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It's all about expectancy
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It's all about expectancy

  #1 (permalink)
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It's all about expectancy

Hello
I am coming to you for advise, as I need an expert eye to look at my logic below and confirm or comment/correct my system's expectancy and tell me if I am too far off from reality.

I have a capital of $40,000 of which I am willing to risk maximum 1% or $400 per trade (8pts).
I am going to trade 2x ES contracts per trade with a fixed ATM strategy that goes as follows:

First Contract
Stop -4 points from entry
Target +4 points from entry

Second Contract
Initial Stop -4 points from entry
Target +16 points from entry
Auto break even stop at +4 points from entry
Trailing stop -4 points, trigger +8, frequency 1 point


So, with the above ATM strategy, I have calculated 11 possible exits for each trade and assigned it a subjective probability of success. I am basically looking at the following exit scenarios:

Case 1: -8 points probability 30%
Case 2: +4 points probability 25%
Case 3: +8 points probability 10%
Case 4: +9 points probability 10%

Case 5: +10 points probability 5%
Case 6: +11 points probability 5%
Case 7: +12 points probability 5%
Case 8: +13 points probability 2.5%

Case 9: +14 points probability 2.5%
Case 10: +15 points probability 2.5%
Case 11: +20 points probability 2.5%

I believe there are no other possibilities except for staying in the trade which I do not object.
No end of day flattening requirement, so I can hold overnight if needed.

My expectancy per trade if I am calculating correctly, turns out to be 3.5 points on the ES or 175$ before commissions and net of slippage of course. This is very theoretical for the purpose of illustration.

Do you think my calculation is correct? Is it the right approach?
Please share if you can what you think is most realistic in terms of probability per the above cases.

I don't have a detailed journal to derive these probabilities from my own past trades. Also I had never used ATM strategies consistently in the past to know how they behave over a long period of time.

So could you please share your experience on this?
I hope I am not completely out of my mind with this

Thank you in advance, and happy trading!

Cheers
Fadi

Successful people will do what unsuccessful people won't or can't do!
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  #3 (permalink)
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Fadi View Post
Hello
I am coming to you for advise, as I need an expert eye to look at my logic below and confirm or comment/correct my system's expectancy and tell me if I am too far off from reality.

I have a capital of $40,000 of which I am willing to risk maximum 1% or $400 per trade (8pts).
I am going to trade 2x ES contracts per trade with a fixed ATM strategy that goes as follows:

First Contract
Stop -4 points from entry
Target +4 points from entry

Second Contract
Initial Stop -4 points from entry
Target +16 points from entry
Auto break even stop at +4 points from entry
Trailing stop -4 points, trigger +8, frequency 1 point


So, with the above ATM strategy, I have calculated 11 possible exits for each trade and assigned it a subjective probability of success. I am basically looking at the following exit scenarios:

Case 1: -8 points probability 30%
Case 2: +4 points probability 25%
Case 3: +8 points probability 10%
Case 4: +9 points probability 10%

Case 5: +10 points probability 5%
Case 6: +11 points probability 5%
Case 7: +12 points probability 5%
Case 8: +13 points probability 2.5%

Case 9: +14 points probability 2.5%
Case 10: +15 points probability 2.5%
Case 11: +20 points probability 2.5%

I believe there are no other possibilities except for staying in the trade which I do not object.
No end of day flattening requirement, so I can hold overnight if needed.

My expectancy per trade if I am calculating correctly, turns out to be 3.5 points on the ES or 175$ before commissions and net of slippage of course. This is very theoretical for the purpose of illustration.

Do you think my calculation is correct? Is it the right approach?
Please share if you can what you think is most realistic in terms of probability per the above cases.

I don't have a detailed journal to derive these probabilities from my own past trades. Also I had never used ATM strategies consistently in the past to know how they behave over a long period of time.

So could you please share your experience on this?
I hope I am not completely out of my mind with this

Thank you in advance, and happy trading!

Cheers
Fadi

I have to go to work (my day job) -- But I'll be back

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  #4 (permalink)
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@ Fadi

1. Why you want to use 40K capital (due to overnight margin?)

-- I think 20-25K is more than sufficient to trade 2 contracts and letís say invest the other 20k elsewhere (diversify



2. Initial Stop -4 points from entry

I was doing some homework few months ago (it was mostly mental so I have nothing to prove) but based on 5 contract I came up with minus $900 to -$1000 stop which is about 4pt so I agree with you. But market condition could change since

Hope this helps

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dario1 View Post
@ Fadi

1. Why you want to use 40K capital (due to overnight margin?)

-- I think 20-25K is more than sufficient to trade 2 contracts and let’s say invest the other 20k elsewhere (diversify

As he mentioned, he is willing to risk $400 per trade, 1%, and wants a 4 handle ES stop, hence, 2 contracts. If he were willing to risk 2%, then more contracts would be fine, or if he were willing to have a 2 handle stop, then more contracts would be fine.

Given that 1 ES contract controls $70,000 (current price of 1411 * $50 per handle), and given that most intraday margin is $500 per contract, it yields a 141:1 leverage. I'd say with that much leverage and hence freedom, nothing wrong with erring on the side of fewer contracts for most people.

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josh View Post

Given that 1 ES contract controls $70,000 (current price of 1411 * $50 per handle), and given that most intraday margin is $500 per contract, it yields a 141:1 leverage. I'd say with that much leverage and hence freedom, nothing wrong with erring on the side of fewer contracts for most people.

@ Josh
Don't get me wrong I have nothing against 40k account trading 2 contract -- I used to trade one contract with 50K account
however I feel 20-25k is more than sufficient for 2
cheers

P.S.
And, I'll never even consider trading 2 contracts with 5k account -- to much pressure

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  #7 (permalink)
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Hi Guys
Thank you for your contribution.

My trading account is with Interactive Brokers, and they apply the below margin requirements on the ES as of late:
Initial overnight: 4375$
Maintenance overnight: 3500$
Initial Intraday: 2188$
Maintenance Intraday: 1750$

So for two contracts, maximum margin requirement is 8,750$ but I usually go by the maintenance requirement, and in that case I consider 7,500$ for two contracts to be the figure.

I have also learnt from my previous job not to let margin exceed 15% to 20% of my total capital and as such 7,500$ is 18.75% of my capital, which makes 2 contracts just the right dose
Of course the remaining capital is not sitting passive, but remains in the trading account and won't retrieve it back to my bank account.

I am happy to read that you too consider 4 points of a stop adequate to day trade the ES future contracts; that's one part on which I also feel confident.
I would like your opinion on the exit cases, and probability distribution if possible.

Thank you again

Cheers
Fadi

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I realize that this is an ancient thread, but did you find that your calculations were appropriate for this probability distribution? How did you arrive at your probabilities?

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