Even if you have a strategy or setup that looks to have an advantage, even a strong advantage, you could still suffer a long string of loses. Part of my new strategy involves moving from 1 to 3 contracts in the ES. There is a lot I can do with 3 to make the most of stops and targets to protect the down side. But even so I am quite aware that one can still go bankrupt when the odds are in your favor. Are there a rules of thumb for trading bank rolls like there are for gambling? Even with a good setup, how many losers should I be ready for. Thanks
BTW. To me a good setup is 55 to 60 percent. In gambling that is tremendous.
Last edited by mcteague; April 25th, 2013 at 07:17 PM.
There is no rule of thumb for this, since it depends on your strategy and risk preferences.
Regarding how much losers to take, I'd say to stop trading when:
(a) you've reached your pre-defined maximum drawdown limit for the strategy, or
(b) you've incurred so many consecutive losers that, looking at your historical backtest results, you can be statistically quite confident (i.e., α = 0.05 or less) that your strategy is broken.
As you can see, terms like 'bankroll' and 'gambling' are not relevant here (in my view ).
One strategy that I use to trade the forex market, I backtested it manually over a couple of years of data. Then I wrote up a ROE (Rules of Engagement) that I saw produced a positive expectancy. Then I took that same ROE and in sim I traded the market. Afterwards I also backtested the results to see where they differed, and altered the ROE where it was needed. Through both tests I had around a 50% win/loss ratio, I ended up losing about the same number of trades in a row. Through the past couple of years though, it was not uncommon to see at least 8 losses in a row. Now that it ready to trade live, the results have been still around 50 %, and when I'm trading, I would not be surprised to see a string of losses that reach 10 in a row, or more, because though my testing I know that over time I will be back over the top. Psychologically is very hard at times to sit through those losses, but I then take a look at my past results, and I know that if I continue to follow the rules, then I will be successful. So to answer your question. How many losses should you expect? Well, I believe you should know that answer before you take your strategy live. Not knowing that, you may well quit trading, right before that winning trade.
I should have guessed that some people would be bothered by my use of those terms. But the the truth is that the mathematical applications are the same. Well at least they are similar.
The image we have of the investor or trader is some guy in a suit with a big diamond ring behind a desk with four or five telephones. "New York Buy!" "Chicago Sell" he commands as he answers each phone. But gambling has us picture some weepy degenerate confessing to his long suffering wife about how he lost the babies milk money in Louie's crap game. Both are bad exaggerations and not really true
You can be a good trader and you can be a good gambler. Good gambler being someone who bets when they have an advantage and has good money management. You can learn things about one from the other.
And as I said, a lot of the math should be quite similar.
It does not 'bother' me. I merely mentioned it since I personally think it's better to treat trading as a professional business active in money management. And from that standpoint, I would frown if a money manager said that his odds are tremendous since he beat gambling odds. Of course, if you want to compare it to gambling or any other activity for that matter, that's fine.
I'm not sure why you are explaining this to me, since I know this already and neither said that nothing can be learned from gambling.
But let us not get carried away with the gambling topic, since that was not your topic question. Perhaps you can also address the other posts in this thread that were on-topic? That way we would know if your money management question has been solved already or not.