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Concerning risk per trade sizing


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Concerning risk per trade sizing

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 Big Mike 
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New site wide poll started, vote on the home page.

This thread is to discuss the topic of which risk model you use, and why.

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 wldman 
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on a trade by trade basis. I do not consider what % of account is appropriate because, for starters I do not enter a trade to lose money. In my mind, as soon as you put a $ standard you define that loss as acceptable...I will not do that. So stop loss is based on recent hi/low or reasonable s/r considering recent vol and vola and usually triggered by a deterioration in one of the entry premises.

Interesting that it seems as though many guys have an idea or opinion about the market and where it might be headed. I try very hard not to do that.

Great topic question Mike. This one should prompt interesting debate.

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 trendisyourfriend 
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For me it's a fixed dollar amount per trade risk. It seems more logical than using a fixed %. The reason is simple, if you start with $10000, and drawn down to $5000, using a fixed % method, it will take you much longer to recover because you started out risking 2% per trade which was $200, but at the drawn down period, your only risking $100 per trade, so even if you have a good winning streak, your capital is recovering at half the rate it would using fixed $ per trade risk. Risking a fixed % per trade will eventually lead to over trading which is about the worst thing you can do for your bottom line.

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 monpere 
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I also use fixed dollar amount risk on every trade, through variable share sizing using the Van Tharp R-Multiple method. I risk the same dollar amount on every trade regardless of how big my stop loss is, by varying the contract/share sizing. Shares = RiskDollarAmount/StopSize. Keeping RiskDollarAmount fixed, when StopSize increases, then Shares decreases, and vice versa. That way I can trade a 30 second chart and a weekly chart with the same methodology, and the same dollar risk per trade, if I want.

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 madLyfe 
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i use the unlimited bankroll theory!

dont believe anything you hear and only half of what you see

¯\_(ツ)_/¯

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 DavidHP 
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madLyfe View Post
i use the unlimited bankroll theory!


I just fade madLyfe's trades and take his money.


( I hope you realize this was just in jest)

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 rani 
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These percentage or fixed amount of risk are certainly better than no risk management at all. Nevertheless I do not use them. I have my risk defined by my methodology before I enter any trade. The actual percentage or fixed amount of risk may differ based on probability and RR. I am willing to risk more on higher probability trade with higher RR.
On the other side I always enter any trade with "black swan" kind of stop loss. Never otherwise.

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 vvhg 
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madLyfe View Post
i use the unlimited bankroll theory!

Nice example of the discrepancy between theory and practice.
In theory you have an unlimited bankroll, in practice the others have.

Vvhg


PS. In order to not hijack this thread: I use a fixed percentage as worst case stop.

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 trendisyourfriend 
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rani View Post
These percentage or fixed amount of risk are certainly better than no risk management at all. Nevertheless I do not use them. I have my risk defined by my methodology before I enter any trade. The actual percentage or fixed amount of risk may differ based on probability and RR. I am willing to risk more on higher probability trade with higher RR.
On the other side I always enter any trade with "black swan" kind of stop loss. Never otherwise.


How do you define the probability of any single trade? And when you risk more, are you not also considering the risk in terms of a fixed $ or % number to some extent?

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 monpere 
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rani View Post
These percentage or fixed amount of risk are certainly better than no risk management at all. Nevertheless I do not use them. I have my risk defined by my methodology before I enter any trade. The actual percentage or fixed amount of risk may differ based on probability and RR. I am willing to risk more on higher probability trade with higher RR.
On the other side I always enter any trade with "black swan" kind of stop loss. Never otherwise.

Risking more on higher probability trades, unless your probability is 100%, when you loose on such trades, you also lose more then normal. A method that does not distribute the risk equally among trades runs the risk of accelerating the point of ruin. The failed trades at the higher risk level will generally carry too much weight in the overall performance of the method.

A lot of traders mention using probability in their trading, yet those traders are discretionary traders. If you are relying on probability to trade, then you have to take every single trade that your method signals. The moment you use your discretion to cherry pick even one trade, then the numbers you spent so much time calculating go right out the window, they become meaningless. Example, if you have a signal that is calculated at 80% win ratio GUARANTEED, and your method gives you 100 signals, and you choose to take only 20 of these signals, you may well have chosen to take the 20 losers out of the 100. You just got a 0% win ratio, out of a system that is a GUARANTEED 80% win ratio.

I don't know too many discretionary traders that could psychologically handle such a situation, but if you are truly trading probability, you are taking every signal, 20 losers in a row should not phase you, because you know the probabilities are the next 80 will most likely be winners.

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monpere View Post
A lot of traders mention using probability in their trading, yet those traders are discretionary traders. If you are relying on probability to trade, then you have to take every single trade that your method signals. The moment you use your discretion to cherry pick even one trade, then the numbers you spent so much time calculating go right out the window, they become meaningless.

There are no absolutes in trading for the most part.

If I analyze my last 1000 cash trades, it gives me a fairly good idea at what my next 1000 trades might look like. Cherry picking is not a factor so long as I continue my normal routine. If you drive the same way to the grocery store every week, it is not cherry picking if you change lanes 3 times vs 5 times, or if you hit 3 green lights vs 2 red lights, or if it rains vs is sunny. The factor is you drive to work the same way every week.

The behavior of a discretionary trader (at least me) is the same.

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 Big Mike 
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Those who risk the same $ amount even as their account shrinks seem to be focused solely on how much money they can make, and not how much they can lose.

For you to continue risking $500 after your account has gone from $10,000 down to $5,000 is case in point. You are so fixated on trying to earn back losses, that you are now only a handful of trades away from completely blowing up your account.

If you were to use a percentage of account size, and trade appropriate markets and instruments for that risk, then you can shrink and grow as your account shrinks and grows.

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 Big Mike 
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Big Mike View Post
There are no absolutes in trading for the most part.

I take that back. There is at least one absolute: every trader is different, has a different opinion, different method, and different outlook on their trading vs the trading of others.

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 trendisyourfriend 
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I think you got it wrong, both are important as we are not robots or we are not all trading mechanically. If you suffer 6 losses in a row or whatever number but it takes you 12/14 winners to recover everything then it is logical to think it is much more taxing psychologically than recovering in 6 attempts. In my opinion, the fixed % is a myth that is perpetuated in most trading forums. I think you should read what monpere wrote about it. This is how i see it and you would need strong arguments to convince me of the contrary.


Big Mike View Post
Those who risk the same $ amount even as their account shrinks seem to be focused solely on how much money they can make, and not how much they can lose.

For you to continue risking $500 after your account has gone from $10,000 down to $5,000 is case in point. You are so fixated on trying to earn back losses, that you are now only a handful of trades away from completely blowing up your account.

If you were to use a percentage of account size, and trade appropriate markets and instruments for that risk, then you can shrink and grow as your account shrinks and grows.

Mike


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Big Mike View Post
There are no absolutes in trading for the most part.

If I analyze my last 1000 cash trades, it gives me a fairly good idea at what my next 1000 trades might look like. Cherry picking is not a factor so long as I continue my normal routine. If you drive the same way to the grocery store every week, it is not cherry picking if you change lanes 3 times vs 5 times, or if you hit 3 green lights vs 2 red lights, or if it rains vs is sunny. The factor is you drive to work the same way every week.

The behavior of a discretionary trader (at least me) is the same.

Mike

You can be a discretionary trader and cherry pick every trade, that is what the overwhelming majority of traders do, but you cannot cherry pick and think it is based on probability. The moment you make the decision to skip a valid signal for whatever reason, the probability equation is void. You are trading on some instinct that has little to do with probability. Is that a valid approach? Absolutely, 95% of traders will agree.

In terms of variable risk. If you take one signal and risk $100 because you think it is a low 'probability', and then you take another occurrence of that signal 3 minutes later, but risk $1000 because you think it is high 'probability', then if you are among us mere mortal traders, you will not be in this business for long, because no matter how high you think the probability of any certain trade is, even if you think it is 1000%, it can loose, and you never know which one is going to win and which one is going to loose, so if you are trading based on probability and you believe in that probability, and you want to control risk, the safest way to do it is to take them all, and with equal risk.

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 Massive l 
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I use a little over 1% on entry. As the trade progresses, I may get up to as high at 5%.
On average I'm a little under 2%.

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 rani 
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monpere View Post
You can be a discretionary trader and cherry pick every trade, that is what the overwhelming majority of traders do, but you cannot cherry pick and think it is based on probability. The moment you make the decision to skip a valid signal for whatever reason, the probability equation is void. You are trading on some instinct that has little to do with probability. Is that a valid approach? Absolutely, 95% of traders will agree.

In terms of variable risk. If you take one signal and risk $100 because you think it is a low 'probability', and then you take another occurrence of that signal 3 minutes later, but risk $1000 because you think it is high 'probability', then if you are among us mere mortal traders, you will not be in this business for long, because no matter how high you think the probability of any certain trade is, even if you think it is 1000%, it can loose, and you never know which one is going to win and which one is going to loose, so if you are trading based on probability and you believe in that probability, and you want to control risk, the safest way to do it is to take them all, and with equal risk.

I am discretionary trader. I trade the same strategy for years (with some adjustments). I do take every signal my strategy gives me, just with different risk profile based on probability. I do not think it is a low or high probability, I know it. Sure it is still a probability, I do not know if the trade ends as a winner or looser.

I do not agree with that generalization. You may be right, that predetermined fixed risk might be the safest way. Maybe. However I do not agree that risk should be determined by percentage or fixed amount of trading capital. Let say your trading capital is $5,000, your risk is 1% and you trade ES. Safe? Hell no. What you actually trade in this case is noise and there is high chance you loose your capital. Risk should be determined by other factors than fixed amount of dollars you can afford to loose. We all know how different is having fixed $200 risk on let say CL compare to ZN.

Of course I agree that 10% of predetermined fixed risk is plain stupid. Whatever I wrote about not having fixed amount of risk does not negate other factors. I am well capitalized and my risk on any trade is never higher than 3% (and that I already consider a high risk). I just do not have any percentage or amount fixed and same for any trade on any product I trade based on my strategy.
If you spend thousands of hours in front of screen and have your strategy tested (and you are not switching to new holly grail or miracle indicator every other month) you know there are trades with higher probability and higher RR. Let me give you a simple example - you are PNF trader. You take long trade on double top as well as on triple top. Are these the same probability entries? No - triple top is by definition higher probability trade than double top one. Do you know you'll get a winner? No, of course not.

As I've said before - predetermined fixed risk is better than no risk management at all. If you do not have enough experience or skills (as trading is a skill activity) or you lack psychological strength or discipline, this may be the best approach for you.
However feeling of having safe amount of predetermined risk is not a substitute for above or for well capitalized account or trading appropriate product in appropriate timeframe based on your capitalization.

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 rani 
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Massive l View Post
I use a little over 1% on entry. As the trade progresses, I may get up to as high at 5%.
On average I'm a little under 2%.

What makes you change the risk from 1% to 5% after you've entered the trade?

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 rani 
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Big Mike View Post
There are no absolutes in trading for the most part.

If I analyze my last 1000 cash trades, it gives me a fairly good idea at what my next 1000 trades might look like. Cherry picking is not a factor so long as I continue my normal routine. If you drive the same way to the grocery store every week, it is not cherry picking if you change lanes 3 times vs 5 times, or if you hit 3 green lights vs 2 red lights, or if it rains vs is sunny. The factor is you drive to work the same way every week.

The behavior of a discretionary trader (at least me) is the same.

Mike

Big Mike, I really like your analogy

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 monpere 
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rani View Post
I am discretionary trader. I trade the same strategy for years (with some adjustments). I do take every signal my strategy gives me, just with different risk profile based on probability. I do not think it is a low or high probability, I know it. Sure it is still a probability, I do not know if the trade ends as a winner or looser.

I do not agree with that generalization. You may be right, that predetermined fixed risk might be the safest way. Maybe. However I do not agree that risk should be determined by percentage or fixed amount of trading capital. Let say your trading capital is $5,000, your risk is 1% and you trade ES. Safe? Hell no. What you actually trade in this case is noise and there is high chance you loose your capital. Risk should be determined by other factors than fixed amount of dollars you can afford to loose. We all know how different is having fixed $200 risk on let say CL compare to ZN.

Of course I agree that 10% of predetermined fixed risk is plain stupid. Whatever I wrote about not having fixed amount of risk does not negate other factors. I am well capitalized and my risk on any trade is never higher than 3% (and that I already consider a high risk). I just do not have any percentage or amount fixed and same for any trade on any product I trade based on my strategy.
If you spend thousands of hours in front of screen and have your strategy tested (and you are not switching to new holly grail or miracle indicator every other month) you know there are trades with higher probability and higher RR. Let me give you a simple example - you are PNF trader. You take long trade on double top as well as on triple top. Are these the same probability entries? No - triple top is by definition higher probability trade than double top one. Do you know you'll get a winner? No, of course not.

As I've said before - predetermined fixed risk is better than no risk management at all. If you do not have enough experience or skills (as trading is a skill activity) or you lack psychological strength or discipline, this may be the best approach for you.
However feeling of having safe amount of risk is not any substitute for above or for well capitalized account or trading appropriate product in appropriate timeframe based on your capitalization.


I did not say I believe in trading a certain percentage of your account. I believe that is purely arbitrary, and depends on the size of your account, and how risk averse you are. And I do not believe risk should be dtermined by how much you can afford to lose. As I said, I use the R-Multiple method "Shares = RiskDollarAmount/StopSize. Keeping RiskDollarAmount fixed, when StopSize increases, then Shares decreases, and vice versa." You are adjusting your contract sizing based on the size of your stop to keep your dollar risk constant.

In this equation, although the dollar amount you are risking is fixed, and maybe based on what you are comfortable on losing, that is not the basis of your stop loss. The actual technical basis of your Risk, is StopSize, because it is the only variable in the equation. With this method, you may take one trade with a 10 tick stop, and a 2nd trade with a 50 tick stop, and if you get stopped out on both trades, you will have lost the same amount of money on each of these trades. So, even though you limited your dollar risk to a fixed amount, you did not limit how and where you place your technical stop in the market.

Since you mention the ES, Put the RiskReward indicator on an ES chart, and put lets say $500 in the 'DollarRisk' parameter field, and 0 in the 'FixedPositionSize' field. Now go to the chart, select the stop line and drag it up and down closer and farther from the entry line, and observe how the number of contracts changes to keep your loss to a maximum of $500, as your stop size changes.

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 tigertrader 
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monpere View Post
I did not say I believe in trading a certain percentage of your account. I believe that is purely arbitrary, and depends on the size of your account, and how risk averse you are. And I do not believe risk should be dtermined by how much you can afford to lose. As I said, I use the R-Multiple method "Shares = RiskDollarAmount/StopSize. Keeping RiskDollarAmount fixed, when StopSize increases, then Shares decreases, and vice versa." You are adjusting your contract sizing based on the size of your stop to keep your dollar risk constant.

In this equation, although the dollar amount you are risking is fixed, and maybe based on what you are comfortable on losing, that is not the basis of your stop loss. The actual technical basis of your Risk, is StopSize, because it is the only variable in the equation. With this method, you may take one trade with a 10 tick stop, and a 2nd trade with a 50 tick stop, and if you get stopped out on both trades, you will have lost the same amount of money on each of these trades. So, even though you limited your dollar risk to a fixed amount, you did not limit how and where you place your technical stop in the market.

Since you mention the ES, Put the RiskReward indicator on an ES chart, and put lets say $500 in the 'DollarRisk' parameter field, and 0 in the 'FixedPositionSize' field. Now go to the chart, select the stop line and drag it up and down closer and farther from the entry line, and observe how the number of contracts changes to keep your loss to a maximum of $500, as your stop size changes.



Indeed, every trade carries the same amount of risk from a probability standpoint. I don't have any idea ahead of time, if one trade has a better chance of being a big winner, than another. So they are not sized, based on any expectation of profitability. The majority of the time, the same goes for adding to my winners. Even though I have a better "feel" for the trade once it is working, my add is still based on an algorithm, and not on discretion. However, there are special times when I do lever up, when I can readily see the trade is spot on.

While every trade is treated the same as far as expectancy, not every market is treated the same. You can't treat this years market, and it's attendant volatility, the same way you treated last year's market, and it's attendant volatility, any more than you can treat two different instruments, with two different vols, the same.

So, even though my stops are discretionary, and ultimately based on where-I-don't-want-to-be-in-the-position-anymore, they are still placed within the context of a volatility-based, position sizing algorithm, which is quite simply, 2% of equity risk, based on a 1.5 ATR stop. This allows me to have a realistic expectation of my risk/reward based on the current volatility of the market and the current volatility of the instrument I’m trading.

What’s most important is what you make of the trade once you have it on. It’s not about, how often you right the market , rather than how much you are right the market. Not only are my winners bigger than my losers, but my winners are ultimately sized bigger and held for a considerably longer time.

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 trendisyourfriend 
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In the last analysis, we can see judging from the various opinions that it is a matter of common sense as in everything else in life. If you start with a bank of $10000, it does not take lots of analysis to determine an acceptable risk. It would probably be equal to 2% of this capital. Once you have determined an acceptable risk, you look for a method or approach you know will present opportunities in line with that risk size. You would not pass your time to calculate a new risk size after each trade. Most probably you will trade with the same figure +/-. When your bank increases say by another +$3500 or +$5000, you'll not necessarily change the risk size, you may just continue what you were doing or decide to add one more contract. It's just a personal choice and possibibly your "greed threshold" (the amount of money one feels they are entitled to by virtue of their intellectual or physical assets). That said, i realise since i trade the Futures markets, i think less in terms of fixed % but more in terms of what i am comfortable to risk at that point in my trading life while being aware of my financial resources and status.

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 trendisyourfriend 
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I agree 100% (pun intended) with that passage:


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... trading.

What’s most important is what you make of the trade once you have it on. It’s not about, how often you right the market , rather than how much you are right the market. Not only are my winners bigger than my losers, but my winners are ultimately sized bigger and held for a considerably longer time.

Once the trade is open, it's minimize your loss and maximize your gain.

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 monpere 
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Indeed, every trade carries the same amount of risk from a probability standpoint. I don't have any idea ahead of time, if one trade has a better chance of being a big winner, than another. So they are not sized, based on any expectation of profitability. The majority of the time, the same goes for adding to my winners. Even though I have a better "feel" for the trade once it is working, my add is still based on an algorithm, and not on discretion. However, there are special times when I do lever up, when I can readily see the trade is spot on.

While every trade is treated the same as far as expectancy, not every market is treated the same. You can't treat this years market, and it's attendant volatility, the same way you treated last year's market, and it's attendant volatility, any more than you can treat two different instruments, with two different vols, the same.

So, even though my stops are discretionary, and ultimately based on where-I-don't-want-to-be-in-the-position-anymore, they are still placed within the context of a volatility-based, position sizing algorithm, which is quite simply, 2% of equity risk, based on a 1.5 ATR stop. This allows me to have a realistic expectation of my risk/reward based on the current volatility of the market and the current volatility of the instrument I’m trading.

What’s most important is what you make of the trade once you have it on. It’s not about, how often you right the market , rather than how much you are right the market. Not only are my winners bigger than my losers, but my winners are ultimately sized bigger and held for a considerably longer time.

tigertrader, You seem to be an experienced trader with many years of market experience. You may have well developed an instinctual feel or method that has brought you outside of the bell curve. But for the majority of traders reading these forums trying to become profitable, adapting the style of sizing trades based on which one they think or feel will have better chance of winning, go further, or run longer, will generally not work in their favor.

Obviously your post was very personal, and you are describing your trading as it relates to your skill level and experience. My view is that R-Multiple share sizing is a safe way of generically controlling risk, and any trader at any skill level can start using that method at market open tomorrow. Would you advise the average trader on this site to size trades the way you do? Do you believe they will control their risk better if they attempt to do what you do based on what you described in your post? Or, are you just saying that it is possible to successfully size that way, but only with the proper market experience, skill and/or instinct?

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 tigertrader 
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monpere View Post
tigertrader, You seem to be an experienced trader with many years of market experience. You may have well developed an instinctual feel or method that has brought you outside of the bell curve. But for the majority of traders reading these forums trying to become profitable, adapting the style of sizing trades based on which one they think or feel will have better chance of winning, go further, or run longer, will generally not work in their favor.

Obviously your post was very personal, and you are describing your trading as it relates to your skill level and experience. My view is that R-Multiple share sizing is a safe way of generically controlling risk, and any trader at any skill level can start using that method at market open tomorrow. Would you advise the average trader on this site to size trades the way you do? Do you believe they will control their risk better if they attempt to do what you do based on what you described in your post? Or, are you just saying that it is possible to successfully size that way, but only with the proper market experience, skill and/or instinct?

No, I agree with you - my methodology is not for novices, and may indeed be classified as a"don't-try-this-at-home" trading style. However,( IMO) at some point in time, when a trader is at a more intermediate to advanced level, and wants to take his trading to the next level, it is the methodology to take you there.

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 Massive l 
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What makes you change the risk from 1% to 5% after you've entered the trade?

If I like what I'm seeing after my initial entry, then I'll add more lots.
By adding more lots, I'm increasing my risk.

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 tigertrader 
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Concerning risk per trade sizing-size-matters.pdf

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 monpere 
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Interesting article. I didn't fully grasp all of it, due to it's rather theoretical nature, but here's the defining paragraph that stood out to me in the entire article:

"Poundstone highlights another important feature of the Kelly system: the returns are more volatile
than other systems. While the Kelly system offers the highest probability of the most wealth after
a long time, the path to the terminal wealth resembles a roller coaster. The higher the percentage
of your bankroll you bet (f from the Kelly formula) the larger your drawdowns."

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 Adamus 
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The Kelly formula requires the average trade, because the Kelly formula was derived from gambling using fixed outcome p'n'l rather than in trading where the p'n'l is variable. It significantly underestimates the optimal fixed fraction. There are many reasons why you wouldn't want to use the optimal fixed fraction though, so perhaps the Kelly formula is better since it's less aggressive. If you want a good intro to the theory, the first chapter of Ralph Vince's Mathematics of Money Management is good. I can't recommend the whole book. He writes a lot like Al Brooks writes - difficult to read!

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 tigertrader 
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Adamus View Post
The Kelly formula requires the average trade, because the Kelly formula was derived from gambling using fixed outcome p'n'l rather than in trading where the p'n'l is variable. It significantly underestimates the optimal fixed fraction. There are many reasons why you wouldn't want to use the optimal fixed fraction though, so perhaps the Kelly formula is better since it's less aggressive. If you want a good intro to the theory, the first chapter of Ralph Vince's Mathematics of Money Management is good. I can't recommend the whole book. He writes a lot like Al Brooks writes - difficult to read!


I have Mathematics of Money Management on pdf. - Anyone interested in reading it can PM me for a copy.

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 worldwary 
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I am primarily a stock trader and I've found that it is easier to control risk trading stocks than trading futures, since stock position sizes are more scaleable.

My basic approach is to allocate about 10% of capital per trade. The impact on the total account is thus 1/10 of the movement of the underlying stock. If the stock loses 10%, my account loses 1%. My "worst case" stop loss on any individual trade is 40%, or 4% of the total account.

As the account grows, I will look to decrease the allocation of capital per trade so that the risk per trade falls closer to 2%. There is a tricky balancing act involving risk vs. the number of trade signals generated per day vs. commissions (the less capital you devote per trade, the greater the proportional share of commissions you wind up paying) that I'm working through but for now the 10% allocation is working okay.

-----------------------------------------------------

"If you must forecast, forecast often."

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 devdas 
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One can try a lighter version,

The Trading Game - by Ryan Jones.

Harvest The Moon
Nest The Market
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 tigertrader 
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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 individual’s 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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 Big Mike 
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Going along with tiger's last paragraph, I feel that traders all too often try to eliminate and reduce risk as opposed to trying to embrace and manage it. Powerful difference between the two.

Mike

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 wldman 
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sharing the secrets of the great mystics. I got a great chuckle out of how well written the post is. Absolutely what I learned too (the hard way)...but in way, way nicer language.

I was alluding to the same thing in my post #2 of this thread but I was trying to keep it as simple as possible.

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 tigertrader 
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wldman View Post
sharing the secrets of the great mystics. I got a great chuckle out of how well written the post is. Absolutely what I learned too (the hard way)...but in way, way nicer language.

I was alluding to the same thing in my post #2 of this thread but I was trying to keep it as simple as possible.


Thank you, my friend !

Unfortunately, you and the chair, are in the rare minority,(especially on this forum) that get it.

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 monpere 
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wldman View Post
sharing the secrets of the great mystics. I got a great chuckle out of how well written the post is. Absolutely what I learned too (the hard way)...but in way, way nicer language.

I was alluding to the same thing in my post #2 of this thread but I was trying to keep it as simple as possible.


Glad my methodology does not require me to be 'a great mystic' in order to make money... just joshing you guys

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 wldman 
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it is hard to communicate clearly sometimes in a medium like internet forum.

I'm sure that if you are continuing to trade real money on a daily basis that you are in fact a great mystic...or at least great mystic eligible.

The idea of risk reward is very complex and the approaches to it almost infinite. What works well enough for any individual should , I guess, be left alone.

I was just making fun of tigertrader's "nice" description, confirming with him that it is not how we "learned". I meant no elevation of one here over another or to create any other implicit conclusion.

To me it does seem insane to define risk the way most here seem to. Briefly...to systemically define a maximum...doesn't that then become the "typical"? I understand how and why that develops...my wish was to prod just a few guys past that thinking. I do not want to seem arrogant in that but I believe that "discovery" if it is to happen, has to be that of they person searching...not because wildman or tigertrader or anyone else said so.

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 monpere 
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wldman View Post
it is hard to communicate clearly sometimes in a medium like internet forum.

I'm sure that if you are continuing to trade real money on a daily basis that you are in fact a great mystic...or at least great mystic eligible.

The idea of risk reward is very complex and the approaches to it almost infinite. What works well enough for any individual should , I guess, be left alone.

I was just making fun of tigertrader's "nice" description, confirming with him that it is not how we "learned". I meant no elevation of one here over another or to create any other implicit conclusion.

To me it does seem insane to define risk the way most here seem to. Briefly...to systemically define a maximum...doesn't that then become the "typical"? I understand how and why that develops...my wish was to prod just a few guys past that thinking. I do not want to seem arrogant in that but I believe that "discovery" if it is to happen, has to be that of they person searching...not because wildman or tigertrader or anyone else said so.

I know exactly what you mean. Obviously there are some very successful traders here who have a natural innate sense of the market, or have develop that sense over their spectrum of experience. I am glad that tigertrader qualified his methodology as 'not for beginners', because most participants on forums like this are traders who are seeking a way to success. My aim is to help them reach that goal by using safe and consistent risk management that will allow them the time to learn and gain enough experience to become successful before reaching their risk of ruin point.

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 wldman 
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for taking that approach and for trying to be helpful.

I do get great benefit from many of the posts here. Some are things I've been through, some are ideas or perspectives I was not previously exposed to.

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 wldman 
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my point across.


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 Timot 
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Anyone who uses Kelly here?

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 Adamus 
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Big Mike View Post
Going along with tiger's last paragraph, I feel that traders all too often try to eliminate and reduce risk as opposed to trying to embrace and manage it. Powerful difference between the two.

Mike


Speaking as someone struggling to grasp this concept, I'd say that this is one of those 'things you know that have to be mastered' but which just seem awesomely difficult to do. I mean, I can talk the talk and say all this stuff too because I've heard it from enough people I respect and I believe it - but can I walk the walk?

Put another way, it's easy to be able to say 'sh*t happens' after the event, but in a position where you see that sh*t is very likely to happen right now, in-grained psychology gets in the way of the desired response. Over and over, ad nauseam.


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 wldman 
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you have a propensity to kill winners and nurture baby losers till they are full grown? Not sure I follow you.

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 Adamus 
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Personally right now it's a tendency to put the stop too close but it could be anything along those lines.

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Adamus View Post
Speaking as someone struggling to grasp this concept, I'd say that this is one of those 'things you know that have to be mastered' but which just seem awesomely difficult to do. I mean, I can talk the talk and say all this stuff too because I've heard it from enough people I respect and I believe it - but can I walk the walk?

Put another way, it's easy to be able to say 'sh*t happens' after the event, but in a position where you see that sh*t is very likely to happen right now, in-grained psychology gets in the way of the desired response. Over and over, ad nauseam.


It's exactly as hard as you make it.

Another idiom you may often hear is "Traders get exactly what they want out of the market".


Quoting 
traders all too often try to eliminate and reduce risk as opposed to trying to embrace and manage it. Powerful difference between the two

So how to actually do this? Just analyze your behavior. Of course, you have to be honest with yourself, which is near impossible for most (they always find some external cause to explain something). But if you can be honest then you can clearly identify trends and behaviors within your approach.

Do these tendencies include trying to eliminate risk? One such example might be to move a stop up for no reason (no market based reason). Another is moving a stop to breakeven, again for no real reason other than to satisfy some personal demon (the market didn't give an indication that moving the stop was warranted).

Or do you embrace risk? Traders are risk takers. Your goal is not to be risk averse. Your goal is to manage the risk, expect the risk, embrace the risk. Sometimes this means what you want to do is take the trades that many others would not take because it is outside of their comfort zone. It does not mean that trade risks 10% of your capital! It means that you need to know that "fat tails" and "black swan" events happen. News happens. You don't know what tomorrow will bring, so in essence it all boils down to "expect the unexpected".

If you can literally come to expect the unexpected, then you will not be caught off guard or severely damage your account when such an event happens. And it will.

I find it really helps to take a step back. Stop trying to scalp the market for ticks and load up some bigger charts. Switch to micro sized instruments if you need to, but get away from all the noise and focus on the bigger moves from day to day or week to week. Until you do this, things will likely only be confusing.

Once you are proficient at trading bigger charts profitability, then you can trade around those positions on smaller time frames.

Mike

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 Adamus 
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Big Mike View Post
It's exactly as hard as you make it.

Another idiom you may often hear is "Traders get exactly what they want out of the market".

That's Ed Seykota. Another one of those pearls of wisdom I talk but can't walk. Man I sound like a schizophrenic.


Big Mike View Post
I find it really helps to take a step back. Stop trying to scalp the market for ticks and load up some bigger charts. Switch to micro sized instruments if you need to, but get away from all the noise and focus on the bigger moves from day to day or week to week. Until you do this, things will likely only be confusing.

Once you are proficient at trading bigger charts profitability, then you can trade around those positions on smaller time frames.

I could do that, and with forex it's really easy to scale down. But I'm not sure I should. I haven't decided that progress has halted yet with my 3-min timeframe trading strategy - I'm just saying the curve is still steep.

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 Big Mike 
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Adamus View Post
That's Ed Seykota. Another one of those pearls of wisdom I talk but can't walk. Man I sound like a schizophrenic.

Not to venture too far , but again I believe this is really rather simple to understand or "get". Now it isn't as simple to execute. But here is what I found most people understand easily: Step back 100 feet from your life. Look at your life as though you are looking through someone else's eyes, or your mind's eye, or whatever you want to call it.

For me (I talked about this for 3 hours in my "weekend with big mike" webinar), I had some major problems in my life that were obstacles to my success as a trader. I had to really change from the inside out. It isn't about taking signals on your chart. No amount of willpower or determination is going to make you a better trader if you have too many unresolved issues or baggage surrounding you.

So just imagine who you are trading against. Hundreds of thousands of people. Some are clueless people in their underwear, and others are billionaire professional traders. You need to beat the majority of these guys to make a profit. Are you up for it? Is your life in order so that you can truly focus on yourself as a trader? Are you really at peace with everything else in your life? Or are you "forcing it"?

Another recent example I gave was a good one I thought. You can have Tiger Wood's clubs, caddy, hat, clothes, shoes, balls, tees, and even Tiger himself standing six feet away from you. But no amount of willpower or determination alone is going to allow you to beat Tiger at golf.

Now the tricky thing is of course that you may sink a putt here and there that Tiger misses. But it doesn't mean you are a better golfer than Tiger. A lot of people get hung up on this, they hit home runs and think they are invincible and then blow up not long after, when really truly they had no better than 50/50 odds on any given trade.

Mike

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 Adamus 
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I'll check it out. Sounds useful (the webinar). Thanks. (Button's gone - can't give you any more for now!)

To get back on topic, my strategy does not allow me to risk more than 1% per trade - that's 0.5% per half position, (the two halves have different targets).

So for my chosen position size, say on a $20K account size I can risk max 0.2K per trade, which is 20 pips @100K position size. So if my setup won't work unless the stop is more than 20 pips away from the entry, I don't trade.

Fortunately it's only in the most volatile conditions that I would want to put a stop that far away and so far my strategy just says stay out during those times.

In the rosey future where I go live with that position size and double my account size, I won't necessarily double my position size. My strategy calls for the smallest significant increases in position size to be proven psychologically before I am allowed to raise it again - i.e. consistency and profitability at that position size.

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 TheTrend 
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I see that everyone here has more or less the same kind of position sizing: fixed fractional 1 or 2%, increasing some trades or pyramiding winners.

Has anyone tried / tested / traded some other algorithms ?

- fixed ratio,
- depedancy of the previous trades,
- trading the equity curve,
- leverage space portfolio from Ralph Vince (this guy was claiming on a forum that he was at its 500th winner in a row !)

etc...

Just curious, interesting subject.

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 monpere 
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Big Mike View Post

I find it really helps to take a step back. Stop trying to scalp the market for ticks and load up some bigger charts. Switch to micro sized instruments if you need to, but get away from all the noise and focus on the bigger moves from day to day or week to week. Until you do this, things will likely only be confusing.

Once you are proficient at trading bigger charts profitability, then you can trade around those positions on smaller time frames.

Mike

The good thing about bigger charts, is that they generally give you cleaner, clearer signals. The bad thing is the bigger the time frame you trade the bigger your stops will generally have to be, and therefore the larger monetary risk you have to take. If your average stop size is 10 ticks on a 4 range chart, it will be 30 ticks on a 12 range chart. If you are trading futures, that is a hard pill to swallow, and most trader's accounts will not allow them to swallow that pill.

The 2nd thing that comes into play with bigger charts is relative risk/reward. Since your stops will generally be bigger, you will now require the market to move further to maintain the same risk/reward. Supposing you are trading a 4 range chart and putting your stop 1 tick behind your entry bar (stop is 5 ticks), you only need the market to move 10 ticks to get a 2:1 risk/reward. Now, if you are trading a 12 range chart (stop is now 13 ticks), the market has to move 26 ticks to maintain the identical 2:1 risk/reward. A 26 ticks move on the 4 range chart is a 5:1 risk/reward trade.

Larger chart timeframes also make great sense when you do use R-Multiple share sizing, because whether you are trading the 4 Range chart mentioned or the 12 range chart, your monetary risk will be the same. This works optimally when you trade stocks or Forex where the share sizing granularity is much greater then futures. With the more popular futures contracts, when your minimum dollar amount per tick increment is $10, this limits how well you can fine tune your dollar risk.

So, if you only want to risk $100 on any stock trade, on the 4 range chart, with the 5 tick stop you buy 2000 shares, on the 12 range chart with a 13 tick stop, you buy 800 shares. You are risking $100 on both trades, no matter which chart you trade. Only difference is, using the 2:1 risk/reward for example, with the first chart, 10 ticks will get you $200, with the 2nd chart, you have to wait for 26 ticks to make your $200.

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 Big Mike 
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monpere View Post
The good thing about bigger charts, is that they generally give you cleaner, clearer signals. The bad thing is the bigger the time frame you trade the bigger your stops will generally have to be, and therefore the larger monetary risk you have to take.

This is not true.

People seem to be hung up on this bigger chart = bigger $$ stop. Not true.

Switch instruments people! Change markets! Trade the market and instrument that is appropriate for you. So if you want to trade a D1 time frame with a 200 tick target or stop, and such a stop is more than 1% of your account size, then guess what --- trade a different instrument or market.

I do not mean switch from ES to CL.

I mean switch from full sized futures EURUSD 6E, to the M6E on CME FX (1/10th size), or to spot forex micro EURUSD at 1/100th the size of the full 6E contract.

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 Big Mike 
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monpere View Post
The 2nd thing that comes into play with bigger charts is relative risk/reward. Since your stops will generally be bigger, you will now require the market to move further to maintain the same risk/reward. Supposing you are trading a 4 range chart and putting your stop 1 tick behind your entry bar (stop is 5 ticks), you only need the market to move 10 ticks to get a 2:1 risk/reward. Now, if you are trading a 12 range chart (stop is now 13 ticks), the market has to move 26 ticks to maintain the identical 2:1 risk/reward. A 26 ticks move on the 4 range chart is a 5:1 risk/reward trade.

In futures markets, 10 ticks = noise. Add to that the high cost of entry (commission, slippage, and not forgetting your time), and it makes no sense. I am glad you have made it work, but I cannot think of anyone else that is a retail trader that has succeeded at scalping for such tiny movements.

Majority of traders I know of try to use smaller and smaller charts, smaller stops, because they want to lessen the risk and $$ blow to their account. Then they end up with this ridiculously tiny stops and trade nothing but noise, ending up needing huge "trend" moves in order to make any money.

These guys would be far, far better served to increase their chart size 5x over, and trade a micro position (futures or forex) to maintain the $$ risk while trading above all the noise.

That said, there is middle ground. You don't have to go from a 4 range chart to a D1 chart, naturally. But 133 tick charts, 4 range charts, etc (I'm guilty of this in the past as well) are just crazy, and it is all tied to the perception of lowering risk, which is completely wrong.

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 monpere 
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Big Mike View Post
This is not true.

People seem to be hung up on this bigger chart = bigger $$ stop. Not true.

Switch instruments people! Change markets! Trade the market and instrument that is appropriate for you. So if you want to trade a D1 time frame with a 200 tick target or stop, and such a stop is more than 1% of your account size, then guess what --- trade a different instrument or market.

I do not mean switch from ES to CL.

I mean switch from full sized futures EURUSD 6E, to the M6E on CME FX (1/10th size), or to spot forex micro EURUSD at 1/100th the size of the full 6E contract.

Mike

Did you read my entire post? Given the example that I wrote (which is how I trade, and I assume that I'm probably not the only trader in the world that trades like that) how is that reasoning not true? And also further in my post, I also mention how different markets come into play, ie. trading stocks and Forex as opposed to futures.

I would agree if you said this 'is not always true', and if so, how about an example or so to illustrate that.
Also, I'm not sure where the standard 1%, 2% of trading account size came from. I trade full time and risk much less then 1% of my trading account on every trade. As an example, If you have a $50k trading account and you are trading the TF with a 5 tick stop, how much of your trading account are you risking per trade?

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  #56 (permalink)
 Big Mike 
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monpere View Post
Did you read my entire post? Given the example that I wrote (which is how I trade, and I assume that I'm probably not the only trader in the world that trades like that) how is that reasoning not true? And also further in my post, I also mention how different markets come into play, ie. trading stocks and Forex as opposed to futures.

I would agree if you said this 'is not always true', and if so, how about an example or so to illustrate that.
Also, I'm not sure where the standard 1%, 2% of trading account size came from. I trade full time and risk less then 0.1 % of my trading account on every trade.

You said "Bigger stops = bigger monetary risk". I am saying no, that is not at all what I am recommending. Bigger charts, bigger stops and SAME monetary (or less) risk by using a properly sized instrument or position.

I provided multiple examples in my last webinar "Where to start as a trader", part 1.

Mike

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 monpere 
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Big Mike View Post
You said "Bigger stops = bigger monetary risk". I am saying no, that is not at all what I am recommending. Bigger charts, bigger stops and SAME monetary (or less) risk by using a properly sized instrument or position.

I provided multiple examples in my last webinar "Where to start as a trader", part 1.

Mike

I understand you're a busy guy Mike, but read the entire post, we are partially saying the same thing. Read my paragraph on R-Multiples.

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 trendisyourfriend 
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I hope perryg won't read that


Big Mike View Post
In futures markets, 10 ticks = noise. ...
That said, there is middle ground. You don't have to go from a 4 range chart to a D1 chart, naturally. But 133 tick charts, 4 range charts, etc (I'm guilty of this in the past as well) are just crazy, and it is all tied to the perception of lowering risk, which is completely wrong.

Mike


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 monpere 
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Big Mike View Post
In futures markets, 10 ticks = noise. ...
That said, there is middle ground. You don't have to go from a 4 range chart to a D1 chart, naturally. But 133 tick charts, 4 range charts, etc (I'm guilty of this in the past as well) are just crazy, and it is all tied to the perception of lowering risk, which is completely wrong.

Mike.


trendisyourfriend View Post
I hope perryg won't read that


Don't you make me start posting my 4 Range charts up in here !!!

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 rani 
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Big Mike View Post
This is not true.

People seem to be hung up on this bigger chart = bigger $$ stop. Not true.

Switch instruments people! Change markets! Trade the market and instrument that is appropriate for you. So if you want to trade a D1 time frame with a 200 tick target or stop, and such a stop is more than 1% of your account size, then guess what --- trade a different instrument or market.

Mike

Exactly, I've wrote the same couple of posts above. Mike is right on this one.

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 tigertrader 
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Knowledge, attitude, skill, and patience, mitigates risk, not tight stops.

Mike and wldman seem to be the only ones who really get it. Risk is in the eye of the beholder, or in this case, the eye of the trader. Two traders equally experienced, equally informed, even equally intelligent will make different judgments again and again, when it come to risk management, and repeatedly one will be more profitable than the other. These traders may be almost identical, yet inevitably there is something unquantifiable that plays an enormous role, and makes one trader more or less certain about the market.

A trader's knowledge of the past gives the trader a proxy for an expected distribution.The trader can then amend that distribution when it diverges from the past, based on his current or forward looking view of the market. That very distribution can now be used to determine how aggressive the trader might want to be within a given risk parameter.If the trader doesn't exceed that draw-down constraint, and his distribution is a reasonable assessment of the future, the profits will grow geometrically.

Therefore, we can be either well prepared or poorly prepared in dealing with uncertainty, decision making, and trading. In the end, it's up to the trader to determine if he is going to be a small loser, who makes a little money, or someone who makes a lot of money, and occasionally loses.

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 wldman 
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Guys if your method is robust it will work equally well over different time frames and across different products. Mike is exactly right...not kind of right.. in his statement here. Yes I understand the math but that is not the important distinction. Like he says reduce the "factor" then by going with a financially more scale able product. All this attention to losers and the how big they might be on a 240 minute or daily chart leads to the question not of risk, but rather is the method robust and worthy in the first place?

Wldman has been at this a long time. Over the years if you added up my losers it would make your head spin. I was an expert on that way way before becoming a consistent profit taker. I bet all the guys with deep experience will say the same thing...you are an expert at losing before you become an expert a winning. Fortunately for me I was able to do most of that while trading other peoples money.

I am certain that entering a trade with an amount of maximum acceptable loss already in your mind is JACKING with your psychology and limiting your outcome from the get go. Focusing on an affinity for the highest probability set ups and exiting when the reasons for entry have deteriorated are two separate skills. Simply using some preset calculation to end the misery is not a skill that can be developed.

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 tigertrader 
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wldman View Post
Guys if your method is robust it will work equally well over different time frames and across different products. Mike is exactly right...not kind of right.. in his statement here. Yes I understand the math but that is not the important distinction. Like he says reduce the "factor" then by going with a financially more scale able product. All this attention to losers and the how big they might be on a 240 minute or daily chart leads to the question not of risk, but rather is the method robust and worthy in the first place?

Wldman has been at this a long time. Over the years if you added up my losers it would make your head spin. I was an expert on that way way before becoming a consistent profit taker. I bet all the guys with deep experience will say the same thing...you are an expert at losing before you become an expert a winning. Fortunately for me I was able to do most of that while trading other peoples money.

I am certain that entering a trade with an amount of maximum acceptable loss already in your mind is JACKING with your psychology and limiting your outcome from the get go. Focusing on an affinity for the highest probability set ups and exiting when the reasons for entry have deteriorated are two separate skills. Simply using some preset calculation to end the misery is not a skill that can be developed.


Sorry buddy; I neglected to include you in the sphere of risk cognoscentis. I edited my last post and you are rightfully noted.

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 monpere 
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wldman View Post
Guys if your method is robust it will work equally well over different time frames and across different products. Mike is exactly right...not kind of right.. in his statement here. Yes I understand the math but that is not the important distinction. Like he says reduce the "factor" then by going with a financially more scale able product. All this attention to losers and the how big they might be on a 240 minute or daily chart leads to the question not of risk, but rather is the method robust and worthy in the first place?

Wldman has been at this a long time. Over the years if you added up my losers it would make your head spin. I was an expert on that way way before becoming a consistent profit taker. I bet all the guys with deep experience will say the same thing...you are an expert at losing before you become an expert a winning. Fortunately for me I was able to do most of that while trading other peoples money.

I am certain that entering a trade with an amount of maximum acceptable loss already in your mind is JACKING with your psychology and limiting your outcome from the get go. Focusing on an affinity for the highest probability set ups and exiting when the reasons for entry have deteriorated are two separate skills. Simply using some preset calculation to end the misery is not a skill that can be developed.

Agreed on both counts. One, You cannot base your stop upon the amount of money you can afford to loose. Two, a sound methodology can work on any time frame. Look at the 'EuroUsd 6E' thread, In that thread, I have basically laid out my trading method, and showed entire days worth of trades on the EURUSD on daily, 60m, 610 tick time frames, on every time frame, same methodology, same entry, same stop placement, enter at the close of a bar, stop behind the entry bar, no mysticism, no zen. I trade the CL on 4 RenkoHybrid chart, and the SPY and GLD etf's on daily and weekly charts, all with the exact same methodology.

We must also make the distinction between the terms 'risk', and 'stop placement'. They are not the same thing. A trader may arbitrarily choose how much money they are willing to lose on a trade (risk), but should not choose his stop placement based on that dollar amount to be risked. What he should do first is determine his stop placement according to market structure. Then, size the trade appropriately based on the size of that stop loss in order to stay within the acceptable dollar amount he is willing to risk.

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 Big Mike 
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monpere View Post
I understand you're a busy guy Mike, but read the entire post, we are partially saying the same thing. Read my paragraph on R-Multiples.

I've read it a few times

We have very different approaches I think. You like to scalp, where I advocate against it.

To each his own, there is no wrong or right way. My experience tells me scalping is much, much more difficult (nearly impossible), where your experience seems to be the opposite (I presume).

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 Big Mike 
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trendisyourfriend View Post
I hope perryg won't read that


monpere View Post
Don't you make me start posting my 4 Range charts up in here !!!

hehe, and again if perry uses this kind of method, more power to him. To be honest, I am not very familiar with his method.

We are all simply speaking from experience. And my experience is that I continually see traders try to minimize pain by trading smaller charts and smaller stops, and the trade such tiny charts that it is noise.

So my advice is to stop that. And I've not done a good job in trying to make it clear (apparently) that when I say trade a bigger chart but a different instrument, I don't mean trade ES instead of oil, or Russell instead of Euro. I mean you need to look at the micro equivalent of your instrument in terms of $$ monetary risk on the table.

That may be micro CME FX futures, it may be micro spot forex, or it may be 100 share lots of ETF's. But you can find a way to keep your risk at 1% while trading a nice big chart where you won't get chopped to death by random noise in the market.

For those trading small charts, I believe we can agree you don't think there is new significant support and resistance every few seconds or couple of minutes in the market (how fast a 4 range chart moves). So if we step back and look at bigger picture we can probably often agree on the key support/resistance areas of the market.

Let's say one area is 1.3200. So I wait for price to come to 1.3200, and if I am bullish I long, and bearish I short. If the next key s/r above 3200 is 3350, and I am short, then my stop is perhaps above 3350. And the next key s/r below 3200 is 3000, so that is my target.

As price goes on about its business, it may become clear through price action that bearish is the wrong call. A series of HH and HL, for example. Or a double bottom. Or any other number of things. I can always exit when I see these things, well ahead of or in front of my 3350+ stop.

Now, you can trade a 4 range chart and trade the same S/R levels, but they will be multiple "pages" (scrolling) left on your chart, because your time frame is so tiny. And since most traders have a tendency to over trade, and are impatient, I am simply recommending to eliminate those potential problem makers by trading a bigger chart so you aren't watching the every move of the market.

Once you get good at identifying these bigger S/R levels then you can define your own method for trading them, and find what you average stop (risk) size needs to be in ticks. It will be the same number of ticks whether you are trading 1 contract or 1,000, whether you are trading full sized EURUSD 6E on CME or trading 1/100th micro size spot forex. The ticks (pips) don't change. What changes is the $$ value associated per tick/pip.

Mike

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  #67 (permalink)
 Big Mike 
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monpere View Post
Agreed on both counts. One, You cannot base your stop upon the amount of money you can afford to loose. Two, a sound methodology can work on any time frame. Look at the 'EuroUsd 6E' thread, In that thread, I have basically laid out my trading method, and showed entire days worth of trades on the EURUSD on daily, 60m, 610 tick time frames, on every time frame, same methodology, same entry, same stop placement, enter at the close of a bar, stop behind the entry bar, no mysticism, no zen. I trade the CL on 4 RenkoHybrid chart, and the SPY and GLD etf's on daily and weekly charts, all with the exact same methodology.

We must also make the distinction between the terms 'risk', and 'stop placement'. They are not the same thing. A trader may arbitrarily choose how much money they are willing to lose on a trade (risk), but should not choose his stop placement based on that dollar amount to be risked. What he should do first is determine his stop placement according to market structure. Then, size the trade appropriately based on the size of that stop loss in order to stay within the acceptable dollar amount he is willing to risk.



We agree!!!!

hehe



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  #68 (permalink)
 Silvester17 
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I believe we need some different opinions, just to keep it interesting.

there're methods that just won't work on bigger time frames. I'm a bid/ask study fanatic. and for my approach I won't consider anything bigger than 4 range on es and 5 range on tf. it's truly amazing how many times you can catch swing highs and swing lows. I normally leave the target open, but the stops don't need to be bigger than a couple of bars.

I do like to go for bigger swings too, and here I'm using hourly and daily charts to find a reasonable target. this approach includes a lot of fundamental stuff. timing is a bit more difficult, so I usually allow a bigger stop.

and please don't forget, not everyone is a swinger

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  #69 (permalink)
 wldman 
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Big Mike View Post
I've read it a few times

We have very different approaches I think. You like to scalp, where I advocate against it.

To each his own, there is no wrong or right way. My experience tells me scalping is much, much more difficult (nearly impossible), where your experience seems to be the opposite (I presume).

Mike

from time to time I don't gravitate toward the "scalp" but when I do it is because I'm bored and looking to force some action. The problem is that now from the retail side of the equation there is very limited edge in that game.

I do recognize that a robust method, well applied, might make consistent winning trades. My experience in that was usually that I'd have 3-6 nice days in a row then on a non trend or a blow off trend day I'd give back the prior run and then some. What I believe to have been at work was a psychological issue where I was not able to be wrong following the streak of wins...I'd get sporty because of course I was right and the market would come around to my position. In defense of my opinion I'd grow my position into a monster. This was a black/gray box system that finally blew up when I was camping with the family. (another story)

I think guys hold onto opinion motivated positions too long...I know I did. So I do not take opinion anymore only profits to objective...and yes that does limit running winners. I am getting better at that because of some of what I see here in futures.io (formerly BMT). BUT having a hellish day because you took profits too soon does not suck compared to printing a loss.

We are all here to share and learn. One of the hard adjustments for me here was to gauge tone in the typed word and sift the volumes to find the gold nuggets. Trade well guys.

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  #70 (permalink)
 wldman 
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Silvester17 View Post
I believe we need some different opinions, just to keep it interesting.

there're methods that just won't work on bigger time frames. I'm a bid/ask study fanatic. and for my approach I won't consider anything bigger than 4 range on es and 5 range on tf. it's truly amazing how many times you can catch swing highs and swing lows. I normally leave the target open, but the stops don't need to be bigger than a couple of bars.

I do like to go for bigger swings too, and here I'm using hourly and daily charts to find a reasonable target. this approach includes a lot of fundamental stuff. timing is a bit more difficult, so I usually allow a bigger stop.

and please don't forget, not everyone is a swinger

I have a modified balance of market power indie originally by Igor Livshin. Sometimes I was certain I was feinding edge for the st scalp. If there is a thread somewhere on that idea I'd like to read it.

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  #71 (permalink)
 Silvester17 
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wldman View Post
I have a modified balance of market power indie originally by Igor Livshin. Sometimes I was certain I was feinding edge for the st scalp. If there is a thread somewhere on that idea I'd like to read it.

I didn't start one yet. the ones I know that go in this direction are "tape is my shape" and of course some of the "gomi" threads.

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  #72 (permalink)
 wldman 
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has got some real weight behind him with his understanding and his programming skills. Don't want to get off topic too far...sorry.

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  #73 (permalink)
 eudamonia 
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Big Mike View Post
It's exactly as hard as you make it.

Or do you embrace risk? Traders are risk takers. Your goal is not to be risk averse. Your goal is to manage the risk, expect the risk, embrace the risk. Sometimes this means what you want to do is take the trades that many others would not take because it is outside of their comfort zone. It does not mean that trade risks 10% of your capital! It means that you need to know that "fat tails" and "black swan" events happen. News happens. You don't know what tomorrow will bring, so in essence it all boils down to "expect the unexpected".

If you can literally come to expect the unexpected, then you will not be caught off guard or severely damage your account when such an event happens. And it will.

Mike

Thanks for this piece of wisdom. As I pointed out in another thread my big issue is having the emotional drawdowns. I don't like to lose (who does?) and I feel heat just as much in simulated trades as in live trades. So beyond just the actual $ risk there is the mental risk.

Before entering a trade I've started the practice of telling myself, o.k. I've lost this $ (that is my stop amount) so that I've fully accepted the risk before entering the trade.

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  #74 (permalink)
 monpere 
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eudamonia View Post
Thanks for this piece of wisdom. As I pointed out in another thread my big issue is having the emotional drawdowns. I don't like to lose (who does?) and I feel heat just as much in simulated trades as in live trades. So beyond just the actual $ risk there is the mental risk.

Before entering a trade I've started the practice of telling myself, o.k. I've lost this $ (that is my stop amount) so that I've fully accepted the risk before entering the trade.

Interesting thought. I think I do the same thing mentally. It's strange, but looking at it that way, it would seem that I think about losing more then about winning, given that I am of the risk averse persuasion. I think it stems from my profession before trading. I was an engineer, where being wrong can literally be death. Trading is probably one of the few professions where it is acceptable, and you are actually expected to be wrong at least certain percentage of the time, sometimes even the majority of the time.

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  #75 (permalink)
 tigertrader 
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eudamonia View Post
Thanks for this piece of wisdom. As I pointed out in another thread my big issue is having the emotional drawdowns. I don't like to lose (who does?) and I So beyond just the actual $ risk there is the mental risk.

Before entering a trade I've started the practice of telling myself, o.k. I've lost this $ (that is my stop amount) so that I've fully accepted the risk before entering the trade.


If you "feel heat just as much in simulated trades as in live trades" then it's not about the money, it's about being right or wrong. Once again, it’s the desire to maximize the number of winning trades, and minimize the number of losing trades.“If you’re trading for emotional satisfaction, you’re bound to lose, because what feels good is usually the wrong thing to do. Getting stopped out is not a bad thing. In fact, it is a good thing because it probably saved you from losing even more money. Successful traders think in terms a risk-adjusted returns. What you should be asking yourself is, how much do I want to gain and how much do I want to put at risk in each trade, and have I placed my stop in the best spot possible.

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  #76 (permalink)
 eudamonia 
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tigertrader View Post
If you "feel heat just as much in simulated trades as in live trades" then it's not about the money, it's about being right or wrong. Once again, it’s the desire to maximize the number of winning trades, and minimize the number of losing trades.“If you’re trading for emotional satisfaction, you’re bound to lose, because what feels good is usually the wrong thing to do. Getting stopped out is not a bad thing. In fact, it is a good thing because it probably saved you from losing even more money. Successful traders think in terms a risk-adjusted returns. What you should be asking yourself is, how much do I want to gain and how much do I want to put at risk in each trade, and have I placed my stop in the best spot possible.

Intellectually I agree with you completely. Obviously stops have their purpose and I'm aware of that. However, that doesn't obviate how I feel when I enter or exit a trade. Being right more than you are wrong (in terms of overall expectancy over a period of time) defines successful vs. failed trading. Lose too many times no matter what your risk percentage or stated expectancy and you are done. My point is that simulated or not you either have a lasting edge or you don't. People who don't take the sim seriously don't really care (and perhaps that's a good thing). This would not be as difficult to handle emotionally if returns were somewhat linear but they aren't. You are given huge windfalls followed by long dry spells. Both of these states challenge you emotionally.

The more you care the more these cycles will affect you. Which is not really too different than saying that successful traders think in terms of risk-adjusted returns . Basically try to forget the outcome (or in my case I like thinking in worst case outcomes because then I cannot be disappointed) and just trade well.

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  #77 (permalink)
 tigertrader 
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eudamonia View Post

Being right more than you are wrong (in terms of overall expectancy over a period of time) defines successful vs. failed trading.

The more you care the more these cycles will affect you. .

The first statement is not only wrong, but in fact, may be inversely related to profitability.


It's not that you "care" (whatever that means- nobody likes to lose money), it's that, 1) you are more focused on the outcome, than the process, of your decision making, and 2) you are intellectualizing a negative outcome. It's a natural defense mechanism where reasoning is used to block confrontation with an unconscious conflict and it's associated emotional stress

The problem with allowing yourself to deal with stress in this way, is is that you are rationalizing your stress away, rather than confronting it. Stress increases your short term focus and co-opts your longer term thinking, i.e., you get out of your winners early, and in turn, you then intellectualize "that you can't go broke taking profits" These biases have a way of projecting themselves into other areas of your trading, i.e., confirmation bias, etc.

A guy playing blackjack in Vegas is dealt 17 and asks the dealer to "hit" him, and gets dealt a 4. Bad process, good outcome. Stick with this strategy and you are sure to lose over time. So focus on process and learn how to deal with negative emotions in a positive way.

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  #78 (permalink)
 mrphr 
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My "theory" my opinion about risk size is this:

If you have a winning strategy, a winning system; And if you do not have much capital you want to be more aggressive and risk 5% per trade. If you have the capital you want to be more conservative and risk 0.5% per trade.

But the ideal risk size would be 1% or 2%.

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  #79 (permalink)
 Jaguar52 
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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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  #80 (permalink)
 PowerBroker 
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Quoting 
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,

I read in my education that that is exactly what the Sm,Hedge funds, and Banks do. Albeit with black box algo. a 2 tick move seems miniscule to some but when the trade has 100 million dollars behind it it's not I don't think.

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  #81 (permalink)
 tigertrader 
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PowerBroker View Post
I read in my education that that is exactly what the Sm,Hedge funds, and Banks do. Albeit with black box algo. a 2 tick move seems miniscule to some but when the trade has 100 million dollars behind it it's not I don't think.


That's the point my friend. Statistical arbitrage is the domain of the big boys. We are not equipped to compete against them. The further you are out in terms of tenor, the less you compete with the algos and hfts , because your trading will not be as execution intensive. It will also be more scalable because you won'be trading as often, so it won't be as commission intensive.

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 PowerBroker 
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Quoting 
Getting stopped out is not a bad thing.

The cost of doing business at that moment and being wrong.

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  #83 (permalink)
 PowerBroker 
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Quoting 
We are not equipped to compete against them.

I don't CARE why they are doing it. I AM interested in When they are doing so I can get a crumb off the floor. Compete? never. Ride their hand made suit coat tails. Indeed.

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  #84 (permalink)
 tigertrader 
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PowerBroker View Post
I don't CARE why they are doing it. I AM interested in When they are doing so I can get a crumb off the floor. Compete? never. Ride their hand made suit coat tails. Indeed.



Good luck...fool's errand and then some. You will need to be co-located and your software will cost about $20,000 per month to lease, if you want to do algo driven stat arb, plus good luck trying to negotiate goldman's commission structure. Of course, I'm not even speaking to the fact that every possible mis-pricing that temporarily exists is instantaneously exploited, by some algo that was programmed by some russian kid with an IQ of about a zillion.

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 PowerBroker 
DetroitMIUSA
 
 
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Didn't mean it that way TT. Just that they can't hide what there doing in the volume. OR can they? I don't know.

Edit: I also understood part of this thread to say that trading size Ie. 10-100 contracts or whatever is the best way to compound $$ of a trade. Most retail traders get jammed up on this the way I understand the economic of it. Not a big enough account balance to trade what they think they can trade. Is this correct? Let alone improper MM.

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  #86 (permalink)
 Big Mike 
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You can continue the discussion in this thread.

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  #87 (permalink)
 petrmac 
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Massive l View Post
I use a little over 1% on entry. As the trade progresses, I may get up to as high at 5%.
On average I'm a little under 2%.

5% when the trade progresses? That means you consider the paper profits as real $ and treat them accordingly or you are adding to the position at certain points?

I am asking because I have bad experience with moving SL (though I still do that - I need to unlearn and accept the risk).
So far I am unable to mix the risk correctly, so the help is welcome.

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  #88 (permalink)
 liquidcci 
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TheTrend View Post
I see that everyone here has more or less the same kind of position sizing: fixed fractional 1 or 2%, increasing some trades or pyramiding winners.

Has anyone tried / tested / traded some other algorithms ?

- fixed ratio,
- depedancy of the previous trades,
- trading the equity curve,
- leverage space portfolio from Ralph Vince (this guy was claiming on a forum that he was at its 500th winner in a row !)

etc...

Just curious, interesting subject.


I use fixed ratio. Works very well. I like fact as your account grows your risk on a per contract basis decreases. I suggest incorporating position sizing into your backtesting as it will reveal some interesting things.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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  #89 (permalink)
 Hotch 
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petrmac View Post
5% when the trade progresses? That means you consider the paper profits as real $ and treat them accordingly or you are adding to the position at certain points?

I am asking because I have bad experience with moving SL (though I still do that - I need to unlearn and accept the risk).
So far I am unable to mix the risk correctly, so the help is welcome.


I don't think he means he's moving his stop in the wrong direction. It's possible to increase risk as you go on side, buy 1 contract with a 4 tick stop, when 4 ticks onside buy another with the same stop, your risk is now 3x your initial risk, but your 1R onside.

In regards to risk/trade. I think that traders who just use x%/trade across all their setups are missing a trick. If you have multiple methods, then it's likely that some have a greater edge than others. So surely they deserve to have greater amounts risked on them (or if you're risk averse, those methods with a lower edge should have less risked on them). I really think that traders don't think enough about risk and just go "1%, I read somewhere that that's a safe amount, that's my MM sorted", everyone I've met who's said that 1% is a good amount, nobody has explained why that particular amount (I'm not saying it's bad, just that many never question it, and that people should).

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 liquidcci 
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Hotch View Post
In regards to risk/trade. I think that traders who just use x%/trade across all their setups are missing a trick. If you have multiple methods, then it's likely that some have a greater edge than others. So surely they deserve to have greater amounts risked on them (or if you're risk averse, those methods with a lower edge should have less risked on them). I really think that traders don't think enough about risk and just go "1%, I read somewhere that that's a safe amount, that's my MM sorted", everyone I've met who's said that 1% is a good amount, nobody has explained why that particular amount (I'm not saying it's bad, just that many never question it, and that people should).

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.

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  #91 (permalink)
 monpere 
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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)
 Big Mike 
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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)
 Big Mike 
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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 individual’s 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)
 Private Banker 
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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.

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PB

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  #95 (permalink)
 Big Mike 
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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.

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  #96 (permalink)
 Surly 
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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)
 Big Mike 
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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.

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  #98 (permalink)
 Surly 
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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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 Deucalion 
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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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 trendisyourfriend 
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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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