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Risk of Ruin
Started: by Big Mike Views / Replies:30,927 / 124
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Risk of Ruin

  #21 (permalink)
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stephenszpak View Post
Thanks.

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

I inserted the link to that thread, I think you will find a few things you touched upon in there.



stephenszpak View Post
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

Why don't you start a thread on that? I would very much enjoy such a thread! I think successful trading has two main elements: 1. you actually have an edge, 2. you execute that edge properly. One is nothing without the other.

vvhg

Hic Rhodos, hic salta.
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  #22 (permalink)
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vvhg

I just checked out your journal. I thought it was going to be general comments about
your trading and such. I see a lot of math which I'm not competent to comment on.

(Be advised, I'm only on-line on the weekends. That's why it's been a few days.)

- Stephen

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  #23 (permalink)
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Well, you don't have to understand why a plane flies to travel with it...
I thought you might be interested in it for tracking different setups and so on as it pulls all the statistics out of your trades automatically....

vvhg

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  #24 (permalink)
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vvhg View Post
Well, you don't have to understand why a plane flies to travel with it...
I thought you might be interested in it for tracking different setups and so on as it pulls all the statistics out of your trades automatically....

vvhg

Maybe I should be interested. At this point it's not something I'd be getting into.
I can see the importance of it though. monpere has done this sort of thing I think. He's always
talking about seeing certain setups and the probability of success. He apparently has a
very structured system.

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  #25 (permalink)
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Futures Edge on FIO
I have posted a new (beta) version of the Journal ( see Trading Metrics for journals/record keeping ), now featuring a real, powerful Monte Carlo engine. As the formulas don't seem to be very precise, we could perhaps use the Monte Carlo instead. I could easily convert it to a standalone version if anyone wishes so...


vvhg

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  #26 (permalink)
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vvhg View Post
I have posted a new (beta) version of the Journal ( see Trading Metrics for journals/record keeping ), now featuring a real, powerful Monte Carlo engine. As the formulas don't seem to be very precise, we could perhaps use the Monte Carlo instead. I could easily convert it to a standalone version if anyone wishes so...


vvhg

I feel like monte carlo is similar, but have been told by math guys it is not.

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  #27 (permalink)
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Big Mike View Post
I feel like monte carlo is similar, but have been told by math guys it is not.

Mike

That is right, it's completely different.
But ideally the results would be similar. Personally I would rather trust a Monte Carlo simulation with many iterations than the formulas you gave me. Bottom line is, both ways are only more or less accurate estimates. You can see that if you think about the initial collection of trades. Would you always exactly repeat this string of trades, your risk of ruin would either be 0 or 100%. This means that both ways involve a concept of shuffling the trades in the collection. I can not see that any of the RoR formulas actually calculates this risk. They all calculate an estimate of that risk. A MC actually calculates strings of trades, and that is done to the penny. But still it is a simulation based on. Random shuffling of the trades. In some cases the results could be very misleading, for example if trades in the original collection are grouped in long strings with many either winning or losing trades. The problem here is that the outcome of a trade would probably have a rather strong correlation to the outcome of the last trade. And as the MC selects trades randomly it breaks that correlation and thus leads to different results(although it would be theoretically possible to include similar behaviour in a MC engine).

Vvhg


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  #28 (permalink)
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I thought there were some basics concepts regarding risk of ruin.

The most basic to me is, if you're losing, then reduce position size.

Like if you look back, whatever, the past week (or 2 or 3) and you have less
money than when you started...you must trade smaller. If you trade the 6E futures
with 1 contract and you are losing money then you must go to the Forex EUR/USD and
trade a mini-lot. Don't go back to the 6E until you are profitable again.

(Hope I got the technicals correct in the above.)

Don't go back to the 6E for at least one month, even if your trading dramatically improves
in the first week.

There are also ETF's as suggested by monpere below. Still on the idea of reducing position size.

(Excerpt of his post below.)
================================================================

If you want to trade the S&P, trade the SPY etf instead of the ES, trade the IWM etf instead of TF, if you want to trade gold, trade the GLD etf instead of the GC.

What's so great about ETF's? The granularity of share sizing. You can trade very few shares, 10, 20 30 shares while you are learning, or developing your method, and keep your risk to a bare minimum so you don't reach the point of ruin, before you develop a winning method. For example, I use to trade the SPY on 8 range chart, 8 tick fixed stop, 16 tick fixed target, and I traded 125 shares on each trade. This meant, on each losing trade, I lost $10, and on each winning trade I made $20. This also means, I can take 10 trades during the day, lose all of them, and only be out $100 at the end of the day! If I win all of them, I made $200 for the day. There a plenty of people making a decent living on $200 a day. So, you can keep your risk to an absolute minimum while you are learning, and developing your method. Once you are confident, and want to make more money, just increase you share size.

I use Van Tharpe's R-Multiple share sizing formula to figure out how many shares to trade: 'shares = risk / stoploss', so in my case above my stop loss was always 8 ticks, and I only wanted to risk $10 on every trade, so: $10 / 0.08 = 125 shares.

https://futures.io/elite-circle/3506-elusive-price-action-how-trade-115.html#post131008
================================================================

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  #29 (permalink)
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stephenszpak View Post
I thought there were some basics concepts regarding risk of ruin.

The most basic to me is, if you're losing, then reduce position size.

Correct, but that (how do I react to a certain ror?) is the second step .

The first is to determin the ror, which in that case, or as a matter of fact in any case with negative expectancy (always presumed you carry on with a rather constant expectancy) is 100%, no formulas needed for that...

vvhg

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  #30 (permalink)
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In short, keep your drawdown low.

The higher your drawdown, the more difficult it is for you to recover.
It is an exponential curve.

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