EricParticipant
Master
“A trader who is willing to suffer a loss of £100 (or willing to deposit only £100) but will
only take profits when they have a position that is winning £1000 will lose 10 times
for each time they win. Net P&L = £1000 – (£100*10) = 0.
A trader who is willing to suffer a loss of £100 (or willing to deposit only £100) but will
take profits whenever they have a position that is winning £10 will win 10 times for
each time they lose. Net P&L = (£10*10) – £100 = 0.
It does not matter how high or low the leverage involved is, or how volatile the
underlying market. This line of reasoning always applies in an efficient market.
Without it a trader could derive infinite profits simply by selecting the “correct” targetwin-size-to-loss-size
ratio and placing an infinite series of trades with appropriatelydistanced
stop and limit orders against each one.”
https://replytoesma.trading/src/assets/IG_Group_response_to_ESMA_call_for_evidence.pdf
To turn your strategy from a simple coin toss you need to find an edge – something that just makes you right more often than you are wrong. It is not easy but test test test, analyse analyse analyse and you will hit upon some ideas. You don’t need a hit rate far above 50% and I am not saying that 1:1 is the right ratio. You can have a winning strategy that wins only 33% of the time – why not as long as the wins are more than the losses and cover the spread.
I am just trying to point out that reward:risk ratio will not a fix for a broken strategy. Adding risk just because you were right last time might turn out to be your edge but you will need to test that theory yourself. Personally I think that the markets do not know or care that you were right last time.
As GraHal tried to point out money management is not the answer to all your problems and what you are doing is trying to use money you have already won to increase your gains which is actually just money management. Money management is just something that you add on after you have come up with that winning idea.
Every trader is different with their stop losses. As I said elsewhere to you I like a very very loose stop to give a trade time to work or even no stop at all and just let an indicator decide my exit point.
My strategy is to find what I believe to be a good entry point and then close the trade with profit. How much depends on the markets not a fixed ratio. The markets do not know or care about fixed ratios – they move up and down at varying rates that follow no set rules!
Eric did you mean to add that link in your post? I can delete it if not.
EricParticipant
Master
Eric did you mean to add that link in your post? I can delete it if not.
It was IGs words (source)
Ahh.. OK I see the relevance now!
Page 28 Appendix 8 Section A.
There are some quite interesting statistics in that paper. I wonder why I never read it before the ESMA’s stupid decision.
The bit before the bit you posted is quite interesting:
Without transaction fees, a trader’s average P&L is always zero. A trader’s
probability of winning a trade is driven entirely by their appetite for a large profit,
relative to their tolerance for loss. The higher this appetite, the lower their probability
of winning but the more they will win if the trade works out. In general our clients
have a low appetite, leading to the result that most of their trades make money (but
average profit size is smaller than average loss size). This would be true even if we
never charged spread, commission or funding.
So most IG customers take small wins and big losses which indicates that most customers like to be right more than they are wrong. Seems most traders are not looking for 2:1 or 3:1.
Also interesting is this part just after the part you shared:
Transaction fees change this picture and are the true factor driving poor client
outcomes.
Average client losses on any given trade or series of trades will, on average, be the
sum of transaction fees paid (spread, commission and funding) over that trade or
series of trades.
The probability of a client winning any given trade, or series of trades, remains
primarily a function of their preferred take-profit size, relative to their tolerance for
losses. However, trading fees reduce this probability of winning. At most levels of
leverage, this reduction in probability is very small.
DEFPARAM CumulateOrders = true
IF not OnMarket and (your conditions) then
Buy 50 contract at market
ENDIF
IF OnMarket and close > PositionPrice + (30 * PipSize) then
Buy 50 contract at market
ENDIF
How would I write this code if I was going to go short instead of long?
I have tried but doesn’t seem to work.
DEFPARAM CumulateOrders = true
IF not ShortOnMarket and (your conditions) then
SellShort 50 contract at market
ENDIF
IF ShortOnMarket and close < PositionPrice - (30 * PipSize) then
Sellshort 50 contract at market
ENDIF
If you are using long and short in the same strategy then you will need to change onmarket to longonmarket in the long IF/THENS.
Thank you.
I have tried to turn a great system into what seems to be much much worse. My idea was to enter a position and buy more as the price moved in my favour. Big mistake. Leave system the way it is, unless you think I am missing something?
Ok so what I have found over back testing past 30 yrs on daily charts is my system kills it in trends but when flat give it all back in losses. Any ideas how to cancel out losses or trade losses into a profitable mean reversion?
Scaling in and scaling out are both great when you get it right and terrible when you get it wrong! You can have a profitable long position and then buy in again and find that you have just bought in as the market turns and plummets or you can have a long position that is in a loss and buy in again thinking you are getting a better price and then find that the market continues falling and now you are in double trouble. At some point you will be wrong and in for more than you would like to be in for.
Ok so what I have found over back testing past 30 yrs on daily charts is my system kills it in trends but when flat give it all back in losses. Any ideas how to cancel out losses or trade losses into a profitable mean reversion?
We do not know if the market is trending or going sideways until it has been doing it for a while and even then the next bar could be the start of the end for either type of market movement. Unless you have a crystal ball then we just have to accept that the past tells us almost nothing about the future!
I think you answered my question. I will remove scaling into positions and run again. As you said when you scale into positions when you are right is very profitable, BUT when I am wrong boy am I wrong
Any ideas?
Yes! The code in my second post!
Hello!
I am trying to scale in with one extra entry after the first. I have been trying to use your code from second post, but can´t get it to work. PRT are taking multiple new positions instead of one. I would be delighted if you guys could help me on this one. How is the “Flag” function operating and is there something else I need to put in my code to get it to work? Best Regards Daniel
