

[tar]

Whether you risk 1 to make 10 or you risk 100 to make 1 , you do worse than random because of 2 things : Costs and Gambler's ruin . Even if you let your winnings run and you cut your loses short , if your trades are random then you would do worse because of these 2 things : costs we already talked about that , second thing Gambler's ruin : you have a limited capital vs infinite wealth " the market" , you will hit bottom before your opponent do ! .
Moving your SL away or tighter and letting your winnings run will change your win rate anyway so its not the holy grail , however bad practices like martingale and hold and hope and cutting winnings short and letting losses run just escalates the problem .


http://trading-system-design.com/gamblers-ruin-paradox-in-trading.html

 

[Forexmospherian]

I've just finished looking at all my trades today and wonder why I took some of them. But those that I did take that I am happy to have taken would have been all the better for (a) a 20 pip stop that wasn't shunted to b/e at the first opportunity and (b) taking profit before a convoncing indication they weren't going where I wanted.

I'll remedy that tomorrow.

Thanks to Trader3333 for the raising of my awareness on why we tend to do worse than random chance suggests we should at this random game of trading.

As and when you get more experienced and have done your live thousands of hrs on small intraday time frames - you will not need a 20 or 30 pip stop - simply because you will understand timing a lot better -its key and crucial for great entries

Also you will know when not to try a swing trade for say 20 -50 pips - and instead ignore or just scalp.

It does come to most traders over time - whether it takes 2 years or 8 years - you will get a few eureka moments - trust me


Regards


F

 

[Sigma-D]

Hi SD

Yes your costs are you costs - but think about it .....

If your turnover or gross pips or profits are increased by having larger costs - then you are still better off

That is a non sequitur. There is absolutely no causality between 'having larger costs' and 'profits are increased'. Quite the reverse.

For example - $100 a 5% cost is $5 and a 50% cost in $50 - a lot higher

But by increasing your trades over a month to say 200 trades - will - or should with a winning system make you a lot more money than just taking 20 trades

So say on 20 trades you turnover is say $1000 and your cost are 5% then you make $950 net

But by taking 200 trades your gains are not pro rata - as you have more trades with better RR's - your win ratio should even be better - ie easier to get 10 pips than 100 pips and you should have a net win higher pip count leading to not a $10k turn over ( ie 10 time more ) but more likely $15 k turnover

So then a 50% cost on $15k is $7500 and you are left with $7500 - a lot better than just 20 trades and a $950 net

So your cost base is yes a lot higher - but its because you generate more profits or returns - you pay your broker more - but you still have more in your pocket

Your logic doesn't have any empirical basis, I'm sorry and a little surprised.

i appreciate its not just simple to follow - but ask any top accountant - and they will say dont drive your cost base down and down and end up with less turnover and less net profit

ie a company with 100 staff - might be able to operate with good profits and even maintain them with just 80 staff

But really reduces cost to say a fifth of the staff bill and drop to only 20 staff - then you have a lot less turnover - lot less staff costs - but probably worse off - with no profit.

ie don't restrict you costs just for the sake of it - its what the costs generate for you what is really important and for me i prefer an higher net income - even with more work and more costs - because to me - its worth it

(ie when it business I was used to 50 -70+ hrs a week including occasional weekend work away from home - nowadays - 25 -40 hrs a week trading is like part time )
Regards

F

I don't have access to any top accountants, but for this example that isn't required. The relationship between costs, turnover and net profit is not linear.

You've picked up on the costs and are using that as a driver for profitability stating, if I've understood you correctly, it doesn't matter what your costs are as turnover (lots of trades) and net profit are all that matters.

What I was saying is that where costs represent a significant fraction of profits on each trade i.e. you're playing for just a few times spread as your goal as you are in your scalping, your win/loss ratio will be negatively impacted as a result. You'll end up having far more risk exposure for far less return, far more scratch or near scratch trades.

 

[Sigma-D]

As and when you get more experienced and have done your live thousands of hrs on small intraday time frames - you will not need a 20 or 30 pip stop - simply because you will understand timing a lot better -its key and crucial for great entries

Also you will know when not to try a swing trade for say 20 -50 pips - and instead ignore or just scalp.

It does come to most traders over time - whether it takes 2 years or 8 years - you will get a few eureka moments - trust me


Regards


F

I do hope you're right.

 

[NVP]

good luck with your journey sigma .......good luck

and take advice when its given .........just a thought

N

 

[NVP]

I don't have access to any top accountants, but for this example that isn't required. The relationship between costs, turnover and net profit is not linear.

thats not what he is saying S

F's talking about managing the variable and fixed cost ratios together with leverage .......you make your choices of mix dependent on your (perceived) optimum business model as related to revenue stream

probably the classic Business example is outsourcing verses in house solutions .......but thats another story

horses for courses
N

 

[Sigma-D]

good luck with your journey sigma .......good luck

and take advice when its given .........just a thought

N

Thank you for your good wishes.

Advice is always appreciated, but the value of its utility can only be judged by reason and experience and time. To accept advice without question and to press into use with experimentation and testing would be a very silly thing to do.

Some things have been said which strike a chord immediately and others I have genuine doubts about - these are possibly the very ones which will become pivotal,or perhaps not. The problem with a medium such as this is that even assuming everyone who expresses knowledge and experience actually has it, there is no way to check their bona fides other than to apply what they say with caution and deep cynicism until it proves itself to be correct or not.

 

[Devilicus]

Bad advice is worst than none.

i'd advise to look through archives and try to find posts by the more knowledgable traders such as 'shakone' and 'random123'.
Similar topic might have been covered some time ago if your lucky?

 

[tar]

Its not a rocket science , costs will eat you alive when you are scalping so better be prepared :

EU spread and costs 1-1.5 pips including hidden costs slippage ... etc but lets say 1 pip .
If you are scalping aiming for 5-10 pips . If price goes against you 5 pips you are down 6 and if it goes your way you are up 4 pips ! 4 vs 6 while the market has moved equally in both cases . If market moves against you 10 pips you are down 11 and if it moves in your favor you are up 9 , now it is 9 vs 11 for a 10 pip movement .
However if you are aiming for 100 pips : It would be 99 vs 101 for a 100 pip movement in price .

Another point to keep in mind when scalping is scalpers tend to trade more , never seen a scalper trades the same as a swing trader , so they usually do on average - at least -5 per day 100 a month , that's 100 pip/month in costs and 1200 pips a year , does the EU move that much ?! So its definitely costs alot more and you're giving away alot of edge .

Originally the term scalping its professional definition was : buying at the bid and selling at the ask , aiming to catch the spread , not paying it 100s of times like what they do right now ! So its a totally different term now , quite the opposite ...