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Why 7% is the Difference between Failure and Success in Trading
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Why 7% is the Difference between Failure and Success in Trading

  #41 (permalink)
Live Your Bliss
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Fat Tails View Post
@Anagami: If you talk about optimal f, the results will be terrible for scalping, once you include

-> the spread as created by using stop market orders (stop loss) and limit orders (profit target)
-> slippage
-> commissions

You cannot make any case for scalping if you use any realistic mathematical model. Below is an example which shows two systems, both with a winning probability of 60% and a R-multiple of 1. The first system uses a target and a stop loss of 10 points, the second system uses a target and a stop of 20 points.

The results are appalling. The 10 point system requires 6302 trades to achieve the target of doubling the account, the 20 point system only 218 trades. Even if you take into account that the 10 point system will generate about 4 times as many trades than the 20 point system, it will only have generated 872 trades out of 6302, when the 20 point system is already done.

Spread, slippage and commissions have a huge impact on scalping systems, this is the reason I never will do scalping with my retail account.

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Thanks. These are very interesting results @Fat Tails, and they do give me a pause.

HOWEVER,

notice that I did not define scalping as trading on a very short timeframe where spread, slippage, and commissions are such a huge factor that they eat you up.

I defined scalping merely as a 1:0.5 RR. You can use this ratio while trading a longer timeframe where those things are not such huge factors.

What do you think?

"...the degree to which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader." - Mark Douglas
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  #42 (permalink)
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Thinking about your example further, in both cases slippage and commission are 1.8 points.

For the 10 point system, that's 18%.
For the 20 point system, that's 9%.
(+spread).

My question is:

how much vig is too much?? (as a % relative to trade risk/reward sizes).

"...the degree to which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader." - Mark Douglas
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  #43 (permalink)
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Anagami View Post
Thanks. These are very interesting results @Fat Tails, and they do give me a pause.

HOWEVER,

notice that I did not define scalping as trading on a very short timeframe where spread, slippage, and commissions are such a huge factor that they eat you up.

I defined scalping merely as a 1:0.5 RR. You can use this ratio while trading a longer timeframe where those things are not such huge factors.

What do you think?

You cannot define something, which is already defined. Scalping is

(1) a legitimate method of arbitrage of small price gaps created by the bid-ask spread.
(2) a fraudulent form of market manipulation
(3) a legitimate method of trading based on quick momentum trades triggered by order flow reading setups

We were referring to 3, quick momentum trades. The main characteristics of a scalp trade is the shorter timeframe, not the win ratio.

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  #44 (permalink)
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'vig' or 'vigorish'?

I assume by "vig" you mean "vigorish":

[I]Vigorish, or simply the vig, also known as juice, the cut or the take, is the amount charged by a bookmaker, or bookie, for his services[/I]

And to clarify, would maximum draw down represent the MIN values as a percentage of the 100 unit base that you use to start the calculations; or does it refer to the minimum value encountered at the end of the 386 trades?

Thanks, Anagami for your work here and also thanks to Fat Tails for his contribution.

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  #45 (permalink)
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Fat Tails View Post
You cannot define something, which is already defined. Scalping is

(1) a legitimate method of arbitrage of small price gaps created by the bid-ask spread.
(2) a fraudulent form of market manipulation
(3) a legitimate method of trading based on quick momentum trades triggered by order flow reading setups

We were referring to 3, quick momentum trades. The main characteristics of a scalp trade is the shorter timeframe, not the win ratio.

Yes, that's the common definition. That's why I was crystal clear that I don't mean a specific timeframe, but a specific ratio. Those are 2 different issues.

"...the degree to which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader." - Mark Douglas
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  #46 (permalink)
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tpbyyc View Post
I assume by "vig" you mean "vigorish":

[I]Vigorish, or simply the vig, also known as juice, the cut or the take, is the amount charged by a bookmaker, or bookie, for his services[/I]

And to clarify, would maximum draw down represent the MIN values as a percentage of the 100 unit base that you use to start the calculations; or does it refer to the minimum value encountered at the end of the 386 trades?

Thanks, Anagami for your work here and also thanks to Fat Tails for his contribution.

Yes, vig = vigorish.

It is the MIN Value at the end. If MIN is say 60, then we consider max drawdown 40 (100-60). This may obviously not be the maximum drawdown per se, but it is the maximum drawdown from the starting value of 100.

You're welcome, it's been quite interesting... not over yet.

"...the degree to which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader." - Mark Douglas
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  #47 (permalink)
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Fat Tails View Post
@Anagami: If you talk about optimal f, the results will be terrible for scalping, once you include

-> the spread as created by using stop market orders (stop loss) and limit orders (profit target)
-> slippage
-> commissions

You cannot make any case for scalping if you use any realistic mathematical model. Below is an example which shows two systems, both with a winning probability of 60% and a R-multiple of 1. The first system uses a target and a stop loss of 10 points, the second system uses a target and a stop of 20 points.

The results are appalling. The 10 point system requires 6302 trades to achieve the target of doubling the account, the 20 point system only 218 trades. Even if you take into account that the 10 point system will generate about 4 times as many trades than the 20 point system, it will only have generated 872 trades out of 6302, when the 20 point system is already done.

Spread, slippage and commissions have a huge impact on scalping systems, this is the reason I never will do scalping with my retail account.

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Harry (@Fat Tails),

While taking a shower this morning (), it occurred to me that your comparison of a 10 point and a 20 point system is useful in some aspects but quite misleading in others.

The # of trades that it takes to reach a target is useful as a comparison benchmark only if the systems are taking the same trades or if the same number of trades occurs in the same time period.

1) Are both systems in your example taking the same trades?
Not at at all! A trade that is 60% certain using the 10/10 system is not necessarily 60% using the 20/20 system. The latter is a much rarer occurrence.

2) Is the same number of trades occurring in the same time period?
No. Same problem as number one. The 20/20 system simply cannot take the same # of trades at 60% as the 10/10 in the same time period.

You're comparing apples and oranges.

Consider:
Say both systems have been trading for some time period which we shall call X.
Say at the end of X, the 10/10 system completed 20 trades.
Where is the 20/20 system? How many trades has it completed?

The 20/20 system has completed many times less trades (maybe 5, maybe 7...etc.) than the 10/10 system in the same time period (X).

Which is ahead at this point in time (X)? Not the 20/20 system.

To say that the 20/20 system gets to the target much faster because it requires less trades is misleading because it takes many less trades than the 10/10 system in the same time period.

The 20/20 system gets to the target faster in terms of the # of trades, but it is slower in terms of time.

Your example is an oversimplification that fails to model this crucial aspect of trading.

"...the degree to which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader." - Mark Douglas

Last edited by Anagami; May 5th, 2012 at 10:18 AM.
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  #48 (permalink)
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Anagami View Post
Harry (@Fat Tails) The # of trades that it takes to reach a target is useful as a comparison benchmark only if the systems are taking the same trades or if the same number of trades occurs in the same time period.

Correct.

Anagami View Post
1) Are both systems in your example taking the same trades?
Not at at all! A trade that is 60% certain using the 10/10 system is not necessarily 60% using the 20/20 system. The latter is a much rarer occurrence.

2) Is the same number of trades occurring in the same time period?
No. Same problem as number one. The 20/20 system simply cannot take the same # of trades at 60% as the 10/10 in the same time period. You're comparing apples and oranges.

The 20/20 system cannot take the same number of trades over the same time period, but I had already taken it into account! Based on the square root relationship between volatility and time, I had made an estimation that the 20/20 system will be able to enter only one trade, while the 10/10 system enters 4 trades. This assumption is realistic, you can compare the average true range from N-minute bars with the average true range from 4xN-minute bars, and will find that it is approximately the double.

If you read my post attentively you will also understand that I have not directly compared the 6302 trades needed by the 10/10 system with the 218 trades of the 20/20 system, but I have used the above approximation to state that the 10/10 system will be able to take about 872 trades while the 20 /20 system takes 218 trades.

But even after 872 trades (4-times as many as the 20 point system) the 10/10 system is far from reaching the target. I will take about 7 times (!) as long to achieve its target, as it has to generate 28 times as many trades.


Anagami View Post
Consider:
Say both systems have been trading for some time period which we shall call X.
Say at the end of X, the 10/10 system completed 20 trades.
Where is the 20/20 system? How many trades has it completed?

The 20/20 system has completed many times less trades (maybe 5, maybe 7...etc.) than the 10/10 system in the same time period (X).

Which is ahead at this point in time (X)? Not the 20/20 system.

To say that the 20/20 system gets to the target much faster because it requires less trades is misleading because it takes many less trades than the 10/10 system in the same time period.

[B]The 20/20 system gets to the target faster in terms of the # of trades, but it is slower in terms of time.

The 20/20 system needs 28 times fewer trades (218 versus 6302), and will reach its target about 7 times faster. It is therefore both faster in terms of trades and in terms of time.


Have added the 15 min charts of ES 06-12 from last Friday with the ATR(256) calculated from the primary bars (red) and the ATR(25) calculated from 60 minutes bars (blue)=. The approximation which I have used postulates that the
ATR from the secondary bars should be about twice the size as the ATR from the primary bars, and this is indeed the case, as 3.16 is about the double of 1.64.

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  #49 (permalink)
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liquidcci View Post
Endless debate about putting trading records up. I for one will not do it because they are private and can be fabricated on a message board like this anyway. So it is moot.

This is definite doable and I think mistake to overlay your own experience onto what others have done and can do. I will say key though is to setup system that needs much less than 60% to survive and make money.

Not trying to defend any side, but I don't see what is so personal if someone put up trading records and remove personal info, i.e. name, account number. @Anagami presented results for combinations of R/R and profitability expectation, he did some homework. Just throwing hands in the air without substantiating a disagreement with real data or some sort of statistical analyses is not a credible argument.

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  #50 (permalink)
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aligator View Post
Not trying to defend any side, but I don't see what is so personal if someone put up trading records and remove personal info, i.e. name, account number. @Anagami presented results for combinations of R/R and profitability expectation, he did some homework. Just throwing hands in the air without substantiating a disagreement with real data or some sort of statistical analyses is not a credible argument.

For the same reason I would not blot all my personal info on my tax returns then mail it to all my neighbors.

But really it is a waste of time. I could quite easily create a fake statement and make every one oooh and ahhh. Point being any statement posted here by anyone cannot be proven to be real. So there is no reason to make effort to do so or request anyone else to do so.

"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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