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Need help with Money Management
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Need help with Money Management

  #1 (permalink)
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Need help with Money Management

Hello,

I have been day trading futures (ES, 6E and CL) for about couple of years. It never worked out properly. I was changing my methodologies/strategies. I was doing 10, 20 or more number of trades to cover my losses and eventually was loosing more money.

Big thank you to BigMike and future.io. This forum has been very helpful. The Psychology webinars and related threads are helping me follow the right path. Since few months, I have been able to control the number of trades to only 3 per day. I am finally able to stick to a decent methodology (using price action) that might help me be successful in trading. I have been able to get some success with 70% for winning trades.
I use the below Chars for my trading:
-->For 6E and CL: 6 range chart (for trading) and 600 tick chart for trend.
-->For ES: 4 range chart (for trading) and 200 tick chart to look at trend.



But the main problem that I see is the risk: reward ratio. I have my target of 8 ticks and stop-loss of 16 ticks i.e risk:reward = 1:2. Currently I am trading 1 contract per trade.

Though I am able to get 70% winning trades, one or two bad days are reducing my profits. For example, I had a bad day today and lot most the profits that I gained in this week.

Will my risk:reward ratio work in long run??
Can anyone suggest any better ways that I can handle money management??

Thanks

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  #2 (permalink)
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  #3 (permalink)
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ucacme View Post
Hello,

I have been day trading futures (ES, 6E and CL) for about couple of years. It never worked out properly. I was changing my methodologies/strategies. I was doing 10, 20 or more number of trades to cover my losses and eventually was loosing more money.

Big thank you to BigMike and future.io. This forum has been very helpful. The Psychology webinars and related threads are helping me follow the right path. Since few months, I have been able to control the number of trades to only 3 per day. I am finally able to stick to a decent methodology (using price action) that might help me be successful in trading. I have been able to get some success with 70% for winning trades.
I use the below Chars for my trading:
-->For 6E and CL: 6 range chart (for trading) and 600 tick chart for trend.
-->For ES: 4 range chart (for trading) and 200 tick chart to look at trend.



But the main problem that I see is the risk: reward ratio. I have my target of 8 ticks and stop-loss of 16 ticks i.e risk:reward = 1:2. Currently I am trading 1 contract per trade.

Though I am able to get 70% winning trades, one or two bad days are reducing my profits. For example, I had a bad day today and lot most the profits that I gained in this week.

Will my risk:reward ratio work in long run??
Can anyone suggest any better ways that I can handle money management??

Thanks

No, to me it is mathematically impossible. You have to win 2 to recoup 1 loss. With a stop loss like that you would need to be winning 90% of the time to make money. Most people are unable to do that.

If you reversed your stop loss to 8 ticks and a target of 16 ticks you could be right 50% (coin toss) of the time and be profitable. Increase it even more and you could be right 30-40% of the time and be profitable.

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  #4 (permalink)
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ucacme View Post
Will my risk:reward ratio work in long run??
Can anyone suggest any better ways that I can handle money management??

Only if you can maintain a very high winning percentage. Which, as you know is very hard to do. I would suggest putting less pressure on yourself and shoot for larger targets. Your winning percentage will drop, but winning percentage isn't the most important thing. You'll have to figure out for yourself how you're going to do that. There is no set formula.

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  #5 (permalink)
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High win rate is a rookie mistake. Lots of so called "experts" out there selling crap talk about their win rate, it is meaningless. Expectancy is what matters, and you need to factor slippage and commissions. The shorter the time frame you trade, the more difficult you make it to have a positive expectancy due to hard costs.

Mike

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  #6 (permalink)
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Thank you all for your replies.

Looks like I need to have atleast 2:1 ratio for Risk:reward. Have little concerned that my profitable trades might turn into losing trade but have to try this approach using my methodology.

Below are the two strategies that I am going to try:

1. One contract per trade with 2:1-->risk:reward ratio.

2. One approach I had in mind was to try 2 contracts for each trade. For each trade, 1 contract @1:1--> risk:reward ratio and the second contract with 2:1-->risk:reward ratio. Will this be good approach to start with??

Most of threads that I have seen suggested to trade only 1 contract until you are successful. Since I have not yet been successful, wanted experts suggestions/comments on the above two strategies.

Please share any other threads that had similar discussions.

Thanks

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  #7 (permalink)
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No matter what style of trading you use, make sure you test your strategy before you go live.

As @Big Mike said, you need a long term positive expectancy strategy in order to succeed.

Most of the people I know who fail at trading never test their approach, or test incorrectly.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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  #8 (permalink)
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Ouch. You've got some problems here.

First, the math is very much against you. You won't be able to succeed if the arithmetic doesn't work.

Suppose you can maintain a 70% success rate, and you have a target of 8 ticks and a stop of 16, as you said. After 10 trades, if you get 70% successes, you will have the following:

Wins: 7 trades x 8 ticks = +56.
Losses: 3 trades x 16 ticks = -48.

So you are up only 8 ticks, at best, after the 10 trades. Now, assume that, as is realistic, you have a tick of slippage on at least some of those trades (meaning, your stop won't really go off at 16, but will execute at 17), and allow for commissions, which you will have for every trade, and the 8 tick profit will vanish and become a loss.

So, basically, the idea of an 8 tick profit target and a 16 tick stop, with a 70% win rate (which is huge) is going to be suicide. You will, over time, lose everything.

We have actually just calculated your expectancy, which is much more important than win rate, as mentioned by @Big Mike. Expectancy is the amount of profit or loss per trade that you can expect to have over a period of time, given your win rate and your average profit and loss.

You calculate expectancy this way:

Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)

So here are your (hypothetical) numbers, based on your examples:

Expectancy = (.70 times 8 ticks) - (.30 times 16 ticks) = .56 - .48 = .8 ticks per trade, or 8 ticks per 10 trades, as we just calculated. This is very thin.

Subtract slippage and commissions, and you're negative. The point is that even with a very high win rate, you are either just on the edge of disaster, or over the edge.

-------------

What's causing that? Clearly, the very small assumed profit (8 ticks) and the larger loss (16 ticks). If you cut your profits this short and let your losses run this far, it will not work out. No variation on this theme will fix this.

More importantly, it's a loser's game to go for these very small profits. You give yourself no cushion or leeway for any losses, which will come. If you assign these types of stops and targets, you simply are going to have trouble staying positive. You will need to have much larger profits relative to your losses in order to stay above water.

One part of this issue is that having a very close target order in the market means that you will cut off your profit at that point. It may be comforting, and it may be rewarding emotionally, to take that money and put it into your pocket, but cutting it short so tightly will hurt you, as the calculations above show.

Another part of this issue is that going for such very, very small gains requires that, basically, you must be completely perfect, which no one can be. The reason this is a problem is that if you don't give yourself any leeway at all, if you don't have any cushion for your losses built up from your profits, you will not be able to outlast the bad times, which will come.

---------------

I would say that the fundamental issue is going after very small price movements. Based on several years of observation on this forum, there are a small number of traders who are consistently successful doing what is called "scalping." It's a very inexact term, but it does apply to the price ranges you have mentioned.

Most people who try it have failed. That doesn't mean that it's inherently an unworkable effort, but the very tight profit margins make it very hard to manage. You may see this from the calculations above. The very good scalpers are generally exceptionally accomplished, because they are doing something that few traders manage.

If you really want to exploit the opportunities that this kind of trading may offer, then, after thorough consideration, by all means go ahead and give it a shot. You should understand that it usually doesn't end well, however. So if you simply extend your profit horizons and don't let your losses get larger than your profits, you may have better success.

Last point: no one knows what anyone else "should" do. I don't know, therefore, what you should do, either. But there is a lot of material on this forum that you can draw on. Poke around, and see if anything appeals to you that does not involve the very short-term orientation of scalping small profits....

And good luck to you.

Bob.


Last edited by bobwest; October 23rd, 2015 at 11:33 PM.
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  #9 (permalink)
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It may help to look at trading ETFs representing the underlying markets you wish to trade at this point so that you can control your risk while you develop your system. I would also advise you to focus on one market in the beginning and devote all you time to trading it. If you can trade one, you can trade another ( you will just need to adapt to its nuances). If using ES, you could trade SPY. You wouldn't be able to tell one chart from the other but you could trade say 300 shares like trading 3 contracts and be able to fade your entries and scale out. The tuition would be about 95% cheaper this way and you could learn to trade swings vs scalping a few ticks. Much more rewarding style of trading with a lot less risk ( yes, scalping is more risky than swing trading) since you can skew the expectancy way in your favor with big targets and cover risk by scaling/ fading vs focusing on one price point.

As far as 2:1 risk:reward goes it will never work as bob explained above in excellent detail. The other thing with 8 tick targets you can easily get chopped up since you are just taking a chance on very short term orderflow- example it takes 12 ticks for my shortest term P&F chart to even print a new column of x's or o's and that chart will throw a dozen or several dozen traditional breakout buy/sell signals per day.

I'll add mone more thing- books you read say risk reward should be measured on every trade and I get this but don't pay too much attention to the finite measurement. Don't get me wrong, you can't be stupid about this and have a 5 pt trade where you risk more. I truly belive that my trade income is made on my scale out targets and my runner position, when it goes the distance, makes up for when I am wrong and take losses. Just a different way of thinking but food for thought.


Last edited by Inletcap; October 24th, 2015 at 12:07 AM.
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bobwest View Post
Ouch. You've got some problems here.

First, the math is very much against you. You won't be able to succeed if the arithmetic doesn't work.

Suppose you can maintain a 70% success rate, and you have a target of 8 ticks and a stop of 16, as you said. After 10 trades, if you get 70% successes, you will have the following:

Wins: 7 trades x 8 ticks = +56.
Losses: 3 trades x 16 ticks = -48.

So you are up only 8 ticks, at best, after the 10 trades. Now, assume that, as is realistic, you have a tick of slippage on at least some of those trades (meaning, your stop won't really go off at 16, but will execute at 17), and allow for commissions, which you will have for every trade, and the 8 tick profit will vanish and become a loss.

So, basically, the idea of an 8 tick profit target and a 16 tick stop, with a 70% win rate (which is huge) is going to be suicide. You will, over time, lose everything.

We have actually just calculated your expectancy, which is much more important than win rate, as mentioned by @Big Mike. Expectancy is the amount of profit or loss per trade that you can expect to have over a period of time, given your win rate and your average profit and loss.

You calculate expectancy this way:

Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)

So here are your (hypothetical) numbers, based on your examples:

Expectancy = (.70 times 8 ticks) - (.30 times 16 ticks) = .56 - .48 = .8 ticks per trade, or 8 ticks per 10 trades, as we just calculated. This is very thin.

Subtract slippage and commissions, and you're negative. The point is that even with a very high win rate, you are either just on the edge of disaster, or over the edge.

-------------

What's causing that? Clearly, the very small assumed profit (8 ticks) and the larger loss (16 ticks). If you cut your profits this short and let your losses run this far, it will not work out. No variation on this theme will fix this.

More importantly, it's a loser's game to go for these very small profits. You give yourself no cushion or leeway for any losses, which will come. If you assign these types of stops and targets, you simply are going to have trouble staying positive. You will need to have much larger profits relative to your losses in order to stay above water.

One part of this issue is that having a very close target order in the market means that you will cut off your profit at that point. It may be comforting, and it may be rewarding emotionally, to take that money and put it into your pocket, but cutting it short so tightly will hurt you, as the calculations above show.

Another part of this issue is that going for such very, very small gains requires that, basically, you must be completely perfect, which no one can be. The reason this is a problem is that if you don't give yourself any leeway at all, if you don't have any cushion for your losses built up from your profits, you will not be able to outlast the bad times, which will come.

---------------

I would say that the fundamental issue is going after very small price movements. Based on several years of observation on this forum, there are a small number of traders who are consistently successful doing what is called "scalping." It's a very inexact term, but it does apply to the price ranges you have mentioned.

Most people who try it have failed. That doesn't mean that it's inherently an unworkable effort, but the very tight profit margins make it very hard to manage. You may see this from the calculations above. The very good scalpers are generally exceptionally accomplished, because they are doing something that few traders manage.

If you really want to exploit the opportunities that this kind of trading may offer, then, after thorough consideration, by all means go ahead and give it a shot. You should understand that it usually doesn't end well, however. So if you simply extend your profit horizons and don't let your losses get larger than your profits, you may have better success.

Last point: no one knows what anyone else "should" do. I don't know, therefore, what you should do, either. But there is a lot of material on this forum that you can draw on. Poke around, and see if anything appeals to you that does not involve the very short-term orientation of scalping small profits....

And good luck to you.

Bob.

Thanks Bob. Perhaps best post I have read in recent time.

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