Soultrader's Clinic :)

Hi ST,

I believe you only need to go back to the first post, click edit and you can change the title. Could be this "first post edit" function is currently broken, but I hear it will be repaired, soon.

nah, tried that - can edit the post but not the title

thanks for trying though

ianf0ster http://www.forexfactory.com/images/s...ser_online.gif
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Member Since Jan 2007
Posts: 52


http://www.forexfactory.com/images/icons/icon1.gif Questions - but not sure I qualify
Hi ST,
I would like to ask a few questions, but I don't know if I qualify. I have invested in shares since 1993 - i.e fundemental based buy and hold. I only have 12 months FX trading and 30 months of shares/indices trading (all on daily charts).

1. What made you decide that the drawdown on the 'grail' was something you were not prepared to trade through?
Or in more general terms how does one tell when a system is busted? I used to speculate on golf - using a commercial system. I turned £2k into £14K inside 6 months, then gave it all back ( £12K) in the next 8 months - only at that point did I decide that I couldn't keep doing it waiting for it to turn good again. I was told that what killed the performance was bad weather which affected the way people played and also making it more of a lottery - since different pairings could experience quite different conditions. I don't know if this is true, but it sounds plausible, since it could have a long term affect - i.e. past 'weather affected' results in the database being used for current odds calculations. Or it could just all have just been chance! Who knows.

2. How can you possibly know that you have tested something under all possible conditions - so as to eliminate chance? Is this even desirable - or after a load of testing should you just take a chance? After all you came pretty close with the 'grail' even though it had a fatal flaw.

3. Since I am uncomfortable about giving back large paper profits in FX, should Ilook at methods of creating profit targets? If so, which ones would you recommend?

Thanks,
Ian

Hi Ian, you qualify fine

Q1.

Based on te backtests we had a good idea of how big the drawdowns would be. On saying that you should always prepare for a bigger drawdown in the future.

During our testing we did see drawdowns of 50 - 55% so we opted for a 'system crash' level of 60% to give it room.

These days ive changed my perceptions to growth and am not aiming to grow too fast - what i do is take half of the profit every month and leave the other half in - that way when / if my current systems fail then i've had some serious money out of them.

ps - as a sidenote, if we had continued to trade the system it would have blown the account totally - even today it is still at new lows in the drawdown, 8 months on.

Q2
you can't know. otherwise there would be no risk and we would all be billionaires. if your test phase had 17 inside bar days on the trot you can bet your bottom dollar that you will experience 20 or 25 in a row.

The past does not equal the future and it never will. Backtesting gives you an idea of a method's possible profitability but never guarantees it - especially if you machine test (which is crap)

All you can do is dilligently test (by hand / eye) a reasonable sample size of trades and market conditions, test against a control sample of time following your tests and then just trade it and test the hypothesis.

That's all we as systems developers do we test our hypothesis that if this happens your do that and it makes money - whilstever the hypothesis proves true you continue to work it - when it fails you dump it quicker than a sunday night curry and monday morning.

Luck also plays a part - almost every system will fail at some point - the luck part is that you don't start trading it at the point it begins to fail. Grail worked for four years and we got one year out of it - one more and we would be in the millions of profits - that's the way the cookie crumbles sometimes.

If you want to read about some really smart people who made billions and lost it just the same way, i'd reccomend Roger Lowenstein's 'When Genius Failed' the story of LTCM (Long Term Capital Management) - these were MIT professors and their story runs very similar to ours - they had about 6 years of the system working - and didnt recognise when it failed. One of the best trading books i've ever read and a great lesson for us all.

Q3

I dont have profit targets - I'm a trend follower and always shoot for the moon. I let my profits run. If you want to curtail yours early then please ask someone else who's successful at doing this (if you can find one).

I give back hundreds of pips every time i close a trade - but there wouldnt be hundreds to give back if i hadnt let it run.

Hi soultrader... I am going to read when I will have time...

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http://www.forexfactory.com/images/icons/icon1.gif Psychological effect of trading larger lots.

HI Soultrader,

Nice to see you here. Followed you posts on Moneytech until you’d had enough and listened to you talk in various Paltalk rooms, also read all of your blog! Found a few nuggets in there and an interesting read.

Trading wise I discovered Fx around 2.5 year ago and have traded live for just over two years. Of course lost a bundle initially came to my senses opened a micro account and traded my butt off ever since. 2007 being the turning point for me with countless Eureka moments some of them being false alarms, but would now class myself just inside stage four (with the odd stupid regression to stage 2) having being consistently profitable in the past few months.

Which brings me to my question: How do you handle the psychological effect of trading larger lot sizes? Not trying to get ahead of myself, I am slowly and cautiously compounding and as the lot size increases (still only mini’s), I find myself acutely aware off the potential for larger monetary loss. Although not actually at the point where I have allowed it to affect me the potential to do so is there. Also I am contemplating adding a little more to my account to aid its growth and see then it may become more of a problem. Incidentally like you mentioned in a previous post, I intend withdrawing half my monthly profits, that’s my plan anyway.

Some of the answers I seek I probably already know having read much on the subject during my limited trading career. I would appreciate any advice or suggestions and an insight into how you handled this area of trading presuming it was ever a problem for you.

Regards,

Chris.

Hi Chris, and thanks for the question - it's a very good one for developing traders but even more important for those who eventually want to manage money for others.

Also well done for getting this far - you have beaten 90% of those out there who fall usually after about 6 months. You deserve a pat on the back so make sure you know how well you've done.

First let me tell you how it happened to me ... and then let me tell you how i think it should be done

When grail was in the planning stage we had every detail worked out - how we would increase stakes, when we would tighten in etc etc - a full money management plan.

At the time we asked ourselves the question - "god, look there - in 6 months we will be on like £70 a pip (14 lots) - bit scary that" we said.

In reality the transition was very smooth. as our bank increased so did our stake - in fact it went faster as we never compounded backwards, only forwards.

In one year we went from £10 a pip (2 lots) to £118 per pip (22 lots) - however because of the frequency of drawdowns as in any trend system by the time we had to increase again we had got used to that level - each time it went up maybe £2 or £3 - got used to it and then it was time for another lift.

At the end the lifts were bigger, like £10 - £15 extra per pip but by that time an average day was a £7,000 loser or a £10,000 winner - £10 - £15 extra on the trade seemed small by comparison.

My biggest day in my personal account was £17,460 - a figure i still have on my wall today.

However, at the same time as trading my personal account I began trading for others under a capital advisory company. To begin with it was around $50k account traded at 5 lots. But of course as our returns got higher so did the investors and within a few short months I was trading over $1500 per pip (150 lots) with millions under management.

The thing is also that trading for yourself and trading for others is different. When trading large amounts for others you cannot afford to get emotional about the amount traded otherwise you will hex the whole thing. Sure, the company were a little nervous but to me it was just pips - it's the only way you will ever get into big money.

My biggest day trading for others was around $160,000 clear profit - sure it was a great day but to me it was the pip count of around 120 pips and not the dollar figure that mattered.

Getting back to the way i did things - was it the right way? i think it was for the method we were trading yes.

This time around I set the money staking at the beginning of the month and it remains that way until the end of the month. Next month it should increase and i have a whole month to get used to it.

Now I NEVER EVER look at the dollar count on a trade, even on my own account - I dont even have the dollar amount display on screen if i can help it. Pips don't change as you progress and if you discipline yourself into not even considering the dollar value then you will be sending a good message to your mind - pips are important - count the dollars later at the end of the month.

Before you know it you will be at high levels and comfortable with it - my advice ... increase only once a month to a comfortable level and dont change the plan till next month - even if you feel it's not enough half way through.

Got to tell you something though, as grail was an intraday system to begin with and on our own account we used to measure the success of the day or week on what kind of car we could buy with our winnings. at the beginning it was a pushbike and then later we had BMW days we were looking forward to a Bentley day in around May 2007 which of course never arrived.

As you get bigger you do lose a respect for money also, it's hard to think hard about spending say £100 on a shirt when you've just blown $7000 in a day and a shirt like that costs less than a pip!

My advice would be to every month plan exactly what you are going to do with your money management and then work your plan.

Hope this helps.

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http://www.forexfactory.com/images/icons/icon1.gif Some personal thoughts on money managment
Hi Soultrader !

It's very interesting following your posts in this
thread.
How did you manage your risk in your private
and your professional account ?
The general opinion ist not to risk more than
1-3% of your account in one trade.
In my trades I'm risking 3% per trade and set my
stops only at important support or resistance points.
( e.g. not only 30 pips in every trade )
I review my profits every month and adjust my
lot size accordingly.
It would be interesting to read your opinion.

Best regards and happy pippin

Bernhard

Hi Bernhard, thanks for the mail.

In my opinion most rules made by other people and banded around as fact are useless tripe.

The one about 'never risk more than 2%' is one of the worst. Allow me to explain.

what use is that rule if your account is $10,000 and you get one trade signal a month? what use is that rule if you trade 20 pairs and get 30 signals a day? - none whatsoever.

The amount you place on each trade should be tailored to the system you trade. it should not be too large that you 'sweat' the trade but it should not be too small so as to be insignificant or you will not value and care for the trade.

When i was trading Grail I risked around 8% per trade. some will say yes, and look what happened to that! but remember, it was the system that failed, not the money managment.

Grail traded one trade per day and one currency therefore a greater risk per trade was warranted otherwise it would not have been worth trading.

These days i could have as many as 10 or 12 trades in at a time and i risk less than 2% on most trades - my risk also changes in conjunction of the probability of the trade im taking on an individual basis.

My risk is worked out on a pair by pair basis as well as a probability basis - for example I will risk a higher lot size on eurusd than i will on gbpjpy due to the violent nature of the latter. I will also risk more if the setup has a higher probability of success.

My advice is that ignore most of these sayings - the 2% 'rule' was most likely made by someone who had millions in funds to trade and 2% was maybe scary to them - it's very much a case of cutting the cloth for your own circumstances. someone with a $500 starter account trading once a week on a 90% signal is hardly likely to want to risk just 2% are they.

The market is littered with such rubbish as 'risk only 2%' - another one is risk / reward, scaling out etc etc. whatever fits your strategy and is comfortable without sweating the trade is right for you.

Hope this helps

I would disagree with that ST.

The "risk only 2%" rule is not only a money management rule, but also a psycological protection. Having three of four consecutive losses (which is perfectly possible for any trading strategy) at 10% each can be psycologically devastating, letting fear build up within us. That risk is just as dangerous as the monetary loss in itself. I remember in my early days of trading one particular trade eating up 20% of my account balance, and it took me quite a while to calm down psycologically-wise from that blow.

Given the fact that, as I understand it, there is no Holy Grail, and most systems will suffer failure at some point (through market dynamics, or flawed implementation) the concept of minimising your risk to a known figure for each trade, or group of trades, is vital to any trader aiming to survive to trade another day.

This site - in its widest sense - is as much geared to educating new traders as it is to giving experienced traders the opportunity to strut their stuff. Every time we post we should consider what the newbie is going to take from the information he/she reads. The aim is to offer a way of learning to trade, over a long enough period, that they can actually survive to reach the heights that match their aspirations. Maybe I mis-understood your previous comments, but isn't there a contradiction here? No doubt you'll correct me if I'm wrong.

As i said - it's what fits in with your system or comfort level but as a hard and fast rule it's so subjective.

as for the psychology that's a different matter - what you are saying is that you should use the 2% rule because you dont know or dont accept the risk levels that your system produces.

if youve done your homework and you know that it's quite possible to have 5 or 6 losers on the trot then it should not bother you psychologically whe it happens and if that is possible then a risk of say 10% is not suitable for that strategy.

however it is suitable for a system that wins 90% of the time and trades once a week for example providing it actually makes money of course

what i'm saying WTB is that a hard and fast rule of 2% is ridiculous - the amount of risk should match the system traded. But it is up to the trader to know what the risk is and not just guess.

you had a 20% drawdown in a single trade because your risk was too much for your strategy, that does not mean everyone should do the same thing you do.

also there are systems where a 2% risk would be way too much, gridscalping for example should have risk levels significantly below 1% let alone 2% per trade.

see what I mean about sweeping statements like that rule?

Hi Peter, not sure i understand your post.

I trade lower risk today as it's a different system - the risk matches the system i now trade which has multiple trades with greater risk wheras before it matched the system i used to trade which had very different risks.

can you explain your point please?

If I may -

I'm not Peter, but..

you cite a 90% chance 1x per week system. Just an example, of course, and I absolutely understand your point(-2% to say a maximum of +10% a week may not seem "fast" enough to some).

At the same time you yourself have readily admitted that even the longest timeframe backtests will avail not enough data to take in all possible events.

In turn - especially with weekly as smallest unit - how would you, even using 30 years of data - have a large enough sample size to ascertain the 90% are not still at risk of being "curve fitted" and likely to deviate as time progresses?

In turn - should one not consider that adjusting MM to "fit a system" can be just as dangerous as relying a system solely on assuming a condition X which may or not reoccur in the future?

Effectively meaning - even if assuming 90% chance, there is always a risk greater than 0% of at least 10, 20, 30, 100, 500 consecutive losses. Theoretical perhaps(things get rather small and a lot of 0s are added after the comma eventually), but it still exists.

Keeping capital at risk low minimizes this worst case scenario by simply extending the maximum thinkable period in time one can "afford" a drawdown of non-functionality without getting drawn down so deep that picking up again becomes futile.

At least this would be my understanding of why keeping a low risk profile - and this includes total number of open trades / total cumulative risk at any given point in time - is not the worst thing to have.

Someone with a smarter understanding of expectency and all that %R stuff could probably put it nicer and more sophisticated, but this is my understanding / my basic approach to it.

Best,

SeekingLight

P.S. Agree with WTB / you on the emphasis on "what you can stomach", but this also involves how you can deal with your expectancy vs risk and the mathematical side.

The point is basically that many who find this site have no concept of the true realities of trading, and many, if not most, have little idea how difficult it can be.

There's a world of difference between someone like yourself, who has years of experience, and who can truly evaluate the strengths and weaknesses of the method you use, and some newbie who is trying to get to grips with a screen full of indicators with no feel for the rhythm of the market.

I'm sure that the 1-2% risk idea is simply to enable them to last long enough to flatten the learning curve a little. I agree that 1% of of a $10m account represents a sum that many would like to living on, but unless they learn to control risk in the early days, many will not be able to handle the mental shift needed to deal with these sums later on in their trading careers.

I agree that for the experienced trader his/her ability to spot high probability trades may justify an increase in risk, but show me any new trader (new to any sort of trading, that is) who has that skill. Even 'A' trades go wrong at times, as I'm sure you know, and it takes longer for the newbie to recover from a large drawdown than it would for you, for example.

Their temptation would be to keep increasing their risk to try and recover that money quicker, and the endless spiral continues.

Hi Seekinglight, thanks for joining in

wow, this is getting some feedback isnt it

Of course you can never eliminate risk, and you can never know if you are one trade away from 500 losers in a row.

And you're right about my thoughts on backtests, but also we have to work with the tools we have which is always the past.

There comes a point in trading a system that you either believe in it or not. you do your tests build your system and forward trade it tentatively. if your real trading matches your system expectations for a long enough time you then believe in it and you want to make serious money from it. (well, i do anyway)

I can only answer stuff from my own perspective - whenever ive been involved in the development of a system it's always taken well over a year to get to the point where you really want to exploit the thing you've created - that is the point after all isnt it?

I'm a trader and a risk taker - if i have a system developed then i will allocate a purse to it and a money management system developed with that system in mind to exploit it whilstever it makes money.

Most methods as peter said have a finite life - when you have one you want to make the most of the opportunity in front of you - well I do anyway.

I'm not happy to find a goose that lays golden eggs and let it lay one egg a week to keep my bills paid. when i find a goose i feed it and feed it so it lays as big and as many eggs as i can get it to lay without making it ill.

I go for the big money, not the crumbs. but then i respect that not everyone has the same outlook that i do, we cant all be cowboys can we?

when i commit money to a system say 25k then that 25k is all risk capital - if it blows then it blows - im still in the game because it's just one system i've committed to and not my whole trading career or my whole bank.

but with that 25k i will work it hard and make it earn whilstever the system is making money.

don';t get me wrong, I wont trade it crazy, I will devise a mm strat that exploits the system whilst keeping it safe within expected boundaries. once those boundaries are breached it's time to close it down and move the money to another system.

Some are happy to make enough to pay the bills and to them keeping your exposure super low might be good - to me that is pointless, I can stack shelves to pay bills. One day I may make a billion, or I may just go through my career significantly wealthy - i'll never go broke because I do operate good MM but without taking those risks I will never even have the chance to get the Big Yard under my belt.

The correct use of money management is to exploit your trading edge or opportunity whilst remaining true to the systems possibilities. Limiting your thinking to 2% no matter what will severlay limit your potential and in the case of grids would blow your bank quicker than a quick thing!

all in my opinion of course, after all this is my thread

Yes I agree about newbies - but you may remember in my first post i did ask for questions from people with at least two years in the game.

Also though I think you may be confusing the newbies as being stupid and just because i say something they will go and blow their account - if only I had that power

This is the professionals trading room also isnt it - isnt that the point of this part of the forum to examine the professional behaviours?

OK I'll butt out then, just a couple of thoughts before I go, though... No, I don't think they're stupid, just un-enlightened. Yes it is, but it can be viewed by everyone....

give me a break.

this is a zero sum game you know - the money you make comes most likely out of newbies pockets. newbies are liquidity providers

bring em on is what I say.

some will make it to where you and I are - thousands will not.

sorry if that offends, but this is the real world - they have a choice to trade or not and a trader acting as policeman protecting newbies is a little hypocrytical to say the least.

Can an admin please clarify if i should shut up and leave the forum?

http://wallyandosborne.com/comics/2006-08-04.gif

Soultrader, This is an open forum for experienced traders and has nearly no moderation. Please feel free to give your opinion.

Not really. As far as I understand the rules we all have the right if not an obligation to discuss these issues. By setting up a "clinic" where only you comment on a chosen few you have done a disservice to the idea of a forum. If you want a private forum then talk to the administration and maybe they can set you up with something like James16 has.

Personally, I wouldn't have had any problem with this until you poked a stick at those of us who trade responsibly by using sound money management principles. For every system there exists an optimum amount to risk. Typically, that amount resides somewhere between 2 and 4%. It can be proven probabilistically and mathematically. Deciding how much to risk isn't a gut feel proposition. If you've got the balls to take a trade then you owe it to yourself to risk the correct amount and that amount is a comprimise between account growth and the inevitable drawdown. The correct risk is an intersection of those two concerns.

If you risk an inordinate amount per trade and you are successful, I commend you but the people you've catered to in your clinic deserve to know that it is off-normal. It is irresponsible to risk too much and it is irresponsible to suggest that someone follow you down that path.

I'm not poking a stick at you - im encoraging sound money management principles - you are the one assuming that I dont use sound money management or that i endorse 'betting the farm'

is it just me? - can anyone else understand what i'm saying here that the money management should match the strategy and not be a hard and fast 2% no matter what?

I agree 100% except I believe it typically is b/w 1-2%. Most people just can not develop systems that should statistically be run at a higher % then this. Sure a bit has to do with risk tolerance. Just my opinion.

But I agree with everything you just said, especially that last line.