I'm not sure where you are at in your trading journey and what methods you have found worked / didn't work for you.
When I first got started trading a couple years ago I developed a plan based off market volatility. Essentially I had extremely large winners around 15% of the time, that made up for the losses I took along the way.
I found for me personally this system was extremely hard to stay disciplined in as the human psychological element to take smaller winners to get breakeven is difficult.
@Scalpingtrader stated my concerns about the non linear nature of the markets.
But what I would suggest doing is also perhaps doing a monte carlo / or some sort of analysis to get some idea of potential drawdown from different trading ideas.
The following user says Thank You to DeadCatBounced for this post:
For sure the market is not linear. Sometimes you are only aiming for 10, other times 20. You'll probably look for pullbacks to add, and they will occur in different places, and not every 2 points. The point of the exercise was to find out what happens if you let your winners run by doing nothing (AIAO), or whether you sized up as the trade moves in your favour. Not suggesting adding linearly is the way to go, or that this should be a template for trading, but just to find out mathematically which way (over time) I'm going to make more money, while not adding risk.
The following user says Thank You to sixtyseven for this post:
But you are looking at risk in relation to only 1 trade when I think you should be looking at risk in relation to account size -
If you are looking at it from just a theoretical statistical model and you have 100 trades and 14 make a truckload of money, there is no way to predict when those 14 will come along. So you might have 30 losers in a row. If each loser is $1500 your account drops $45k.
I think that is the downside to trading a system where there are such few winners is that your potential drawdown is just so much greater.
I agree with using a monte-carlo simulation to account for the randomness / streakyness of system performance.
I also agree there is a psychological aspect underlying all of this. Either scaling in or scaling out, is done for psychological reasons, not in order to maximize profitability. A trader may have a theoretically optimal system, that maximizes profits, which they cannot actually implement, or stay with, due to the psychology associated with the risk inherent to that system.
Be Patient and Trade Smart
Last edited by trendwaves; May 26th, 2015 at 03:25 PM.
Thanks for this sheet. Im looking over it to understand. I made something slightly similar but to help understand position sizing. I posted in my trade journal. Its based off the idea from Van Tharp's marble game for position sizing but I created it in excel with the random number generator function. So it takes less than a sec as opposed to hours.....lol.