Money Management / Maximising Profits

[trendie]

Following on from my unsuccessful (so far) attempt to make grid trading work, I want to explore the use of multiple lots to maximise a small edge.

If you had a system that had a 20% return, ie, you risked 100 pips for a 120 pip return, how could you multiply the return?

So, as an example, suppose you risked 100 pips for a 120 pip return.
Thats a 20 pip return.
Over a 50/50 win rate, you would win 120 pips, and lose 100 pips.
Thats an average 10 pips per trade. (20 pips spread over the two trades)

Now, if you traded 1 lot for each, its a simple arithmetic return.

But, suppose you bought a new lot for every 20 pips.
You would have bought 5 lots (zero, 20, 40, 60, 80, 100).
If the market turns at exactly 100 pips, you would lose (100 + 80 + 60 + 40 + 20).
Thats a 300 pip loss aggregate.


If the market runs to 120 pips.
You buy at zero, 20, 40, 60, 80 and 100.
If the market runs to 120 pips, you win 120 + 100 + 80 + 60 + 40 + 20).
Thats an aggregate win of 420 pips.

So, a losing 100 pip trade loses you 300 pips aggregate.
So, a winning 120 pip trade wins you 420 pips aggregate.

A 20% return in linear pips results in a 40% return in terms of multiple lots.

So, rather than using linear trades, ie, single lots, would using multiple lots help to squeeze out a greater return from systems that have valid, but small edge??

hope that makes sense.

 

[Shakone]

Trendie, if I may offer some food for thought.

For systems where you are adding either to losers or winners, you ought to consider whether this is better than going all in at one point. Agreed?

Your first entry is triggered, this has a stop and a target. Now does this entry have an edge on its own? If not, then over the long term you are expecting this trade to lose you money overall, so this is pulling the profitability of the system down, regardless of other later entries, isn't it?

So that should tell you that first entry should be one that has an edge in its own right. Please disagree with me if you feel anything isn't the case.

Now, suppose the first entry does have an edge. The second entry is triggered. We can view this second entry as a trade in its own right, as well as now a two lot combined trade. Viewing it in its own right, the second trade with entry, stop and target ought to also have a positive expectation, otherwise you're detracting from the profits just as above. Does this second entry increase or decrease the edge and why?

With the point that you would want every new entry to have a positive expectation in its own right, do you think that is likely that by just adding to positions every 20 pips or so with fixed target and stop you will find such an edge?