Actual Results?!?

Quoting Dexis

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Here it goes again...

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Quoting mbqb11

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haha

Sky, glad to hear you are finally having some "aha" moments. It is a great thing. Basically my answer is someone posting their pips is going to have very little bearing on anything you do. I might make 50 pips a month and be adding 7% to my account while someone making 1000 pips a month is adding 1% to their account. Also I can make negative pips for the month, and still be adding a positive percentage increase to my account.

If you want to check out a recent thread(it did get a bit heated, but there is great info in there) go here....
http://forexfactory.com/showthread.php?t=36600

Shoot me a PM if you need anything clarified.

Mike

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Quoting Skyhr

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Oh sure, I understand the whole adding X amount of pips but increase N percentage. I'm just curious to see what's actually possible with some of these systems, per month, per pair, just to see what systems are sometimes capable of.

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Quoting Dexis

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http://www.forexfactory.com/showthread.php?t=36600

http://www.forexfactory.com/showthread.php?t=36805

http://www.forexfactory.com/showthread.php?t=3474

http://www.forexfactory.com/showthread.php?t=34249

http://www.forexfactory.com/showthread.php?t=33866

All these links are to threads discussing about trading for a living, account sizes, possibilities etc. etc.

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Quoting Skyhr

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Oh sure, I understand the whole adding X amount of pips but increase N percentage. I'm just curious to see what's actually possible with some of these systems, per month, per pair, just to see what systems are sometimes capable of.

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Quoting mbqb11

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man you pulled all those links up FAST! lol

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Quoting Gmak

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A much fairer way of determining success is % increase of account balance and at what potential risk that increase was achieved.

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Quoting Skyhr

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Listen, I'm not talking about %. I know different traders with the same system can yield different results.

I'm talking about, if one were to hypothetically follow a system mechanically, how many net PIPs may be possible?

Net pips should be independent of percentages, equity, etc. I'm talking cold, stone pips.

I know if someone makes 300+ pips a month with 1 mini lot, in a 1k mini account, that's not alot.

Yet someone with 300+ pips a month with 20 lots in a 1MM account is.

But the pips are the same: I'm just wondering how many pips can possibly made in a month per pair if one were to follow a mechanical system. That's all... Nothing about personality or what if we don't follow the rules...

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Quoting Gmak

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It isn't necessarily gaining more pips that is important.

It also depends on drawdown, and the associated risk factors involved in determining the amount of capital you would lay on any individual trade.

if experience has taught me that 90% of the time a trade worth 20 pips is going to be successful, and that I would only lose 10 pips if I was wrong I might be highly tempted to risk 10 times the amount of capital than if I had a system which gave me 200 pips with a risk of 100, with a success rate of 90%. The rate of return and the drawdown in both circumstances would be identical.

say I place 10 lots on order 1 and 1 lot on order 2 and repeat each trade ten times.

one lot is equal to $10

scenario 1

($10 * 10 lots * 9 trades * 20 pips ) - ($10 *10 lots * 1 trade *10 pips)

= $17,000 profit

Scenario 2

($10 dollars * 1 lot * 9 trades * 200pips) - ($10 * 1 lot * 1 trade * 100 pips)

= $17,000 profit

The rate of return is identical, the risk factor and danger of drawdown are identical.

However in using scenario one I have banked just 170 pips. In scenario 2 I have banked 1700 pips.

I don't believe you can say the person trading scenario 2 is more profitable.

To illustrate more, lets enter one more variable.

Trade opportunity one happens 20 times a year. Trade opportunity two happens only 10 times per year.

we now have

Scenario 1:

($10 * 10 lots * 18 trades *20 pips) - ($10 * 10 lots * 2 trades * 10 pips)

= $34,000

scenario 2:

(1 lot * 9 trades * 200) - (1 lot * 1 trade * 100)

= $17,000

I have certainly earned more using scenario one.

However, I have earned 1700 pips using scenario two. Using scenario one I have in fact earned just 340.

I also know which trader I'd rather be.

A much fairer way of determining success is % increase of account balance and at what potential risk that increase was achieved.

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Quoting Gmak

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Exactly my point. I changed the $ value associated with each pip

The problem is that no two trading systems are exactly alike. They will likely use different risk management, different exit strategies, profit targets and stoploss concepts.

Not only that, but even within a system itself, there are likely to be different lot sizes traded which are dependent upon the individual parameters of that particular trade


Therefor even within a single system there is likely a different $ value associated with each pip.

Only if we can equalise that dollar value can we begin to use pips as a measure of a single system, let alone for comparison between them.

As Mbqb11 says, the simplest and most powerful measure of comparison between systems is probably expectancy.

Although I am no expert I'm going to give explaining this a bash, because it is incredibly important.


1) Understanding your system

When developing your system it is essential to be able to provide suitable answers to the following questions, whether your system is discressional, mechanical or a combination of both.

A) Have I tested the system for at least 100 trades?

B) What is my average Take Profit (in pips)

C) What is my average Stop Loss (in pips)

D) What is the ensuing reward to risk ratio?

Once you can answer the above points you are ready to set out in evaluating your system.

Ok, I've tested a system. I've named it the 'Wonderpip'.

A) I tested it for 100 trades.

B) My average take profit was 100 pips

C) My average stop loss was 50 pips

D) I won 60 times, I lost 40 times. Therefore my reward to risk ratio is as
follows.

(60 * take profit): (40 * stop loss)

= (60 * 100) : (40 * 50)

= 6000 : 2000

= 3 : 1

I win 3 pips for every 1 I lose.

Golly, Wonderpip is wonderful!


2) Expectancy

Expectancy is a particularly simple calculation for determining how much you expect to earn from any given trade. It is very important because it gives you a specific confidence every time you make that next trade.

It is very easily gleaned from the above information.

Put simply the equation for expectancy is as follows

Expectancy =

(Probability of Win * Average Win) - (Probability of Loss * Average Loss)

In terms of Wonderpip this would be

(0.6 * 100) - (0.4 * 50)

= 40

we would expect to gain 40 pips every time we entered a trade.

If your system is unfortunate enough to reveal a negative expectancy it means its time to start looking for a new system.


3) Determining a risk model

So far we know that Wonderpip has a positive reward:risk ratio. We also have confidence in the fact that each time we enter the market we do so with a specific expectancy of earning 40 pips. For emphasis; this is very important because it gives you a vast amount of faith in entering your very next trade.

However, how do all these happy statistics resolve themselves in dollar terms?

Fortunately it is extremely easy to translate expectancy from a per trade figure to a per dollar one.


$expectancy


A) $ risk.

We know that on average we stand to lose 50 pips every time we enter a trade.

If we allow 50 pips of risk to be equal to $1 of risk

$1R = 50 pips

it is irrelevant what the 50 pips stand for as long as R is always equal to $1.


B) $ profit

we also know that we stand to gain an average of 100 pips every time we enter a trade.

1* profit = 100

therefore

1 * profit = 2 * risk

expressed in terms of risk this gives us

$profit (P) = $2


C) We know our win rate = 60%.

We know our loss rate = 40%

We know our sample of trades to be 100


to calculate $expectancy we do the following calculations

i) We multiply P by the number of winners = $2 * 60 = 120

ii) We multiply R by the number of losers = $1 * 40 = 40

iii) Subtract the losers from the winners = 120 - 40 = 80

iv) divide the result by the trade sample size = 80/100 = 0.8

$expectancy = 0.8

What this means is that over a large number of trades you expect to gain 80 cents for every dollar you risk.

In my opinion $expectancy is the most potent yardstick by which to measure a systems performance, since that is in effect what we are all in forex for.

Once we have found our $expectancy we can then use it to determine our rate of return over time.

This is expressed as an R multiple. (remember that for our purposes R = $1)

take our expectancy figure of 0.8 and multiply it by the number of trades in our sample (100)

0.8 * 100 = 80R

For every 100 trades we make we expect to gain 80 dollars for every 100 risked.


Trade Frequency

The final factor to consider in analysing a systems performance is frequency of trades.

You might well have an expectancy of increasing your account balance by $80 every time you complete 100 trades, however if it takes you till Armageddon to achieve that number then you're system isn't worth the time spent building it.

A system which achieves 80R in a week is 52 times more profitable than one which achieves 80R in a year.


Whether you are more comfortable with ratio's, pips per trade or return on dollars we have now determined in each of the three ways that Wonderpip is profitable.

It is also expressed in a way that has no bearing on account size, lot size or anything else.

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Quoting Skyhr

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Hello,

I've noticed that there are TONS of systems here,

I'm just curious - who here ACTUALLY consistently makes net pips (per month per pair)? And how many? Anyone making 500+? 100+? 1000+?

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