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What statistic shows if you are 'letting winners run and cutting losses short'?
How do you know if you are letting your winners run and cutting your losses short? I wonder if there is a stat that tells you this. Maybe the answer is whatever your expectancy is. Maybe the answer is revealed from an analysis of MFE (max favorable excursions) and MAE (max adverse excursions). Maybe there is a whole other way. Perhaps it is the wrong question to ask when evaluating one's trading and hoping to see one's weaknesses and/or strengths.
Can you help answer these questions from other members on NexusFi?
If you consistently let your winners run and cut your losses short Expectancy would reflect that, given its calculation includes size of average win and size of average loss so, over time, Expectancy would increase.
MAE and MFE would not necessarily reflect this. For example, you could have a low MFE, but that does not necessarily show that you are maximizing your runners, it could simply be that your entry point is not ideal.
Size:
Average winning trade size in ticks or $
Average losing trade size in ticks or $
Frequency:
Frequency of winning trades as a % of total trades
Frequency of losing trades as a % of total trades
There is an inverse relationship between size and frequency typically. There are many paths to success in this business but the most common paths typically look like this.
1. Large size of winners (Small frequency of occurrence) with small size of losers (High frequency of occurrence) This is what most retail day traders start off aiming for. Trending markets typically work well this approach whereas range markets do not.
2. Small size of winners (Higher frequency of occurrence) with large size of losers (loser frequency of occurrence) . This is what scalpers aim for. This approach works well in ranging markets.
With most trading platforms they tell you your average trade size and win loss percentages. So you should be able to tell where you are at on the spectrum pretty easily.
MAE / MFE are useful as well, but they tell you something slightly different. They can show you how much risk you took on what ultimately turned into a winner (MAE). And they can also tell you how close you got to your target before you ultimately hit your stop (MFE). The best use case for these will be to try to do if / then analysis to determine if you would have adjusted your stop size or profit target size would you have made out better or worse. It's a very nice analysis to be able to do from time to time for sizing, but I don't think this will give you what you are looking for.
If what you are really looking for is how much money you potentially left on the table by only capturing 20 ticks out of what eventually turned into a 30 tick move..... You will need to source the raw data yourself and quantify each trade (Entry / Exit) against what happened after the trade. This type of reconciling wouldn't be practical for discretionary traders because it would take a lot of effort.... By contrast algo- traders can do this fairly easily. I used to do this on some of my old strategies. But you need to be fairly strong with programming to have a shot at doing this and not wasting a whole weekend trying to recon 10 trades.
Hope this helps.
Ian
In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
Use MAE to adjust your stops on your system. If your average MAE is X over a large enough sample size and you use a stop much larger you're taking way too much risk.
If over the last 100 trades as an example your MAE is 10 ticks but you're using a 50 tick stop it's time to adjust your system and tighten that up. All your average trades will still survive. You might have a few more stop outs but your stats tell you that a 50 tick stop for a system that on average has trades go against by only 10 is way too big of a stop.
Try using MAE that way and see if you get better results. Also maybe trail your stop tight as you reach your average MFE. That's most likely where your profits are. The good trades will just go even with a tighter trail stop around your MFE. Those outliers over time will bring your MFE up. Your job is to control your risk keeping trades to an average loss and trying to avoid outlier losses.
From there you can look to improve entry location which would help tighten up MAE. Keep adjusting and improving your system.
