Low Risk, High Reward Trading Experiment

Quote: "Thanks for sharing your thread, (not that you have a choice): just teasing."



Was misquoted. I was teasing, do not get offended by a tease not meant for you.

Looking at the Weekly Chart for GBP/USD, Do you see the Wave 5 complete yet, or still going higher?

Thanks

Hi ITME,

Can you give some comment regarding Kelly 's formula of optimun amount of
risk .
RM = W% - ( 1-W%)/( W/L)
RM = Optimun of amount of risk that give maximum capital gain at the
end.
W% = Percentage of chance of winning a trade.
W= win amount.
L = loss amount.
Example
for trend trading system , percentage of winning is about 20% to 30% .
Since market trends in 20% to 30% of time .
W%= 30% = 0.3.
W/L = quite large arount 5 to 1 or more,
RM= 0.3- ( 1- 0.3)/ ( 5/1) = 0.3-( 0.7)/5 =0.16 or 16%
That means a trend trader can use 16% of his trading capital to trade
that can gives maximun return of capital.
So if a trader follows your trading strategy , what is the optimum amount of risk capital he should use ?
Thanks for your input.

Thanks for the formula, newbieinfx. It sounds like an oversimplification, because it doesn't take into account the distribution of losses, but in case the distribution of losses is random, then the formula might be something like the one given. The result of 16% for your example sounds about right.

I will have to give it more study when I have more time.

As I have said before, my immediate goal is a 50% success rate with minimum 5:1 Reward / Risk ratio. According to Kelly 's formula of optimum risk I should thus employ

RM = .5 - (1-.5)/5 = .4 = 40%

This agrees with my more detailed studies on the matter.

If one employs the Itme Theorem of Gain on Capital from Short Term Investments, then the compound earnings on such a trading program will be very high.

In N trades, the return on capital will be:

Multiplier of Capital = (1-RM)^(N*(1-W%) ) * (RM*W/L)^ (N*W%)

If RM = W% - ( 1-W%)/( W/L),

then,

Multiplier of Capital = (1-(W% - ( 1-W%)/( W/L)))^(N*(1-W%) ) * ((W% - ( 1-W%)/( W/L))*W/L)^ (N*W%)

= ((1-W%+(1-W%)/(W/L))^(N*(1-W%) ) * ((W% * W/L - 1 - W%)^(N*W%)

Thus it is evident that the optimum return on capital is a product only of win/loss ratio and reward / risk ratio.

The Kelly formula of optimum risk trading capital (Value at Risk or Risk Factor) is well practiced in financial markets with a proven successful result by legendary Edward O. Thorp.

ITME is right to emphasize the crucial importance of the reward/ risk ratio.

Forex trader, special trend trader with a known percentage winning 40% to 50% of trending market, has to know the minimum reward/risk ratio in order to attain success.

The question is ''how big do the reward / risk ratio and win / loss ratio have to be for success as a trend trader?".

The Kelly formula ( RM = W% - ( 1-W%)/( W/L) ) has proven that anything less than 2:1 reward / risk ratio it is impossible to succeed in forex trading market for any trend trader with a known winning percentage around 40%. With W% = 40% = .4 and W/L = 2.0 then RM = .4 - (1-.4)/(2.0) = .10

If RM = .10 = 10% then losses will be 10% of capital and wins will be RM X W/L = .10 X 2.0 = 20% of capital. If one wins 40% of the time and loses 60% of the time, but the wins are twice the size of the losses, then trading program will be a success in the long run.

AudCad did move up stop or get out im not sure what do you suggest?

anybody have a idea about the audcad????????????

AUD/CAD rose to a high probability reversal point - 1.9243, which I should have foreseen. This was our exact stop. The stop should have been higher than this. Raise stop. The wave pattern looks complete and all targets, save one at 1.9257 on uptrend have been met. Reversal at this price is probable. Also - AUD/USD has reached a high probability reversal price. This is positive, as it is likely to reverse at .7950 or thereabouts.

Adjust stop to 1.9271 from previous value of 1.9243

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Previous trade experiment:

Friday December 29 at 15:30 ET
Trade Experiment #298 Sell AUD/CAD at .9208
Stop should be .9243
The first target is .9000
The second target is .8840
Risk is 44 pips
Reward is 199 / 359 pips
Reward / Risk Ratio is 4.5 / 8.2
Confidence level: good
Accuracy: good
Reward / Risk Ratio : good

For research purposes only.

I have already raised it to9259 hopefully thats good.Target still9000?4you

Tuesday January 2, 2006 at 4:45 ET

I have revised my wave count for Trade Experiment #289A Sell CHF/JPY at 97.77. We are approaching what I believe is the top of the third wave, not the top of the fifth wave. The interim high so far is 97.90, which is a probable reversal point. Adjust target for CHF/JPY short trade to the anticipated bottom of wave 4 at 97.50. Then we will re-enter our short position at the top of wave 5 at about 98.25.

Adjust target for Trade Experiment #289A Sell CHF/JPY to 97.50

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Previous trade experiment:

Thursday December 28 at 15:00 ET
Trade Experiment #289A Sell CHF/JPY at 97.77
Stop is 98.32
Target is 92.70
Risk is 64 pips
Reward is 498 pips
Reward : Risk ratio is 7.8 to 1
For research purposes only.

The entry point is the anticipated high of the upwards trend. The target is the bottom of Wave 1.

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Previous trade experiment:

Tuesday December 19 at 7:30 ET
Trade Experiment #289 Sell CHF/JPY at 97.05
Stop is 97.36
Target is 95.90
Risk is 39 pips
Reward is 107 pips
Reward : Risk ratio is 2.7 to 1
For research purposes only.

The target is the bottom of Wave 3.

Tuesday January 2, 2006 at 5:45 ET

It's possible that AUD/CAD will top out here at 1.9263. However, EUR/USD, GBP/USD and AUD/USD have the potential to go a bit higher. On the positive side, USD/CAD looks ready to drop, which will bring down AUD/CAD.

AUD/CAD has a potential reversal value at 1.9300 also, but I suspect that there will be a sizeable correction before this value is hit, if it is hit.

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Previous Comment:

AUD/CAD rose to a high probability reversal point - 1.9243, which I should have foreseen. This was our exact stop. The stop should have been higher than this. Raise stop. The wave pattern looks complete and all targets, save one at 1.9257 on uptrend have been met. Reversal at this price is probable. Also - AUD/USD has reached a high probability reversal price. This is positive, as it is likely to reverse at .7950 or thereabouts.

Adjust stop to 1.9271 from previous value of 1.9243

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Previous trade experiment:

Friday December 29 at 15:30 ET
Trade Experiment #298 Sell AUD/CAD at .9208
Stop should be .9243
The first target is .9000
The second target is .8840
Risk is 44 pips
Reward is 199 / 359 pips
Reward / Risk Ratio is 4.5 / 8.2
Confidence level: good
Accuracy: good
Reward / Risk Ratio : good

For research purposes only.

Tuesday January 2, 2006 at 5:45 ET

Trade Experiment #300 Sell EUR/CAD at 1.5510

Stop is 1.5561

Target is 1.5300

Risk is 51 pips

Reward is 200 pips

Reward / Risk Ratio is 4.0 : 1

Confidence level: fair
Accuracy: fair
Reward / Risk Ratio : fair

For research purposes only.

This is an attempt to enter at the top of the third wave and trade the fourth wave down - not a preferred wave configuration. Estimating the target is not reliable for this kind of trade with my current system.
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Previous comment:

No smart long trade on EUR/CAD (yet)
EUR/CAD Update for Monday December 18 at 20:00 ET
When things get this far along in a trend, my preference shifts to the short trade at the very, very end of the uptrend. I feel that probabilities of success decrease the further we get towards the end of a trend. So we don't expect to go long unless a very clear pattern emerges indicating the bottom of the downwards corrective wave we are now on and good trend reversal values are met.

Generally, my prediction is for a fall to about 1.5020 to 1.5040, then a rise to 1.5530 to 1.5740. 1.5690 is a possible reversal value. When the price reaches the very top, as evidenced by an Elliott Wave completion pattern and the intersection with high probability reversal values, we will have a good low risk / high probability short trade opportunity. We expect a Fifth Wave upwards, with the top of its internal third wave at 1.5530, and the top of its internal fifth wave at 1.5740.

The current price is 1.5145. We are in a short term corrective downwards fourth wave A-B-C of an upwards third wave of an upwards extended Third Wave according to our current wave hypothesis. Alternatively, we could be in a short term corrective downwards fourth wave A-B-C of an upwards first wave of an upwards B Wave.

Tuesday January 2, 2006 at 5:45 ET

Trade Experiment #301 Sell GBP/JPY at 234.30

Stop is 234.91

Target is 232.60

Risk is 70 pips

Reward is 161 pips

Reward / Risk Ratio is 2.3 / 1

Confidence level: fair
Accuracy: good
Reward / Risk Ratio : poor

For research purposes only.

As in the last trade experiment, this is an attempt to enter at the top of the third wave and trade the fourth wave down - not a preferred wave configuration. Estimating the target is not reliable for this kind of trade with my current system.

p.s. - current high is 234.57
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Previous comment and prediction:

<table class="tborder" id="post171247" align="center" border="0" cellpadding="6" cellspacing="1" width="100%"><tbody><tr><td class="thead" id="currentPost">12-28-06, 14:22 <!-- / status icon and date -->
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</td> </tr> </tbody></table> <!-- / user info --> </td> </tr> <tr> <td class="alt1"><!-- message, attachments, sig --><!-- icon and title --> Impending large GBP/JPY correction
<hr style="color: rgb(209, 209, 225);" size="1"> <!-- / icon and title --> <!-- message --> Quote:
<table border="0" cellpadding="6" cellspacing="0" width="100%"> <tbody><tr> <td class="alt2" style="border: 1px inset ;"> Originally Posted by marc
Hi!
GBPJPY has a very huge, strong; a concrete wall at 234,20.
Marc
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Good point, Marc. I believe that GBP/JPY will initiate a large Fourth Wave downwards correction at about 234.00 that will carry it down as far as 220.00, which is 1400 pips (or 6%) in a flat A-B-C formation, before rising in its Fifth Wave to its ultimate trend high at about 235.00.
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Hi itme

this is the first time i have used this forum

I admire your capacity to pinpoint reversals and market condsolidations - pretty spot on in fact

As a longer term trader, i bought AUD/CAD during recent breakout of weekly range - and work soley on candlestick and intuition.

My weakness is timing of entrance/exits - over longer term (daily/weekly/monthly)

could you please make any suggestyions as to a book/s that covers both 1. the very practical applications of WAVE, and 2. deeper aspects (spiritual/otherwise)

or, do you have any info that is available or published re your Q system

this would be greatly appreciated

thankyou, Frankie

Tuesday January 2, 2006 at 9:15 ET

Trade Experiment #302 Sell GBP/USD at 1.9749

Stop is 1.9782

Target is 1.9530

Risk is 37 pips

Reward is 215 pips

Reward / Risk Ratio is 5.8 / 1

Confidence level: fair
Accuracy: fair
Reward / Risk Ratio : good

For research purposes only.

This is an attempt to trade Wave C of Wave 4 down.

p.s. - recent high is 1.9749 (entry price met)

Did you mean 1.9739 (which was reached earlier) or 1.9749 (didn't trade today but was the last high on the 20th december)?

Itme,

what time frames is the Wave C and Wave 4 ? Just trying to follow and confirm my charts

Thank you.

According to my charts, high today for GBP/USD is 1.9737. My system gives me an entry for short trade of 1.9749. If it doesn't get there today, then we probably won't get a second chance. But other opportunities will come along.

The big downwards corrective Wave Four began December 1 at 13:00 ET. One interpretation is that the downwards Wave A of Wave Four ended December 18 at 12:00 ET. Wave B of Wave Four is an a-b-c and might end soon at 1.9749 to 1.9775.

Another good interpretation is that A, B, and C are all complete already, and we are in Wave 1 of Wave Five up now. I favor this latter interpretation. In either case, we are due for a downwards correction.

Tuesday January 2, 2006 at 11:00 ET

AUD/CAD keeps rising. .9265 was the top of a smaller wave, but another wave is carrying the price higher. The recent high is .9283. The estimated top of the entire swing trend is .9290 to .9300.
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Previous comments:

AUD/CAD possible high here at .9263
Tuesday January 2, 2006 at 5:45 ET

It's possible that AUD/CAD will top out here at .9263. However, EUR/USD, GBP/USD and AUD/USD have the potential to go a bit higher. On the positive side, USD/CAD looks ready to drop, which will bring down AUD/CAD.

AUD/CAD has a potential reversal value at.9300 also, but I suspect that there will be a sizeable correction before this value is hit, if it is hit.
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Previous Comment:

AUD/CAD rose to a high probability reversal point - .9243, which I should have foreseen. This was our exact stop. The stop should have been higher than this. Raise stop. The wave pattern looks complete and all targets, save one at .9257 on uptrend have been met. Reversal at this price is probable. Also - AUD/USD has reached a high probability reversal price. This is positive, as it is likely to reverse at .7950 or thereabouts.

Adjust stop to .9271 from previous value of .9243
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Previous trade experiment:

Friday December 29 at 15:30 ET
Trade Experiment #298 Sell AUD/CAD at .9208
Stop should be .9243
The first target is .9000
The second target is .8840
Risk is 44 pips
Reward is 199 / 359 pips
Reward / Risk Ratio is 4.5 / 8.2
Confidence level: good
Accuracy: good
Reward / Risk Ratio : good

For research purposes only.

Hi ITME,
Please give more details of your rating in your trade.
fair = ? how many stars ?
good = ? how many stars ?
If a trade has 90% of certainty , what is your rating ?
Thanks.