Is it really that difficult?

[Rhody Trader]

My advice to you would be to look further than the win rate.
Alone it does not tell you want you want to know.
You need to look at the Expectancy of your model. This is calculated from the win rate and other info.
The Expectancy needs to be positive ( greater than zero) for you model to be worth using.
There are websites which tell you how to calculate Expectancy.
e.g. www.indextrader.com.au/positive_expectancy.asp

Glenn

I would go one step further and say it's expectancy combined with trading opportunities. You can have a great expectancy, but if you have too few opportunities to apply it, the system won't do much for you. On the other hand, if you have a low expectancy, but the system generates trades at a high frequency you can do very well.

 

[pttrader]

My advice to you would be to look further than the win rate.
Alone it does not tell you want you want to know.
You need to look at the Expectancy of your model. This is calculated from the win rate and other info.
The Expectancy needs to be positive ( greater than zero) for you model to be worth using.
There are websites which tell you how to calculate Expectancy.
e.g. www.indextrader.com.au/positive_expectancy.asp

Glenn

Thanks Glenn for the info. I went to the web site and did the calculation on some real trades made and not hypothetical backtesting. It came out to: E(R) = $4.28 per dollar that I risk. I think I did it right???Anyway, I followed the formula that was there. Since I have never done this before I am not real sure how good that number is. Is that good? Average? Poor?

 

[pttrader]

I would go one step further and say it's expectancy combined with trading opportunities. You can have a great expectancy, but if you have too few opportunities to apply it, the system won't do much for you. On the other hand, if you have a low expectancy, but the system generates trades at a high frequency you can do very well.

What would you consider high frequency for a swingtrading system?

pttrader

 

[Glenn]

Thanks Glenn for the info. I went to the web site and did the calculation on some real trades made and not hypothetical backtesting. It came out to: E(R) = $4.28 per dollar that I risk. I think I did it right???Anyway, I followed the formula that was there. Since I have never done this before I am not real sure how good that number is. Is that good? Average? Poor?

Here's a way to make comparisons:-
www.trade2win.com/knowledge/articles/general articles/developing-a-trading-strategy-2


Glenn

 

[nine]

There is some very good information in this thread but for me it doesnt quite come together.

Glenn is quite correct in favouring expectancy as a nice measure of trade outcomes that, if one had to take only one measure, would be better than win/loss ratio or average win/average loss. But to me it is only one part of the equation. Also, simple equity curves based on the historical sequence of trades are only looking at the sequence that did take place. They ignore the other possibilities and, sadly, those other sequences all to often seem to occur when one trades long term systems (the old back test vs real results problem).

For me you need to include:
Win loss ratio
Average Win and Average Loss
which combine to give you an expectancy and also based on historical outcomes an equity curve.

You also need to take into account the frequency with which the opportunity appears. When day trading I might get 6 opportunities a day whereas when eod futures trading on I might see 1 opportunity every 6 weeks (for one futures contract).

Finally, expectancy is not enough, one needs to understand ones risk of ruin. And thats why I favour high win rate systems over lower win rate systems. When you run montecarlo or other sims where you resequence the trades you discover that low winrate systems have a much higher chance of catastrophic failure than a high winrate system. Said another way, a 70% win system with an expectancy of 1.5 is much better than a 30% win system with an expectancy of 1.5.

Growltiger alluded to this in that the low winrate system can expect long sequences of losing trades ... and some of those sequences will ruin the trader/account. As well as being safer the equal expectancy high winrate system will be much easier to trade.

(I am assuming that in both cases you take the same risk and that the trader doesnt make any mistakes)

Hopefully that makes sense.

 

[Rhody Trader]

What would you consider high frequency for a swingtrading system?

pttrader

I can't give you a hard and fast number. You can look at it this way, though:

If you have a system that trades once per week on average (52 times/year) with a $100 expectancy, you would expect to make $5200/year.

On the other hand, if your system generates an average of 2 trades per week (104/year) with an expectancy of $60, you would expect to make $6240/year.

If you just went on expectancy, you would say the first system is better ($100 vs $60), but the second one would make you more money over time.

Here's where it really gets fun. The above examples assume fixed lots. If you used fixed percentages instead, the higher frequency becomes even more profitable through compounding because of the frequency at which the compounding occurs. A return of 5% per week is better than 10% every two weeks.

That all said, Kiwi's comments on risk about ruin are an important consideration.

 

[pttrader]

Here's a way to make comparisons:-
www.trade2win.com/knowledge/articles/general%20articles/developing-a-trading-strategy-2


Glenn

Very good articles by Tim! Can't say I clearly understand all he is talking about so I will have to take some time and read this stuff really well but it seems like at first glance alot of thinking has gone into the trading system he presents. Practical stuff with a rational analysis! I don't know how my E(R) compares to what he is describing. I probally didn't measure everthing he is talking about. But from what I can gather over a quick glance 4.28 profit to 1.00 risk is at least average and maybe good. My system's win rate was .9474. My losing rate was .0526. Average win $45.29 average loss $10.00. I thought Rhody Trader made a valid point on the opportunities. I think he is right. For a system to be viable it has to give you the opportunities to trade. So, I figured it for my system covering the same time period of the trades mentioned above. It came out to be, on the average, about 1 trade every three days. I wasn't too happy about that. I would like to see at least 1 trade every 2 days and perhaps one per day. I think what hurt it was one trade was locked up for around 11 days. KIWI also mentioned "risk of ruin". What is the calculation for that?

Also, I don't know if the calculations I did could really be considered valid because of the short period of time over which the trades took place. It would seem to me a longer time frame would be a better and more reliable test. Anyway, I used this time frame because I trained someone to use my system and they did their first trade on October 12. Since they had just opened the account and were new at trading it was very interesting to me the win rate they managed to accomplish. My system has always had a high win rate but this is probally the best that I can remember. The calculations covered a period of 57 tradeble days (excluding 2 holidays during this period) of "real" trading (not hypothetical). From October12 to December 31 2004. It was a total of 19 trades. 18 winners. 1 loss. Anyway, thanks for this info and I WILL have to take some time and go over Tim's concepts. I have another person that I trained that made aorund 39 or 40 trades and emailed me their results. I might dig this up do the figures on that and see how it works out.

pttrader

 

[fridayeve]

losing money

most people loose money regularly , probably 98% due to their lack of understanding about how the markets work, this makes them gamblers who frankly would do just as well in a casino, but really not fit to trade in a shark infested area like markets, if you wish to start trading first seek out the best guru/teacher you can find and then spend as long as it takes to learn the subject prior to jumping in or you will lose almost every time.

Im new to trading..actually Im researching TA and learning to swing trade. First on paper then in about 6 months Ill look to put some money behind it. Im reading these posts and Iall I read about is how 98 % of all traders lose money or break even. It is truly discouraging to hear how no one is making any money. How can this be. I understand it is difficult to learn at first but I just read a guy trading for 7 years still has months/ years that he breaks even or still loses.HOW CAN THAT BE? Isn't there a learning curve to where it is possible to make a consistent buck and a decent living...Honestly, I have spent the last 3 months reading day and night about how to trade... but after reading all of these negative posts I wonder if it is even worth pursuing...Can one of the 2% of traders out there who are making a living from trading give me some POSITIVE feedback...thanks

 

[Rhody Trader]

... KIWI also mentioned "risk of ruin". What is the calculation for that?

I don't have a hard and fast calculation in front of me. Maybe someone else can provide one.

The basic idea, though, is to figure out what chance you have over a given number of trades to completely blow out your account. The lower your win % and the higher your loss per trade, the higher this probability would be. Conversely, a high win % and low loss per trade would produce a very low chance of ruin.

Have you been able to expand out your data set and get comparable results?

 

[pttrader]

I don't have a hard and fast calculation in front of me. Maybe someone else can provide one.

The basic idea, though, is to figure out what chance you have over a given number of trades to completely blow out your account. The lower your win % and the higher your loss per trade, the higher this probability would be. Conversely, a high win % and low loss per trade would produce a very low chance of ruin.

Have you been able to expand out your data set and get comparable results?

Right now I am testing the system with emini gold trading using 1 contract to see how it does. Never traded gold before. Started with a live simulator (dome) on 3-11. Between 3-11-05 and 3-17-05 I completed 3 trades. There was one or two other possible trades but somehow missed the boat not paying attention, I guess. So far 3 trades. Three wins. $49.80, $109.60, $136.10. That is trading 1 contract each time. Biggest drawdown was around $79.00 dollars and some cents. However, it also produced the biggest win. Overnight margin was $250.00 dollars each contract.

I will have to trade around 20 times to really get a feel for the system's accuracy/average profit/average loss in gold.

I put my stoploss for the most part on each case at around 99.00 and some cents. So, I put up 250.00 and made 49.80. Then 250.00 more and cleared 109.60. Then 250.00 again and cleared 136.10. Less the commissions of course which is under 6.00 round trip each time for a total of around 17.00 to 18.00.

Like I say it isn't enough trades to tell if it will be good trading gold or not.

Taking the above into consideration what do you think the risk of ruin is in the above 3 trades? Or is there enough data to figure it? Or even enough trades?

PT

 

[Rhody Trader]

Well, with a 0% rate of loss, you have no risk of ruin. Of course, you'll eventually experience some losers. If not, I'd REALLY like to learn your system. :cheesy:

If you have some back-testing results you could use that in your calcuations. Ideally, you want a data set which covers a full set of market cycles (uptrend, downtrend, sideways) so you have a fairly comprehensive look at the system's performance.

 

[pttrader]

Well, with a 0% rate of loss, you have no risk of ruin. Of course, you'll eventually experience some losers. If not, I'd REALLY like to learn your system. :cheesy:

If you have some back-testing results you could use that in your calcuations. Ideally, you want a data set which covers a full set of market cycles (uptrend, downtrend, sideways) so you have a fairly comprehensive look at the system's performance.

It would be nice but unfortunately there is no such system! 3 trades isn't enough to really say anything. If looks any good after 20 or 30 trades in different market cycles then I might have something good. Just have to wait and see.

PT

 

[fridayeve]

Risk of ruin

Right now I am testing the system with emini gold trading using 1 contract to see how it does. Never traded gold before. Started with a live simulator (dome) on 3-11. Between 3-11-05 and 3-17-05 I completed 3 trades. There was one or two other possible trades but somehow missed the boat not paying attention, I guess. So far 3 trades. Three wins. $49.80, $109.60, $136.10. That is trading 1 contract each time. Biggest drawdown was around $79.00 dollars and some cents. However, it also produced the biggest win. Overnight margin was $250.00 dollars each contract.

I will have to trade around 20 times to really get a feel for the system's accuracy/average profit/average loss in gold.

I put my stoploss for the most part on each case at around 99.00 and some cents. So, I put up 250.00 and made 49.80. Then 250.00 more and cleared 109.60. Then 250.00 again and cleared 136.10. Less the commissions of course which is under 6.00 round trip each time for a total of around 17.00 to 18.00.

Like I say it isn't enough trades to tell if it will be good trading gold or not.

Taking the above into consideration what do you think the risk of ruin is in the above 3 trades? Or is there enough data to figure it? Or even enough trades?

PT

The risk of ruin which in itself is a dangerous way to look at trading is entirely related to your understanding of the markets and nothing to do with statistics, of course if pockets are deep enough you may never run out of funds. Far more likely is that ruin will arrive at your door if you do not fully understand what you are looking at in market terms and your mind decides to direct you down a particular route without the precise knowledge required. If or when this occurs ruin will surely be round the corner as your feelings will misdirect you. By looking at the possibility of financial ruin in percentage terms you are indicating your lack of undrestanding and allowing your mind the opportunity to fool you.

 

[pttrader]

The risk of ruin which in itself is a dangerous way to look at trading is entirely related to your understanding of the markets and nothing to do with statistics, of course if pockets are deep enough you may never run out of funds. Far more likely is that ruin will arrive at your door if you do not fully understand what you are looking at in market terms and your mind decides to direct you down a particular route without the precise knowledge required. If or when this occurs ruin will surely be round the corner as your feelings will misdirect you. By looking at the possibility of financial ruin in percentage terms you are indicating your lack of undrestanding and allowing your mind the opportunity to fool you.

Are you saying one should not even calculate risk of ruin. That it is a harmful exercise?

PT

 

[fridayeve]

When not to trade

Are you saying one should not even calculate risk of ruin. That it is a harmful exercise?

PT

If you stop trying to establish at what point you may be on the road to ruin and concentrate only on improving your understanding, then ultimately there will be no concern left, as you will know when to trade and much more importantly , when not to trade.
The idea that time is spent trying to assess when the rot has set in only prevents you from focusing on the facts as they present themselves, when you concentrate on the information infront of you, the exercise becomes a simple one.
Remember learn when not to trade first, this will finally show you when to trade.
Fridayeve.

 

[dbphoenix]

If you stop trying to establish at what point you may be on the road to ruin and concentrate only on improving your understanding, then ultimately there will be no concern left, as you will know when to trade and much more importantly , when not to trade.
The idea that time is spent trying to assess when the rot has set in only prevents you from focusing on the facts as they present themselves, when you concentrate on the information infront of you, the exercise becomes a simple one.
Remember lesrn when not to trade first, this will finally show you when to trade.

I don't know who you are, but newbies should print out what you've posted so far. Those who listen will save themselves a great deal of time and an even greater amount of money.

 

[fridayeve]

The rules could not be simpler, making sure you stick to them is the difficult bit. I would suggest that the first year is spent understanding oneself and the second year is spent learning what the markets are showing you. Finally the third year should be when you paper trade first and maybe some time after you have got the paper trades consistantly right, you might be ready to dip your toe in the water, that is of course assuming that you have by now a full understanding of who you are.
Regards Fridayeve.

 

[pttrader]

I don't know who you are......

Yea Right DB!!!

PT

 

[pttrader]

The rules could not be simpler, making sure you stick to them is the difficult bit. I would suggest that the first year is spent understanding oneself and the second year is spent learning what the markets are showing you. Finally the third year should be when you paper trade first and maybe some time after you have got the paper trades consistantly right, you might be ready to dip your toe in the water, that is of course assuming that you have by now a full understanding of who you are.
Regards Fridayeve.

Been trading for years. Never have looked at loss of ruin until I came to T2W a few months ago. Just thought it an interesting concept. I am not a newbie trader. All the understanding yourselve stuff I leave for others. My interest is making money. For that I alI need to do is observe the markets, read the tape, and react. And protect myself with a stop loss if I am wrong.

 

[dbphoenix]

Yea Right DB!!!

PT

:?: If I've ever heard of "fridayeve", I've forgotten about it. Which has nothing to do with the truth of what he/she is saying.