Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
Why 7% is the Difference between Failure and Success in Trading
The thread is not about higher timeframes or even about edges on lower timeframes.
The thread is about the percentage of improvement that is necessary for profitability. (though you are welcome to discuss other issues as you choose, but that doesn't mean I'm terribly interested in them. ).
Daily chart - 1 bar a day.
5 min chart - 81 bars a day.
Therefore, there is theoretically 81 times more opportunity.
You are never in the wrong place... but sometimes you are in the right place looking at things in the wrong way.
Not sure what your gripe is, but it doesn't seem like you took your meds this morning. I would strongly suggest you don't trade in this mood.
I provided nothing but solid simulation data to show the point of this thread: the difference between failure and success in trading can be as 'little' as 7%. But it does not seem you are capable of grasping that.
You are never in the wrong place... but sometimes you are in the right place looking at things in the wrong way.
When you say "Yes, edges are stronger on higher timeframe", I think it is fair to investigate that and discuss why you think this is the case.
This is a discussion forum and I like to discuss. I would like to know why you think edges are stronger on a higher timeframe. It may be obvious to you but to me, it is not obvious.
You brought this fact to the discussion, you could at least show the courtesy to discuss the point you made.
I don't care either way to be honest, I just like to explore other people's opinions.
I primarily trade intraday because of overnight risk. The shorter time frame you are exposed to the market the less risk.
"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."
The smaller your holding time the smaller your targets. If a "price swing", whatever way you define it is an average of 50 points when holding for several weeks it might only be 5 points or even 5 ticks when holding smaller time frames (such as 2 hours or perhaps even 2 minutes).
As these targets become smaller your commissions and spread do not diminish. Therefore, the vig becomes a more substantial portion of your net profit. It is not uncommon that a swing trading method that has a 5% vig taking 5 trades per month would encounter a 25-30% vig taking 5 trades per day.
Therefore, your net profit and edge per trade goes way down the smaller your holding time. Of course, your opportunities go up.
Lastly, the purpose of a "prop firm" would be for that firm to make money. They make money when you take trades. Not when you are profitable. So it makes a good deal of sense to them that they teach a high trade frequency method. But that doesn't necessarily have anything to do with making good traders.
Continuing after being so rudely interrupted by an obnoxious vendor with his own agenda , let us look at 1:1 RR. This is an extremely common ratio. Many traders and algos take profits (usually at least partial) at the point where their gain equals their initial risk. Thus 1:1 RR makes for an interesting study.
The parameters are the same as previously, except the RR is 1:1.
Case 1: 50% Winning (Random)
Not terribly interesting, but a good starting point. Evenly distributed trials as expected.... the cost of trading will sink you though, need to improve the winning percentage.
Case 2: 55% Winning (Improved)
Say we improve our winning % by 5 percent. Profitable or not?
Looking at the results, one is more likely to be, but not strongly so. Because of vig, much more likely to be break even at 1:1 RR at 55%.
Case 3: 60% Winning (Profitable)
At 60%, we encounter a much healthier picture.
Notice that for the first time, none of the trials finished below the starting point, meaning the odds of being in the negative after 386 trades are less than 0.01%.
Case 4: 70% (Expert)
We take a very significant jump here out of being 'merely' profitable to being proficiently so.
Achieving 70% at 1:1 RR is difficult (though attainable as I'm sure some members will remind me).
Case 5: 80% (Master)
Master level would require having an incredible insight and very high level of selectivity (i.e. a-hole the size of a decimal point ).
Now, let's look at the ratios of the maximum positive trial (MAX VALUE) to the maximum negative trials (MIN VALUE).
At 1:1 RR, at 50% Winning Rate, the ratio is about: 1.
At 1:1 RR, at 55% Winning Rate, the ratio is about: 2.
At 1:1 RR, at 60% Winning Rate, the ratio is about: 6.
At 1:1 RR, at 70% Winning Rate, the ratio is about: 17.
At 1:1 RR, at 80% Winning Rate, the ratio is about: 42.
Recall from the first post that for 1:2 RR, at 40% (minimum ballpark level determined for profitability), the ratio was 5.
Important Question: Which is easier to achieve? Which one should the trader strive for?
I can't say which is easier to achieve like you said many factors. But I would rather be profitable with the lower winning %. Gives you more room to absorb outlier type draw downs. I think is bad idea to trade a strategy that needs those high percentages to make money.
"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."
The expectancy of the two alternatives is identical, the answer lies elsewhere. You will find it in the thread on the risk of ruin. To show this, we need to make some assumptions on the way we trade and on risk tolerance.
Assumptions:
-> I start with an account size of 100.000 USD
-> My target account is 400.000 USD
-> I will definitely stop trading after a drawdown of 50% (ruin)
-> My tolerared risk level for that drawdown is 1%
-> I am following a fixed-fractional approach for position sizing, that is I will increase my position size if my account gorws or decrease it after a loss
-> I use a model for YM, which includes slippage and commission
The results are shown below:
(1) The trend following model with the higher R-multiple and the lower win rate requires 450 trades to reach the target.
(2) The model with the lower R-multiple requires only 218 trades to achieve the same target.
The reason here is that the second model produces far lower drawdowns. Although both systems have the same expectancy, the second model has a higher Optimal F - in the example below 12.09% compared to 5.76% for the first model. This means that for equal drawdown risk the second model trades twice as many contracts and it comes out the clear winner.
@Anagami: Your analysis was right, the second model beats the first. You have just given an excellent example for the application of a Monte Carlo analysis. You can also use Monte-Carlo Analysis for fixed fractional betting, the difference between the two systems will even be more impressive.
@liquidcci: You got it wrong, the second model is better because it produces lower drawdowns and therefore allows for higher leverage. But I agree that the result is counter-intuitive.
).
