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Concerning risk per trade sizing
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Concerning risk per trade sizing

  #91 (permalink)
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liquidcci View Post
You make a good point. I think every strategy is different and to apply a 1% across the board may not always work. I think every setup must be evaluated by looking at stop to target ratio and what profit that ratio will give relative to draw downs etc. Setting at 1% could be to much or to little depending on how a particular strategy behaves. I typically have very different stops and targets for my shorts and longs for example because they behave differently.

You can go broke losing 1% at a time if your stops are always being hit.

I think the whole 1%, 2% thing is what you tell newbie traders, who don't know what they are doing, in order to prevent them from blowing their account in 3 days. If you are a seasoned trader and you are using a percentage like that, you should be able to tell me exactly the reason why you chose that number, and provide some data and/or analysis supporting that reasoning, no matter what that percentage number happens to be.

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  #92 (permalink)
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Jaguar52 View Post
For me, I had to deal with accepting that on every trade there was going to be the initial risk, the initial reward expectation; the developing risk and eventual reward. All I could do was control the initial risk and set in place my expectation of the reward. This allowed me to take the trade.
After that, I only had control over the developing risk. The eventual reward was more of a desire until the point I let go of the trade. The reasons I closed out my trade had more to do with my primary desire to preserve capital, and then once it was possible, my continuing desire to make a profit. My ultimate desire was to make at least a 1:1 with my initial risk, and then my wishful desire was to have the market supply me with a 4 to 1 profit reward on every trade.
At some point in my trading what I desired and what I was able to achieve were miles apart. As these got closer and closer, I began to realize that I could make a profit if I accepted what I was able to do most of the time. Sometimes I can make a profit on 10 trades in a row. Bam, bam, bam...
I said a profit. How much profit is the next question. For me, that is 4 ticks. My desire is 40 ticks per trade, but the reality of my ability is 4 ticks per trade 8 out of 10 trades.
Once I understood this, I reduced my risk per trade to as low as possible so that once I had accumulated some profits for the day, I could accept more risk in the trade. The way I accepted more risk was allowing it to go against me a bit longer. I said a time thing, not a price thing. For me, if price remains ticking back and forth within a tight spread, and slowly inches its way in the wrong direction, then time is against me, and I view it as an effort to keep as many contracts on the table in the wrong direction as possible and entice more orders being placed in the wrong direction. So, I can remain only if I am willing to accept a bit more risk. I increase my risk because I will stand my ground and challenge the market to comply with my desire since it costs me nothing additional except for time. The money I make is mine only when I leave the table.
In my experience, managing the risk and the reward in the trade is what separates most winners and losers. Most trades entered, at some point, have reward. Also, most trades entered at some point have loss. They also have a point where the trader can elect, (yes, you can chose) to make a profit, or allow it to not make a profit; or let it turn into a loss. So, for this and a few other reasons having more to do with steady withdrawals for income, I trade with a risk of one quarter percent per contract traded. The lower this number, the better I feel.
I do not know what most traders tolerance is. But if I were to describe myself, I would say I am a very defensive trader. I look for serious interest at key areas, and my tolerance for increased risk is very low. I will just surrender my contract at the first BE opportunity and wait for the next trade. This means that when I enter a trade I enter because I see a solid commitment of the price bracket to expand in my direction at least 1 more bar or 6 more ticks, or whatever size my first target is +2 ticks (one to get in, one to get out). If price starts to play games, I do not challenge it. I get out and wait for the next opportunity. Since my charts are price, not time, based, when I add time to it, I am increasing my risk.
So, once I accepted my risk profile, I was able to understand my reward profile, and actually make a profit many more times than not. I still desire the risk reward ratio of 4:1, but I trade to make money on a daily basis, one trade at a time. On every trade I take the risk I can accept. I get out when it falls beyond my tolerance level or I hit my reward level. Sometimes, I get the full reward I desire.
For every trader there is the theory and there is the reality of what that trader can do on a consistent basis. There is no correct answer. I do not have the answer for anyone except myself. I cannot say your thinking is wrong or right. All I can do is tell you to keep a detailed record of your observations about your trading with particular emphasis on your thoughts and reactions to loss and gain, and come to understand your risk and reward levels. There are many suggestions and recommendations available all over the place. Pick a point and go with it. IF anything, do not expect to change the nature of the market. At its core, the market is a risky place where reward can only be achieved if we come to an understanding of our risk tolerance and find a way to overcome its inherent negative conotation.

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  #93 (permalink)
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tigertrader View Post
Monpere, et al.

A conclusion that can certainly be drawn from our discussion is; the whole question of risk management is far from an objective subject. You need at least one subjective piece of the puzzle to put it together, and that is an individualís tolerance to risk. Now that is subjective, meaning there is no rule that says how risk averse you should be. That is an integral part of your emotional makeup.

The problem is, human nature does not operate to maximize gain, but rather to maximize the chance of gain, i.e., maximize the the number of winning trades, and minimize the number of losing trades. The result is, not only is risk controlled, but profitability is also controlled. In other words, playing it safe can be just as bad as taking too much risk, because you are not optimizing your winning trades nor the days with expanded ranges.

Sure, it's possible to devise trading schemes based on very short-term price swings that will on average be profitable. However, the average profits on individual trades from such methodologies are miniscule, and the trades they generate are so frequent that it not feasible to scale these strategies. If you look at it from a (modern portfolio theory) point-of-view, you can think of the trading profit on any given trade, as the compensation you receive for the risk you took on the trade. In a sense, the market demands a premium from the trader for taking less risk, which is of course, reduced profitability

As Michael Moubassin pointed out above, "Substantial empirical evidence shows that price changes do not fall along a normal distribution. Actual distributions contain many more small change observations and many more large moves than the simple distribution predicts." The ramifications of this observation are that not all markets should be treated the same and not all trades should be treated the same. The individual days and individual trades, which I like to call "special" must first be recognized and then they must be taken advantage of to the fullest extreme. It is far worse to miss taking advantage of a special trade than to make a bad trade, and it is just as bad for your P&L to fall into it's normal distribution of returns, on a day with 3XATR, as having a bad day.

Traders take risk, in the sense they routinely make judgements whose outcomes are uncertain. So it would follow then, that good traders don't try to eliminate risk as much as manage it, and intsead, can increase their chance of profitability by better reducing that uncertainty. This can be accomplished by making better trading decisions than those that are less informed, less knowledgeable, and less skilled. Ultimately, it is not what the trader knows, but who he is. The really profitable traders are able to ignore or subvert their natural tendencies to do what feels comfortable, and instead, do what is necessary, to be optimally profitable.

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  #94 (permalink)
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Interesting discussion here. I look at risk in three ways as they affect position sizing. First and foremost is risk of loss of capital. When defining this particular area, I look to only risk a small percentage of my trading capital but my "Uncle" point isn't necessarily a static tick amount. It's rather a place that negates my trade idea. So, if the day is extremely volatile and the area that would negate my trade is 30+ ticks away, I would then adjust my position size accordingly to handle that risk level. I think it's silly to trade the exact same position size on every trade with an exact stop amount. By doing so, you're stacking the odds against you!

The second important risk to consider is opportunity loss. This again ties into capital loss and position sizing as this will have an influence on opportunity. An example would be, you think the market will go down and you establish a short entry from whatever your set up criteria is. You get in, set your stop and your target(s). This is where the mistake can come into play. Let's say instead of determining a correct area/level to place your stop, you just throw in a 1 point stop or whatever. The reason for that particular stop you set is that is the maximum amount of money you can feasibly lose without inflicting too much damage to your account. The market then goes up another point, hits your stop and then continues in the direction you expected hitting the precise areas you had targeted. That's opportunity lost from unreasonable stop expectations. This is probably one of the biggest reasons traders cannot seem to get consistent. Had you simply placed your stop at the appropriate area/level, the trade would've worked out perfectly. If you're trading a market that is too big for you, stop! Look for something that is sensible to your account size and risk tolerance. There are plenty of alternative markets out there that provide excellent opportunities.

The third area of risk is I firmly believe that you should trade at a minimum, 2 contracts per trade. Reason being is this allows you to play a little defense while taking profit. Trading with only one contract is another case of having your back against the wall. By scaling out as your trade moves in your favor, you're guaranteeing a break even or profitable trade provided you set your initial scale out appropriately. So what's an appropriate initial scale out area? It needs to be one that allows your trade to be break even or slightly profitable. The more contracts you trade the more creative you can get. One mistake I've seen is traders trading say, 2 contracts. First scale out is 2 ticks while their stop is 6 ticks. How does that make sense? Guess what happens? They get their initial target hit and then the market takes out their stop resulting in a net loss. If trading 2 cars, place your first target equal to your stop and let the other one ride or go to a target that makes your R:R favorably positive. Also, when I say break even, I'm not saying move your stop to your entry area. That's another inexperienced move to do. Markets will often return to your entry area which is where people get taken out and they end up losing on opportunity because the move works out as they expected. You can of course begin to trail your stop once the market has moved in your favor by a certain amount but you have to give a trade time to develop and moving a stop to entry too soon can take you out of a nice trade.

Anyway, hope that helps.

Cheers,
PB

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  #95 (permalink)
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@Private Banker, couldn't have said it better myself.

I know there are always the guys that say all in, all out is mathematically superior, and if that is what drives them to be good traders then hats off. For me I am more keen to play to my psyche and taking off risk along the way in a trade, scaling out, taking profits, it all works better for me.

I also scale in. For the longest time, I was afraid to do this because I misunderstood the message that is hammered home "do not add to losers". I started by only adding to trades when they had moved in my direction. But now I add to trades that both move in my direction, as well as move against me. However, there is an incredibly important distinction that you must make ---- has the trade moved against you, but is still valid? Or has the trade moved against you, and not your original trade idea is no longer a good one.

Clearly you shouldn't add in the second scenario when the trade is no longer a good trade. And that is where most people go wrong, they average down/dollar cost average to try to minimize pain. For me, I simply know ahead of time that I will likely add once, twice, maybe even three times in a trade, so I never put the full trade on in one spot.

But I also trade much bigger charts than I used to, and bigger charts than a lot of people on the forum these days. That is important because my stops are much bigger, as are my targets. Again, not talking about $$$. I am talking about distance in ticks, not dollars in ticks. I sometimes trade using my spot forex account and sometimes full sized futures, all depending on what the total trades I have working in the market are doing and how much my risk exposure is.

Mike

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  #96 (permalink)
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Another way to think about risk?

I wanted to make a point about risk outside the mathematical analysis of it - I digress for a bit then bring my subject back to risk towards the end of this post...

Something that strikes me while I'm reading the posts in this thread is that it seems many here feel what they are doing when they trade is somehow different than what the "big money" of "big players" are doing. This is a viewpoint I've seen expressed elsewhere on this forum as well. I'll try to explain what I mean. It seems that many feel that they are playing in a different game or with different rules because they are trading small size (in a relative sense, if you are trading intraday on the ES, many would consider anything smaller than 10-20 contracts to be "small"). I get the feeling that many also feel that because of the methodology they use that they are playing a different game than the "big boys". I'm not sure if I'm explaining this adequately but perhaps the counterpoint will illuminate.

When you place a trade in a chicago or NY futures market, you are stepping into the ring with the heavyweights - this playing field is level. You and "them" are all clearing your orders on the same exchange and the mechanisms that lead to order fills are the same in both cases (yes, big money may have faster computing power than you but this is immaterial to the fact that all trades are getting matched on the same exchange). You are not "playing a different game" and you are not subject to different rules than the biggest traders in the world. They don't treat your order any different than every other order on the book (excepting, e.g., rules governing large block trades matched via the POSIT system).

Consider this - let's say you trade ES and you placed a trade this morning that generated a 12-tick profit. Let's say you used 2 contracts and were AIAO for $300 profit. Another trader at goldman sachs places the same trade with 500 contracts. She made $75,000. Within the limits of the liquidity of the market you're trading, there is NO DIFFERENCE between what you are doing and what the GS trader is doing. There is no difference between the mechanics of their trade and yours - the CME matched your order with orders on the books just the same as the GS trader's order (of course the GS trader's order had to be matched with more orders...).

My point being that when you trade, you are competing with and playing the same game as EVERYONE ELSE. If you are able to take money from the market, you are beating most of the traders in the game - you're not "taking money from the bottom 25%" or "taking money from other rookies". If you are consistently taking money out of the market, you have achieved a skill-level such that you are right there with an elite group of competitive traders. You are tow-to-tow with the "big boys" and winning. Do not make the mistaken assumption that you can be "OK" at trading and make money consistently. Do not make the mistake that you only need to beat some other beginning traders to start making money.

In this sense, what you are "risking" when you engage in trading is that you are not skilled enough to WIN - that you (or your methodology) are not good enough to take money OUT of the market. If you are not good enough to win, it does not matter how much you risk on a given trade - this simply determines how slowly or quickly you lose all your money. I would offer the assertion that if you are not, at least in part, thinking about risk in this way - you are not "good enough" to take money from the market and by managing your risk profile you are simply modulating the rate at which you lose your money.

George Soros said "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." He was one to press his bets - he bet huge when he thought he had the edge. My point being you're not going to bring down the Bank of England using a mechanical approach to risk. Obviously you don't have to be George Soros to make money consistently, but if you think you're not competing against the likes of him, I would say that you're wrong.

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  #97 (permalink)
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Surly View Post
When you place a trade in a chicago or NY futures market, you are stepping into the ring with the heavyweights - this playing field is level.

Hmm, not sure I can really agree on this.

You are both driving on the same Interstate highway, but one of you is driving a Pinto, and the other a 18-wheeler weighing 40 tons. You might be on the same road with the same exits or red lights, but the playing field is hardly level. For proof, simply drive your Pinto straight into the 18-wheeler and see if he even notices or if he just thinks a bug hit the windshield.

Mike

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  #98 (permalink)
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Big Mike View Post
Hmm, not sure I can really agree on this.

You are both driving on the same Interstate highway, but one of you is driving a Pinto, and the other a 18-wheeler weighing 40 tons. You might be on the same road with the same exits or red lights, but the playing field is hardly level.

I will give you that trading with large size can allow a trader to manipulate the market to a degree - a very large trader can choose to defend a price level or push a market through a price level. However, in the ES this would be very costly due to arbitrage and liquidity - as it would be in any major currency market. In some smaller markets, a large trader can manipulate a market more easily - but the risk:reward is less favorable due to the overall size of the market. Beyond this type of activity, the playing field is level - if you can provide an example that counters this statement, I would like to know about it.

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  #99 (permalink)
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Big Mike View Post
@Private Banker......

I also scale in. For the longest time, I was afraid to do this because I misunderstood the message that is hammered home "do not add to losers". I started by only adding to trades when they had moved in my direction. But now I add to trades that both move in my direction, as well as move against me. However, there is an incredibly important distinction that you must make ---- has the trade moved against you, but is still valid? Or has the trade moved against you, and not your original trade idea is no longer a good one.

Clearly you shouldn't add in the second scenario when the trade is no longer a good trade. And that is where most people go wrong, they average down/dollar cost average to try to minimize pain. For me, I simply know ahead of time that I will likely add once, twice, maybe even three times in a trade, so I never put the full trade on in one spot.

But I also trade much bigger charts than I used to, and bigger charts than a lot of people on the forum these days. That is important because my stops are much bigger, as are my targets. Again, not talking about $$$. I am talking about distance in ticks, not dollars in ticks. I sometimes trade using my spot forex account and sometimes full sized futures, all depending on what the total trades I have working in the market are doing and how much my risk exposure is.

Mike


Magnificent point. Context is everything. There is even a point of view that every trade one takes...no matter what kind of trade, or context or strategy or entry exit point or risk tolerance.........has a probablity of 50/50. This is arguable...highly arguable. That means there is no diffrence between a monkey and a risk cognizant trader....and while that makes good copy here I doubt it would stand up to scrutiny.

I have seen enough good discretionary traders that make Mike's point so potently valid and the 50/50 probability point invalid (with context). Understanding when to apply what, how to trade a range day versus a trend day vs a reversal day, context of news, of truly contrarian thought, of levering up when things literally fall into your lap and mostly to simply not commit any money to the market at other times is a life long learning process.....

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  #100 (permalink)
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The anatomy of a longer term trade management



Big Mike View Post
...But now I add to trades that both move in my direction, as well as move against me. However, there is an incredibly important distinction that you must make ---- has the trade moved against you, but is still valid? Or has the trade moved against you, and not your original trade idea is no longer a good one.
...
Mike

Mike, could you give an example of such a trade where price has moved against you while still considering your original premise valid? I'd be interested to see such a trade on your bigger chart interval that you currently use.

If i consider my own experience specially on the ES where price can go up and down the same distance during the day session i must admit i would not know how to deal with that effectively psychologically speaking. What rules of thumb or recommendation can you share to help in that department.

Also, how can you effectively manage such a trade if you trade during regular hours ? I typically trade the regular session from 8:30 AM to 4:00 PM EST. I don't trade during the night. I am trying to determine if i can increase my interval but not at the expense of my life.

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