Risk of Ruin - Psychology and Money Management | futures.io
futures io futures trading


Risk of Ruin
Started: by Big Mike Views / Replies:31,706 / 124
Last Reply: Attachments:41

Welcome to futures io.

Welcome, Guest!

This forum was established to help traders (especially futures traders) by openly sharing indicators, strategies, methods, trading journals and discussing the psychology of trading.

We are fundamentally different than most other trading forums:
  • We work extremely hard to keep things positive on our forums.
  • We do not tolerate rude behavior, trolling, or vendor advertising in posts.
  • We firmly believe in openness and encourage sharing. The holy grail is within you, it is not something tangible you can download.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.


You'll need to register in order to view the content of the threads and start contributing to our community. It's free and simple, and we will never resell your private information.

-- Big Mike

Reply
 41  
 
Thread Tools Search this Thread
 

Risk of Ruin

  #11 (permalink)
Elite Member
Cincinnati Ohio
 
Futures Experience: Intermediate
Platform: NinjaTrader
Broker/Data: Futures Broker
Favorite Futures: AUD
 
Silver Dragon's Avatar
 
Posts: 1,597 since Feb 2011
Thanks: 3,845 given, 3,316 received

Risk of Ruin

Found this out of the Internet. Numbers look in line but would like some verfication.


Notes:
  • Cells highlighted in Yellow are what you fill in.
  • All other cells have formulas. Do not change!!
SD

nosce te ipsum

You make your own opportunities in life.
Attached Files
Register to download File Type: xls Risk Or Ruin.xls (24.0 KB, 187 views)

Last edited by Silver Dragon; December 22nd, 2011 at 11:44 PM. Reason: typo
Reply With Quote
The following 7 users say Thank You to Silver Dragon for this post:
 
  #12 (permalink)
Elite Member
Northern Germany
 
Futures Experience: Intermediate
Platform: NT
Favorite Futures: FDAX, CL
 
vvhg's Avatar
 
Posts: 1,583 since Mar 2011
Thanks: 1,016 given, 2,798 received


Silver Dragon View Post
Found this out of the Internet. Numbers look in line but would like some verfication.


Notes:
  • Cells highlighted in Yellow are what you fill in.
  • All other cells have formulas. Do not change!!
SD

What puzzles me is that risk of ruin increases dramatically when you decrease MaxRisk. That sure can't be right!?

vvhg

Hic Rhodos, hic salta.
Reply With Quote
The following 3 users say Thank You to vvhg for this post:
 
  #13 (permalink)
Elite Member
Northern Germany
 
Futures Experience: Intermediate
Platform: NT
Favorite Futures: FDAX, CL
 
vvhg's Avatar
 
Posts: 1,583 since Mar 2011
Thanks: 1,016 given, 2,798 received



vvhg View Post
What puzzles me is that risk of ruin increases dramatically when you decrease MaxRisk. That sure can't be right!?

vvhg


This is basically the same error that I had with my calculations (though not the only one).
So I am tempted to conclude that the formula is wrong.
Perhaps we can come up with a better formula?

vvhg

Hic Rhodos, hic salta.
Reply With Quote
The following 2 users say Thank You to vvhg for this post:
 
  #14 (permalink)
Elite Member
Cincinnati Ohio
 
Futures Experience: Intermediate
Platform: NinjaTrader
Broker/Data: Futures Broker
Favorite Futures: AUD
 
Silver Dragon's Avatar
 
Posts: 1,597 since Feb 2011
Thanks: 3,845 given, 3,316 received


vvhg View Post
This is basically the same error that I had with my calculations (though not the only one).
So I am tempted to conclude that the formula is wrong.
Perhaps we can come up with a better formula?

vvhg


Found this site: http://www.earnforex.com/blog/2011/10/risk-of-ruin/


Has formula's with examples specifically for trading.


SD

nosce te ipsum

You make your own opportunities in life.
Reply With Quote
The following 6 users say Thank You to Silver Dragon for this post:
 
  #15 (permalink)
Elite Member
Massachusetts (USA)
 
Futures Experience: None
Platform: NinjaTrader
Favorite Futures: YM
 
stephenszpak's Avatar
 
Posts: 778 since Jun 2009
Thanks: 144 given, 358 received

Futures Edge on FIO

What value do you place on the webinars on FIO?

 
(Sorry Mike, terrible at math.)

Apparently the risk of ruin increases the longer someone trades with a, let's say 60% win rate. (55%, 72%, etc.)
I don't know if anyone covered this already. The only thing that can help is to trade smaller when one is trading
badly, if I understand the conclusion at the link.
=================================================================

Conclusion In agreement with Kaufman the risk of ruin is greatest at the beginning. The risk of ruin also increases the longer your remain a trader because the risk of experiencing a series of losses increases.
The risk of ruin in our example would remain the same as the risk at the beginning if we did not scale back when we started to hit a series of losing trades. By scaling to smaller trade sizes as our portfolio is reduced we lower the risk of ruin and improve our survival rate.


Risk of ruin - Traderpedia
==================================================================

At the:

Khan Academy

there is nothing there about 'risk of ruin'. He has a great many videos about Probability, Statistics and Finance.
You could spend too too much time there however. Trying to re-invent the wheel.

Maybe you could e-mail him to do a video on the subject. He (they) seems to love to learn and teach.

khan-academy-comments@googlegroups.com

Reply With Quote
The following 2 users say Thank You to stephenszpak for this post:
 
  #16 (permalink)
Elite Member
Massachusetts (USA)
 
Futures Experience: None
Platform: NinjaTrader
Favorite Futures: YM
 
stephenszpak's Avatar
 
Posts: 778 since Jun 2009
Thanks: 144 given, 358 received


Silver Dragon View Post
Found this site: http://www.earnforex.com/blog/2011/10/risk-of-ruin/


Has formula's with examples specifically for trading.


SD

I found this at a link within the above link.

Page 1 (of 4 pages) is here:

Minimizing your risk of ruin - Undesignated - Futures Magazine

Maybe we could look at this from a more practical standpoint.
If you keep track of the different trade setups you take, you might be able to eliminate the lower probability ones.
I really don't have a list in my head, but there are upward breakouts vs. double (or triple) bottoms. They are similar
in that one expects the price to move upwards.

Do you personally make more with one type or the other? If you just trade breakouts, then we'd have to modify
the question somehow.


Anyway, maybe there are some reasons why you make less in certain circumstances.

- Stephen

Reply With Quote
The following user says Thank You to stephenszpak for this post:
 
  #17 (permalink)
Elite Member
Northern Germany
 
Futures Experience: Intermediate
Platform: NT
Favorite Futures: FDAX, CL
 
vvhg's Avatar
 
Posts: 1,583 since Mar 2011
Thanks: 1,016 given, 2,798 received

The more I think about the risk of ruin formulas, the more I come to the conclusion that first they seem to be more a kind of educated guess than hard fact and secondly (as also stated in the link @Silver Dragon posted) the obtained values seem to be rather relative and should not be mistaken as absolute values.
So this would lead me away from these calculations again and back to the good old monte carlo engine.... I will try to improve and pimp the one in the journal (here) so that it is ( more than ) a full substitute for the ror calculations.
I would appreciate your views on that...


stephenszpak View Post
Maybe we could look at this from a more practical standpoint.
If you keep track of the different trade setups you take, you might be able to eliminate the lower probability ones.
I really don't have a list in my head, but there are upward breakouts vs. double (or triple) bottoms. They are similar
in that one expects the price to move upwards.

Do you personally make more with one type or the other? If you just trade breakouts, then we'd have to modify
the question somehow.


Anyway, maybe there are some reasons why you make less in certain circumstances.

- Stephen

I personally do that (at least in some degree of detail) and I think that it is a very good thing to do. But the risk of ruin would need to be calculated for the mix of methods you actually trade. Though it would be interesting to know it for individual setups or instruments. I think I could realize that using the monte carlo engine....


Vvhg

Hic Rhodos, hic salta.

Last edited by vvhg; December 27th, 2011 at 04:00 AM.
Reply With Quote
The following 2 users say Thank You to vvhg for this post:
 
  #18 (permalink)
Elite Member
Massachusetts (USA)
 
Futures Experience: None
Platform: NinjaTrader
Favorite Futures: YM
 
stephenszpak's Avatar
 
Posts: 778 since Jun 2009
Thanks: 144 given, 358 received


vvhg View Post
The more I think about the risk of ruin formulas, the more I come to the conclusion that first they seem to be more a kind of educated guess than hard fact and secondly (as also stated in the link @Silver Dragon posted) the obtained values seem to be rather relative and should not be mistaken as absolute values.
So this would lead me away from these calculations again and back to the good old monte carlo engine.... I will try to improve and pimp the one in the journal(I will insert the link later) so that it is ( more than ) a full substitute for the ror calculations.
I would appreciate your views on that...



I personally do that (at least in some degree of detail) and I think that it is a very good thing to do. But the risk of ruin would need to be calculated for the mix of methods you actually trade. Though it would be interesting to know it for individual setups or instruments. I think I could realize that using the monte carlo engine....


Vvhg

You wrote:

But the risk of ruin would need to be calculated for the mix of methods you actually trade.

Reminds me of something I read long ago. Can't remember exactly though, something like:

Traders can't win without an 'edge'. But they have a hard time defining exactly what that 'edge' is.



One very basic thing to check out is, perhaps, a monthly profits graph. This is something I'm just throwing out,
it's not scientific really. There must be a standard, but I don't know what it is. So, graph the profit (or loss) per
month. Assuming, hopefully, there are just profits, is the graph steady or increasing? If not there is a problem.

What one is doing is looking at the actual dollar results of 10's of trades.
The number that broke even, or were losers, or were winners, is not relevant here.

I'm sure there are many factors that can cause losses, and therefore increase the
risk of ruin that aren't often considered.

Some of them are:

Is the trader getting enough restful sleep?

Is the trader trading worse after X hours (let's say 4) than when he/she began the trading day?
Why? fatigue? boredom?

Is there a severe and on-going distraction in the traders life? (e.g. is a family member extremely ill ?)

Is the trader thinking about buying something expensive which can only be bought with trading gains?
This is another distraction, of course. This one is directly related to trading, since it causes impatience
in the act of trading.




Ad astra

- Stephen

Reply With Quote
The following user says Thank You to stephenszpak for this post:
 
  #19 (permalink)
Elite Member
Northern Germany
 
Futures Experience: Intermediate
Platform: NT
Favorite Futures: FDAX, CL
 
vvhg's Avatar
 
Posts: 1,583 since Mar 2011
Thanks: 1,016 given, 2,798 received

Very good post indeed. I have to agree with about all of it. Many things you mentioned are actually in the journal (here). Have you had a look at it? And what do you think about using a good monte carlo engine instead of ror formulas ( or even basing some ror calculation on actual monte carlo results).

vvhg


Sent from my iPad using Tapatalk HD

Hic Rhodos, hic salta.

Last edited by vvhg; December 27th, 2011 at 04:00 AM.
Reply With Quote
The following 2 users say Thank You to vvhg for this post:
 
  #20 (permalink)
Elite Member
Massachusetts (USA)
 
Futures Experience: None
Platform: NinjaTrader
Favorite Futures: YM
 
stephenszpak's Avatar
 
Posts: 778 since Jun 2009
Thanks: 144 given, 358 received



vvhg View Post
Very good post indeed. I have to agree with about all of it. Many things you mentioned are actually in the journal (I will insert the link when I'm back at the computer). Have you had a look at it? And what do you think about using a good monte carlo engine instead of ror formulas ( or even basing some ror calculation on actual monte carlo results).

Vvhg


Sent from my iPad using Tapatalk HD

Thanks.

No I haven't seen your journal.
I know nothing about monte carlo engines or ror formulas.

I wonder if anyone anywhere has ever done a comprehensive list of things that can cause ongoing
trading losses (in other words 'likely ruin'). There are the technical things, like 'The instrument I trade
just isn't moving like it used to.' or the psychological 'I used to make money.
I guess I was just lucky then.'

Some believe that if a trade failed, it failed because of an error on the traders part.
Others believe that if a trade failed, there can be no explanation. Some will fail, period.

I can't say which is best really. I would say that if one is experiencing hard trading times
that there should be a search for the reason. Hard trading times, means the risk of ruin
for the trader has already increased.

========================================================

A trader at one with his feelings feels nothing between himself and executing his method.

- Ed Seykota

Ed Seykota Quotes TREND ROOM
========================================================

This saying has its merits, but one has to remember why traders trade. Traders trade
to make money. If you're making some money it's great to say "I'm following my rules. That's
the main thing." It sounds good anyway.
If you're losing money consistently it's crazy to say "I'm following my rules. That's
the main thing."

If a trader is losing consistently over time 'feeling nothing' isn't going to help. If nothing
on paper, that is, all the losses, aren't getting any attention, the best thing for the trader
would be to experience fear, or at least concern.

Ignoring ongoing losses is denying the existence of a serious problem, that is, likely ruin.

- Stephen

Reply With Quote
The following user says Thank You to stephenszpak for this post:

Reply



futures io > > > Risk of Ruin

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)
 

Spring Grains Outlook w/Sean Lusk @ Walsh Trading

Elite only

FIO Video Journal Challenge featuring NinjaTrader ($2,000+ of prizes)

April

Process above all else w/Anthony Crudele @ Futures Radio Show

Elite only

Machine Learning - Quantitative Trading w/Martin Froehler @ Quantiacs

Elite only

Market Dynamics w/Peter Davies @ Jigsaw Trading

Elite only

Ask Me Anything w/Patrick Rooney @ Trading Technologies

Apr 18

Ask Me Anything w/FuturesTrader71

Apr 19

Machine Learning w/Kris Longmore

Elite only

Market Analysis w/Dave Forss

Apr 25

Introducing iSystems with Stage 5 Trading

Apr 27
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
More Contracts = Less Risk hondo69 Psychology and Money Management 27 October 25th, 2014 11:07 AM
Risk/Reward Calculator baruchs NinjaTrader 5 December 10th, 2013 05:56 AM
Even the Fed Canít Value Financialsí Risk Quick Summary News and Current Events 0 November 14th, 2011 03:30 PM
ZN low risk JTrain Bonds and Interest Rates Trading 9 January 11th, 2011 05:11 PM
Effective risk sefstrat Psychology and Money Management 5 October 17th, 2009 11:37 AM


All times are GMT -4. The time now is 11:25 AM.

no new posts
Page generated 2017-03-29 in 0.18 seconds with 20 queries on phoenix via your IP 54.211.11.57