I am totally aware of strategizing.
If you are in a trade where the margin allows you a maximum of ONE car to trade - and two
consecutive SL bring you at the wall - there is no more "strategizing" coming in.
In other words: worn out & basta!
For all lower margined products you may have luck to get "first some cushion". There is no guarantee.
If you don't get a sufficient cushion - you are out too.
Thinking a 5% DD is VERY tight - no matter how your trading approach is - and under what circumstances
it may happen.
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This is obviously dependent on the product being traded, the particular combine amount/parameters, and most importantly, the skill of the trader and his trading strategy, which you seem to not be factoring in at all, using only generalities, when in fact the specifics of the individual trader are what are most important here.
If you were to go work for a prop firm and they gave you $100K to trade with after you proved yourself in simulation, how much do you think they would let you lose of their money before you got cut off?
You are essentially citing the holy grail of trading in general--keeping your losers small, and your winners large. This has nothing to do with TST or anything really beyond what trading is all about. Going big when the gods are with you sounds great, except you don't know if the gods are with you when you take the trade, so "going big" is really another word for "gambling," which is why so many traders blow up, which is why TST and any firm with a brain will put limits on position size/drawdown/etc. There are more intelligent ways to get big on a winning trade from a risk perspective than "going big" and hoping the gods are with you on this one.
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Your definition of "scalper" seems to be different from mine.
1) What is a typical expectancy per trade from a typical scalper?
2) What win rate does a typical scalper need to maintain in order to break even?
3) How many trades per day does a typical scalper take?
TST's #1 criteria for any trader they consider is risk management. I have spoken to many funded traders and two professional traders in the chat room who have confirmed this. One of the professionals trader put it this way: "If you make 5 grand a day but your risk management sucks TST will pass you by."
Any strategy you devise should be built around controlling risk. If you do this and have a solid trading plan then MAX DD and daily loss limit is not really an issue.
A good way to determine if you have risk under control is to take the max number trades you will make in a day and multiply it by the worse case loss scenario. If the number is greater than the daily loss limit then you have too much risk.
For my plan it works out this way: Max trades = 3; Worse Case loss = 15 ticks; position size = 1; daily loss limit: 500
3 x 15 X 1 = 45
$10 per tick * 45 = 450
$5 commission * 3 trades = 15
Total = 465
This is my worse case, however my personal loss limit is 300 so I would have stopped after the second trade. Although 15 ticks is where I have my stop at the beginning of the trade I have yet to have a 15 tick stop out when my rules are followed. This is because I move my stop up as soon as the trade either goes in my favor or against me. My average stop out is around 10 ticks.
Conclusion: There is very little chance of hitting my daily loss limit with this type of risk management. With my personal loss limit of 300 it would take 5 days to hit the MAX DD of 1500. This gives me plenty of time to figure out what I am doing wrong and correct it.
nosce te ipsum
Trade what the market is doing; NOT what you think its going to do.
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From the Hedge Funds Market Wizards book, some of the fund managers have these stats, and all of these are funds that have been in business for somewhere around a decade or longer (and most of the average annualized returns are in the 20% or so range):
Colm O'Shea: -10.2% max DD, worst month -3.7%
Larry Benedict: -5% max DD, worst month -3.5%
Scott Ramsey: -11% max DD
Edward Thorp: 3 losing months in 19 years, all less than -1%
Michael Platt: -5% max DD
From Platt's chapter (p274):
"The deal is that if a trader loses 3 percent, he has to give me back half of his trading line. If he loses another 3 percent of the remaining half, that's it. His book is auctioned. ... We want people to scale down if they are getting it wrong and scale up if they are getting it right. If a guy has a $100 million allocation and makes $20 million, he then has $23 million to his stop point." [he then explains that this 3 percent stop is reset every Jan. 1]
Now, we are talking very different scenarios here, don't get me wrong. One is a few contracts allowed, another is a $100 million account (or many billions for some of the funds above) that has a lot of different options for diversification and risk management, so I'm not trying to say the two are comparable in size.
What I'm trying to say is that good traders (and in this case fund managers) put a lot of emphasis on risk control. For TST's smallest $30K account, I really don't see why 5% is viewed as so tight, particularly when the profit objective is 5%. Just as you said only "luck within a positive period" could account for successfully completing a combine, your view that a 5% max DD is "VERY tight" regardless of the approach is simply based on your limited paradigm. I'm not saying anything is right or wrong, but consider that something that seems out of the realm of reasonable probability in your view may very well be very reasonable and achievable for others.
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It the trader has established that he can trade well, then he likely will already have an account in place and be doing just fine. If the trader needs to open a $5K account, it's quite possible that he will do so, and lose far more than the $170 refundable deposit that it would cost with TST to work on his trading and have the option to be funded with no monetary risk to the trader. Maybe not, but I'm looking at what is likely, based on what happens more often.
In the above statement, you demonstrate the tendency to focus on the profit instead of risk. It sounds kind of like "Why give up 40% of your potential profits, and have to pass a 'test' first in order to do so?" The other way of thinking is, "Why risk losing $5000 of my own money, when I could limit my risk to a few hundred dollars, and instead risk losing someone else's money?"
What would your max ES position size be on a $5000 account, out of curiosity?
Well, again, this whole account size is rather imaginative when we are talking about %s. If we look at the highest intraday margined instruments you wouldn't need more than 10K to trade 3 contracts with 1.5K loss. And in the case of ES, it can be as low as 5K.
So if we look at our account as 5K not 30K, the 1.5K allowed loss suddenly becomes way less tight. That is almost 30%, not 5%.
But you are right in a way of looking at it profit target vs. max. DD.
A well established (meaning decent account size) profitable trader doesn't need the Combine, because there is little to gain. Definiately not the 30K or 50K. According to Mr. Patak, the 50K is the most passed, most popular, so it is safe to assume, most Combiners are not well established....
They don't need to, but that is the alternative, not a 30K account. Sure, there is more risk trading your own money, but there is a better payoff too with better tax treatment.
If the trader actually has a choice (they could open a small account), then it is a judgement call. There are good arguments for both. I assume some of the Combiners don't even have the choice (for example a teenager trying from Russia), or they are not good at trading their own money.
Depends on what the account is for. If it is generating income for a living, I would be TST strict, if it is just a play account I could go the max. what the brokerage allows...
I see 2 types of traders using the Combine:
1. Traders with small or no account.
2. Testing new strategies. (it is cheaper to lose a $200 fee than let's say 1-2000 bucks real money to find out your new strategy doesn't work)
What I don't see is well funded, profitable traders adding to their account. If you are already swinging 30-40 cars, there is little to gain with an additional 10 contracts what comes with profitshare and bad tax treatment...
Last edited by Pedro40; March 30th, 2013 at 09:30 PM.