GREY1's APPROACH TO TRADING US STOCKS

The problem with the lottery is there is no way of achieving a positive expectancy. If expectancy is negative there is no way of achieving profit.

The only way to profit is to find a strategy with a positive expectancy then size your positions to protect your capital. First establish how much of your capital you are prepared to risk per trade. Second size your position according to the volatility of the instrument.
 
LevII said:
The problem with the lottery is there is no way of achieving a positive expectancy. If expectancy is negative there is no way of achieving profit.

The only way to profit is to find a strategy with a positive expectancy then size your positions to protect your capital. First establish how much of your capital you are prepared to risk per trade. Second size your position according to the volatility of the instrument.
Click to expand...

At least with the lotto the reward is predetermined and there-fore the math's is relatively easy.

With trading in theory the reward could conceivably be enormous (as is the case with most of my trades) :cheesy: so we have to work with averages based on random walk theory??? which makes the math's subjective.
 
But if scalping then would you not have the target set at the time of entering your trade? You would also have your SL 'set' when you enter trade(?). So, in that sense, don't you know the RR? The probability or otherwise of hitting your target is the big question then; hence trying to enter high prob trades.

Cheers

Steve
 
I am going to leave you with a quiz…

IS SPENDING £1 on the LOTTO a risky adventure ? or not
 
May I thank you all for your contribution . We have a winner thread here . well done all and i am glad we are talking business here.

I wont expand more on what has been said by myself and others . I think we have managed to get the point across .

The next stage would be to answer

1) How to have a projection of future reward
2) How to scale in and out mechanicaly and correctly


The term future reward is meaning less because the factor affecting the future behaviour of stock movements are endlessly variant. How ever we have to still have some knowledge of possible and probable reward other wise we are doomed.

we need to know an unknown i am afraid and there is no way around it and to know this the only tool at our disposal is the immediate past. it is the immediate past that one should get into to find a way out for a possible future reward and i have introduced such a bench mark in my COMPLETE VWAP STRATEGY post. They are called MPD bands.

MPD bands are risk bands and not a trading bands like bollinger. MPD bands can give you an approximate estimate of what a stock at any time could reward you .

I think it might be best if i give an example of use of MPD to illustrate the risk assessment.


Objective :-- TO WIN EVERY DAY

Trade 1 .. Trader takes a trade and loses say $100
Trade 2 Trader takes a second trade ad loses $500

Trader now needs to make $ 600 plus to come out on top ..

stock price is say $50. upper MPD is $50.20
Trader knows that the possible reward for the next trade is around 20C
Trader then knows he needs to have a position size of 3000 of the stock price to get his money back ( break even and to win to have higher position size )

Is the 3000 shares a risky adventure?

if yes then move to other stocks with higher MPD gain and reduce pos size to reduce the risk .

Now ,, this is an elementary approach to risk management using MPD bands. VWAP engine uses other algorithms to acheive that but for the time being this is a stepping stone for our traders to gauge their possible reward while trading .

please remember i have made few assumptions here to have an approximate solution to risk managements for beginners.

use the above technique for the first few days and i can assure you that i will be taking you through more sophisticated methodology later on .


Ps:-- in the second phase of risk analysis i will bring Volatiltiy into the risk bands and you see how the combination of these two can paint a clear picture of risk of a trade at any stage .



grey1
 
Grey1

stock price is say $50. upper MPD is $50.20
Trader knows that the possible reward for the next trade is around 20C
Click to expand...

It may be a good idea to explain to others why the reward on the next trade is known to be 20c


Paul
 
Grey1 said:
Trade 1 .. Trader takes a trade and loses say $100
Trade 2 Trader takes a second trade ad loses $500

Trader now needs to make $ 600 plus to come out on top ..

grey1
Click to expand...
Grey1, a potentially provocative question if I may.

Is this not dangerously close to being a martingale strategy? Should not the trader be sizing his position according to his account size, his risk tolerance in relation to it, the potential reward (at the MPD band or VWAP) and the volatility of the stock? Should he not be doing this exercise without considering his desire to make up losses? I do appreciate his set objective is to win every day.

Sorry if I have misunderstood.

My thanks also for another valuable thread.

LII
 
LevII said:
Grey1, a potentially provocative question if I may.

Is this not dangerously close to being a martingale strategy? Should not the trader be sizing his position according to his account size, his risk tolerance in relation to it, the potential reward (at the MPD band or VWAP) and the volatility of the stock? Should he not be doing this exercise without considering his desire to make up losses? I do appreciate his set objective is to win every day.

Sorry if I have misunderstood.

My thanks also for another valuable thread.

LII
Click to expand...


LEVII


Position sizing will come from your capital ( see example below ) how ever we need to have MPD band to tell us how to move from one stock to another . Therefore we use MPD bands as a means of measuring the risk element in STOCK SELECTION than position sizing .

Example

stock 1 reward 20c exposure needed 3000
stock 2 reward 80 c exposure needed 750

stock 2 seems to be a better candidate but , are we going to take 750 as our next trade ? Then read the next part..

POSITION SIZING


lets say your capital is $100 000
lets say we use 1% rule ( I will discuss the study of ruin in detail in future )
so stop loss would be $100 000 * 1 /100 = $1000
so we have $1000 in our hand to go shopping . Every stock has a price tag defined by their volatility

Stock A ATR 30 C i can afford to buy 3333 of this stock ( $1000 divided by 30 c)
Stock B ATR 50 C i can afford to buy 2000 of this stock
stock C ATR 120 C I can afford to buy 833 of this stock



next we look at the possible reward from MPD

Stock A MPD possibe reward 10 C
Stock B MPD possible reward 30 C
Stock C MPD possible reward 80c

remember we were down $600.

in above example stock C seems to be the correct stock ( 833 * 80= $644 which would recover my $600 loss plus $44 profit ) .. Hence we use MPD band as a confirmation for correct choice of stock

I think i have answered your question now.

Just one more explanation ... if you adjust your postion sizing according to ATR ( volatility ) then there is absoloutly no difference if a stock is HOT ( dangerous to play ) or cold . because you are taming the stock by reducing its postion size accoriding to its volatilty . There for for those who have read this thread and fully understood it it is safe to play any stock as long as you fully implement the simple and elementary position sizing technique i discussed

All above can be programmed into Trade station and you don't have to be bothered with any calculation intra day once you have coded it.. You must become as mechanical as possible.


Grey1
 
Trader333 said:
Grey1



It may be a good idea to explain to others why the reward on the next trade is known to be 20c


Paul
Click to expand...

MPD bands are calculated as follow

upper MPD = VWAP +( high -Low ) /2
lower MPD = VWAP - ( high - Low /2)
 
45 min into the trade and Grey1 is up by $1246.
 

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Grey1 said:
MPD bands are calculated as follow

upper MPD = VWAP +( high -Low ) /2
lower MPD = VWAP - ( high - Low /2)
Click to expand...

Yes I see, howver I think that this will still need some more explaination so lets say the following:

VWAP price is $50
MPD bands are at $50.25 and $49.75

Price is currently $50.05

What is the potential reward for Long or Short trade ?

This presumes that we are not taking a "Top Down" approach and have eliminated the need to know market direction as a factor in our decision to take the trade.


Paul
 
Trader333 said:
Yes I see, however I think that this will still need some more explaination so lets say the following:

VWAP price is $50
MPD bands are at $50.25 and $49.75

Price is currently $50.05

What is the potential reward for Long or Short trade ?

This presumes that we are not taking a "Top Down" approach and have eliminated the need to know market direction as a factor in our decision to take the trade.


Paul
Click to expand...

Paul

simple ,, In this case the potential reward would be 50.25 -50.05= 20c

I have already decided to be long so the potential reward in taking a short is irrelevant.



Grey1
 
I am done for to day . very difficult to trade again . It felt like getting blood out of stone .
$up 1657.97 for the day max drawdawn around $100 Max win $2100.

Grey1
 

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oh dear, with my limited knowledge, I think i would have been tempted to go short as the potential reward was greater viz 30 cents :eek:
 
Last edited:
samtron said:
oh dear, with my limited knowledge, I think i would have been tempted to go short as the potential reward was greater viz 30 cents :eek:
Click to expand...

samtron,

We dont take a trade simply because there is more rewards in taking it , we taking it when the set up is there.

When VWAP trading we only pair trade stocks that are touching their upper and lower bands. This way we eliminate the market direction which is the root of all evils lol

Under no circumstances a trader should take a directional trade using the vwap strategy .


grey1
 
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