Successful traders: Risk Taker or Risk Averse? - Psychology and Money Management | futures io social day trading
futures io futures trading


Successful traders: Risk Taker or Risk Averse?
Updated: Views / Replies:5,567 / 42
Created: by Big Mike Attachments:2

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors Ė all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you donít need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 2  
 
Thread Tools Search this Thread
 

Successful traders: Risk Taker or Risk Averse?

  #21 (permalink)
Elite Member
Berlin, Europe
 
Futures Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
 
Fat Tails's Avatar
 
Posts: 9,651 since Mar 2010
Thanks: 4,226 given, 25,597 received
Forum Reputation: Legendary


artemiso View Post
@ratfink

I think he means 50% of your 'capital invested'. Capital invested could be something like 2% of your total account equity. So in fact, this is a free lunch opportunity if you could trade it forever. If this is hard to imagine just mathematically, you can just see the Monte Carlo simulations that I generated and nearly all of the equity curves end up in the positive after 1000 bets.

If you do Monte Carlo simulation, you basically reshuffle the trades and execute them in a different order. You can apply Monte Carlo simulations both to static bet sizes and to fixed fractional betting. Your simulation did not take into account the fixed-fractional approach. Here is the difference:

Static betsize: You reshuffle the trades and always bet the same amount. That is you always take the same absolute risk without looking at your equity. You would take the same bet if your equity is $ 100.000 compared to an equity of $ 500.000. Betting with a static betsize will lead to linear growth.

Fixed-fractional betting: Your risk as a percentage of equity remains constant. After a winning trade you increase your betsize accordingly, after losing trade you reduce your betsize. If you have a favourable bet, fixed-fractional betting will lead to exponential growth.

You can model both approaches with a Monte-Carlo simulation. The static approach is modeled with adding up returns. The dynamic approach is modeled by multiplying returns (or adding log returns).

Kelly betting is fixed-fractional betting using an optimal fraction of your account. This will lead to the fastest geometrical growth. However, fixed fractional betting is only possible, if the geometrical mean of (1 + r+) and (1 + r-) is greater than unity. In the case that I have described the geometrical mean is

geometrical mean = [ (1 + 0.5) * (1 - 0.2) * (1 - 0.2) ] exp (1/3) = 0.9865

and the system is not profitable. If this number exceeds the value of 1, fixed-fractional betting should lead to faster growth than betting the same amount irrespectively of returns. If the geometrical mean is smaller than 1, than you should not bet, as losing bets would significantly increase your risk of ruin, if you want to continue to play the game.

Reply With Quote
The following 4 users say Thank You to Fat Tails for this post:
 
  #22 (permalink)
Elite Member
Berlin, Europe
 
Futures Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
 
Fat Tails's Avatar
 
Posts: 9,651 since Mar 2010
Thanks: 4,226 given, 25,597 received
Forum Reputation: Legendary


artemiso View Post
From how you framed your question, I understood that you were saying I had set aside some capital for this strategy alone (see my reply to @ratfink):

...which is free-lunch, and I modeled exactly this in the Monte Carlo simulations above and it is very clear that your capital doesn't fall anywhere near -20% in 1000 consecutive bets with >99.9% confidence. I think the problem that lies with your response is that you are assuming 100% of your entire account capital is placed on each trade, which is not in the spirit of:

If you place 100% of your entire account capital on each trade, even if it is in treasuries buy-and-hold (not some leveraged ETF), there is no realistic situation under which you can avoid sizeable risk of insolvency, so good luck.

I did not assume that I place 100% of my capital on each trade. I just assume that I rebalance the bet size to the downside after a loss and to the upside after a win. I know that I can compensate the adverse impact of rebalancing if I manage a portfolio and if the system is only part of that portfolio. In that case the rebalancing of the bet size depends on the return generated by the entire portfolio, the contribution of this bet as part of the portfolio might be positive.

But that was clearly not the question. If I run this system on a separate account and rebalance the risk after every trade I am going to lose money. And that is exactly the way leveraged ETFs work, which do daily rebalancing on a fixed-fractional basis.

Reply With Quote
The following user says Thank You to Fat Tails for this post:
 
  #23 (permalink)
Elite Member
Manchester, NH
 
Futures Experience: Beginner
Platform: thinkorswim
Broker/Data: TD Ameritrade
Favorite Futures: Stocks
 
Posts: 902 since Jul 2012
Thanks: 603 given, 1,785 received


My simulations took into account fixed fractional betting as you had suggested.

If you are not convinced that this is free-lunch, we should play the game in real-life. Both you and me wire $100,000 to an escrow agent on the condition that we will numerically carry out your game for 10,000 rounds. To avoid bad luck, I think both you and me agree it is fair to repeat this game 1000 times and pick the median result.

For each time I lose, I'll pay you.
For each time I win, you'll pay me.

At the end of the game, we will exchange the net difference or the full $100,000, whichever is lower.

In fact, I've already written the code so we just need to decide on an escrow agent.

 
Code
% MATLAB 8.0.0.783
%% Inputs
rounds = 1e4;
curveIterations = 1000;
initialAccountEquity = 1e5;
win = 0.5;
loss = -0.2;
winProb = 1/3;
fractionalBetSize = 0.01;

%% Computation
cumReturnCurves = zeros(rounds, numel(fractionalBetSize));
equityCurves = zeros(rounds+1, numel(fractionalBetSize));

for fractionalBetSize = fractionalBetSize
accountEquity = zeros(rounds+1,curveIterations);
accountEquity(1,: ) = initialAccountEquity;
for i = 1:curveIterations
    for j = 1:rounds
        r = rand(1,1);
        betSize = fractionalBetSize * accountEquity(j,i);
        if r <= winProb
            accountEquity(j+1,i) = accountEquity(j,i) + betSize*win;
        else
            accountEquity(j+1,i) = accountEquity(j,i) + betSize*loss;
        end
    end
end

fatTailsPaysArtemiso = min(1e5, median(accountEquity(end,: )) - 1e5);

Reply With Quote
The following 2 users say Thank You to artemiso for this post:
 
  #24 (permalink)
Elite Member
Birmingham UK
 
Futures Experience: Intermediate
Platform: NinjaTrader
Broker/Data: IG/eSignal
Favorite Futures: Dax
 
ratfink's Avatar
 
Posts: 3,336 since Dec 2012
Thanks: 11,276 given, 7,090 received


Massive l View Post
I think the most successful traders are able to balance their risk appetite with risk aversion.
Being a risk taker does not automatically make you a leader. It could make you a fool.
Lots of leaders remain in the background, calculating their next move. They know when to press
and put on that risk and they know when to pull back and observe. It's a delicate dance that is mastered
through lots of thought and preparation.

Art of War indeed. Thanks for the reminder.

Travel Well
Reply With Quote
The following user says Thank You to ratfink for this post:
 
  #25 (permalink)
Elite Member
Berlin, Europe
 
Futures Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
 
Fat Tails's Avatar
 
Posts: 9,651 since Mar 2010
Thanks: 4,226 given, 25,597 received
Forum Reputation: Legendary


artemiso View Post
My simulations took into account fixed fractional betting as you had suggested.

If you are not convinced that this is free-lunch, we should play the game in real-life. Both you and me wire $100,000 to an escrow agent on the condition that we will numerically carry out your game for 10,000 rounds. To avoid bad luck, I think both you and me agree it is fair to repeat this game 1000 times and pick the median result.

For each time I lose, I'll pay you.
For each time I win, you'll pay me.

At the end of the game, we will exchange the net difference or the full $100,000, whichever is lower.

In fact, I've already written the code so we just need to decide on an escrow agent.

 
Code
% MATLAB 8.0.0.783
%% Inputs
rounds = 1e4;
curveIterations = 1000;
initialAccountEquity = 1e5;
win = 0.5;
loss = -0.2;
winProb = 1/3;
fractionalBetSize = 0.01;

%% Computation
cumReturnCurves = zeros(rounds, numel(fractionalBetSize));
equityCurves = zeros(rounds+1, numel(fractionalBetSize));

for fractionalBetSize = fractionalBetSize
accountEquity = zeros(rounds+1,curveIterations);
accountEquity(1,: ) = initialAccountEquity;
for i = 1:curveIterations
    for j = 1:rounds
        r = rand(1,1);
        betSize = fractionalBetSize * accountEquity(j,i);
        if r <= winProb
            accountEquity(j+1,i) = accountEquity(j,i) + betSize*win;
        else
            accountEquity(j+1,i) = accountEquity(j,i) + betSize*loss;
        end
    end
end

fatTailsPaysArtemiso = min(1e5, median(accountEquity(end,: )) - 1e5);

This is not a fixed fractional betting approach. You have reduced the betsize to a fractional betsize, as you only want to bet 1% of your capital. In case that you win your account equity will move from $ 100,000 to $ 100,500.

Your bet size is calculated on the entire portfolio, but not on the separate equity of $ 1,500. Therefore you increase your betsize by 0.5% after a winning bet and not by 50% as the fixed fractional betting assumes. We are not playing the same game.

Also you have shown that the bet initially proposed can be profitable, if added as a component to an investment portfolio. A diversified portfolio reduces the volatility of returns, and it is diversified if the $ 99.000 are just sitting in your account as cash. However, if all the returns of the portfolio are positively correlated by 100%, the bet proposed may not yield a positive cash flow.

The outcome of your game would be close to

1.005 * 0.998 * 0.998 = 1.00098

during the first rounds, which is a figure > 1, whereas

1.5 * 0.8 * 0.8 = 0.96

is a figure < 1 describing the original bet. I am not playing your game.

Reply With Quote
The following 3 users say Thank You to Fat Tails for this post:
 
  #26 (permalink)
Trading for Profit
Munich, Germany
 
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: Equity Index Futures
 
Posts: 285 since Apr 2012
Thanks: 121 given, 116 received

As this thread relates to "successful traders": They are at least risk neutral.

See definition of risk aversion according to Wikipedia:

Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff. For example, a risk-averse investor might choose to put his or her money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value.

Risk aversion - Wikipedia, the free encyclopedia

So, how can one be risk averse and a successful trader? I don't see that.

However, I do not understand nor see the connection to being a leader or follower. This is a different concept from my point of view and has little to do with risk.

Reply With Quote
 
  #27 (permalink)
Elite Member
Israel
 
Futures Experience: Intermediate
Platform: NinjaTrader
Broker/Data: pfg
Favorite Futures: eminis
 
Posts: 323 since Jun 2009
Thanks: 6 given, 206 received


Quoting 
So, how can one be risk averse and a successful trader? I don't see that.

As I said, only risk avert person can be a successful trader.
Risk takers are gamblers.

Reply With Quote
 
  #28 (permalink)
Trading for Profit
Munich, Germany
 
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: Equity Index Futures
 
Posts: 285 since Apr 2012
Thanks: 121 given, 116 received


baruchs View Post
As I said, only risk avert person can be a successful trader.
Risk takers are gamblers.

Yes, but how about being risk neutral. See the aforementioned definition.

Reply With Quote
 
  #29 (permalink)
Elite Member
Manchester, NH
 
Futures Experience: Beginner
Platform: thinkorswim
Broker/Data: TD Ameritrade
Favorite Futures: Stocks
 
Posts: 902 since Jul 2012
Thanks: 603 given, 1,785 received


Fat Tails View Post
This is not a fixed fractional betting approach. You have reduced the betsize to a fractional betsize, as you only want to bet 1% of your capital. In case that you win your account equity will move from $ 100,000 to $ 100,500.

Your bet size is calculated on the entire portfolio, but not on the separate equity of $ 1,500. Therefore you increase your betsize by 0.5% after a winning bet and not by 50% as the fixed fractional betting assumes. We are not playing the same game.

Also you have shown that the bet initially proposed can be profitable, if added as a component to an investment portfolio. A diversified portfolio reduces the volatility of returns, and it is diversified if the $ 99.000 are just sitting in your account as cash. However, if all the returns of the portfolio are positively correlated by 100%, the bet proposed may not yield a positive cash flow.

The outcome of your game would be close to

1.005 * 0.998 * 0.998 = 1.00098

during the first rounds, which is a figure > 1, whereas

1.5 * 0.8 * 0.8 = 0.96

is a figure < 1 describing the original bet. I am not playing your game.

@Fat Tails

Thanks for clarifying. It seems that we're thinking of different scenarios.

Reply With Quote
The following user says Thank You to artemiso for this post:
 
  #30 (permalink)
Trading for Profit
Munich, Germany
 
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: Equity Index Futures
 
Posts: 285 since Apr 2012
Thanks: 121 given, 116 received



karoshiman View Post
Yes, but how about being risk neutral. See the aforementioned definition.


It can also be argued that successful traders have to be risk takers as there are no exact probabilities in trading. Hence, "calculating" the expected value of a trade is not possible (relating to the definition above). Even if you backtest a system for x years you just know the historical probabilities. These may or may not apply in the future.

How about being "risk attentive"?

Reply With Quote

Reply



futures io > > > Successful traders: Risk Taker or Risk Averse?

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Linda Bradford Raschke: Reading The Tape

Elite only

Adam Grimes: TBA

Elite only

NinjaTrader: TBA

January

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
FT71's Price Risk vs. Information Risk argument keymoo Psychology and Money Management 23 April 1st, 2017 12:46 PM
Webinar: Topsteptrader on Discipline and Risk to be successful Big Mike Psychology and Money Management 16 June 10th, 2014 02:45 PM
Export the risk in terms of Risk/Reward using Van Tharp Multiple R daniv NinjaTrader 0 October 21st, 2012 05:52 AM
CS Global Risk Appetite Signals Risk-Off As Sentiment Stays In 'Panic' Mode Quick Summary News and Current Events 0 December 22nd, 2011 06:40 AM
Traders: Winning Ratio versus Risk/Reward nillz123 Traders Hideout 13 March 23rd, 2011 03:53 PM


All times are GMT -4. The time now is 09:38 AM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-11 in 0.21 seconds with 20 queries on phoenix via your IP 54.226.227.175