Trading

[Mr. Now]

Here are a few thoughts on trading, specifically on entry point.

1. Most entry point selection methods are at best educated guesses, meaning they are often little better than 50-50.

2. In light of the above, you need at least a correctly perceived 3:1 reward:risk ratio in the situation to consider the trade at all. Because less than that has no positive EV.

Getting is wrong in estimating the ratio means you lose in the long run. You must correctly perceive a real 3:1 or better to win in the long run, generally speaking. Yes I know some of you have a 70% entry point method etc etc...

The above points are rarely spelled out this plainly. Even Alan Farley's excellent book mentions it only in a few places and only in passing.

It seems ridiculously simple. It isn't.

[mal_noles]

Im damn tired but I dont see the logic in this at all. How is a 2:1 ratio -EV if you are averaging 55% winners or hell 50%.

[kimchi]

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Im damn tired but I dont see the logic in this at all. How is a 2:1 ratio -EV if you are averaging 55% winners or hell 50%.

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Transaction charges will kill you if your system is only marginally +EV.

I started trading a system that produced just over 30% successful trades. The risk:reward ratio was much greater than 3:1 and so it should have been profitable.

Financing costs and transaction charges made it =EV and my errors and emotions eventually turned it -EV.

I'm currently working on a system that effectively fades the above system, theoretically turning those 70% losers into winners. It doesn't quite work in practice and my trades in testing produce figures similar to Mr. Now's.

One of the biggest hurdles to overcome is the cost of doing busniess (financing, transaction charges, spread, data etc).

If only I could get rakeback on trading...

[Tupacia]

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Im damn tired but I dont see the logic in this at all. How is a 2:1 ratio -EV if you are averaging 55% winners or hell 50%.

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This doesn't make any sense to me either. Also, if all entry points are educated guesses, than it's impossible to accurately perceive your risk:reward ratio as it's nothing more than a wild guess.

[kimchi]

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Im damn tired but I dont see the logic in this at all. How is a 2:1 ratio -EV if you are averaging 55% winners or hell 50%.

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This doesn't make any sense to me either. Also, if all entry points are educated guesses, than it's impossible to accurately perceive your risk:reward ratio as it's nothing more than a wild guess.

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It isn't a wild guess if you've tested your system. You can make estimates of the expectancy of each trade over the long term.

If over historical and forward testing 50% of your trades are winners and each winner nets $2, and your average loss is $1. You can calculate your expectancy:

expectancy = (PW*AW)-(PL*AL)

PW = probability of a winning trade
AW = average win
PL = probability of a losing trade
AL = average loss

= (0.5*2)-(0.5*1) = 0.5

You could expect to win $0.50 for every $1 risked

[DcifrThs]

Mr. Now,

you have completely negated the possible move size.

entry points may mean a huge deal if you're looking at trading stocks in small ranges or other things where small changes means the probability of profitability is significant in small distances from that entry point.

but in large swings like reversals of carry trades or being long the yuan right now, once you recognize an imbalance, it is important to get there immediately. to what degree you want to get there is your call.

i'd like to stress again the vast difference between "probability of being right and/or making money" and "expectation of money to be made"

it seems you've left the latter out. and that is a fatal mistake imo.

you may know that, and i'd expect you do, but you didn't stress how important that is to being successful in trading and executing on the difference is even more important than knowing it.

Barron

[kimchi]

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entry points may mean a huge deal if you're looking at trading stocks in small ranges or other things where small changes means the probability of profitability is significant in small distances from that entry point.


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Your exits are far more important. People are always looking for entries. The pros look for an exit before they place a buy order.

Besides, unless you're a scalper, why bother trading stocks that move in small ranges? Why pressure yourself to aim for the bull's eye when just hitting the dartboard will turn a profit?

Trying to extract a profit intraday from tightly ranging markets subjects the private day trader to unsustainable trading costs.

Shorter-term trading strategies tend to have a higher probability of profit than longer term swing/trend trading. Unfortunately, these profits tend to be small and the losses, despite being in the minority, can be substantial.

Richard Dennis' Turtles made huge gains while less than a third of of their trades turned a profit. Their system was able to absorb long runs of losses through risk-management, and allowing their trades to run to large multiples of the initial risk taken.

A system with a 90% win-rate is no use if the wins are $1 and the occasional loss is $10, yet it is these systems that are most appealing to amateur traders because of their need to be 'right' rather than profitable.

[DcifrThs]

I didn't mention exit points since i think more in macro terms rather than intra day trading.

in global macro, it is important to think about what would create a different environment and thus lead you to want to exit the trade. of coruse you think of that ahead of time and try to guess at prices at which the imbalances wold be "solved," but you can't ever know an exact exit point for certain in advance when dealing w/ this type fo trading imo.

Barron

[Mr. Now]

Do not confuse the % chance that you have direction right with your reward:risk ratio. These are two differenty things to consider. Most entries are 50-50 and when you are initially testing out your premises, this is a prudent assumption to make.

Those making comments on ENTRIES, please place them under this sub-thread.

[Mr. Now]

Dcfr,

No I have not disregarded the potential larger upside of each trade; this is a trade management topic.

Those making comments on trade management, please consider posting same under this section.