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What's wrong with us forex traders?

  • #41
  • Apr 30, 2008 6:54pm Apr 30, 2008 6:54pm
So, if I flip a coin and go long on heads and short on tails, establish a 2% risk position to capital, not margin, for each trade, what is my true risk? Point being, the trader has everything to do with the risk to reward of a system. Don’t get me wrong, I prefer speaking in terms of percentages. I think the problem is, and you are alluding to it, is that reporting in pips gained or percentage earned still does not give an accurate picture of the real risk to reward of a trader’s money management.
Shouldn’t we make our judgment based on % return on investment to relative drawdown of a pre-determined time sample per trader? Am I missing something, please correct me if so?
  • #42
  • Apr 30, 2008 7:07pm Apr 30, 2008 7:07pm
Hipster, the whole point of the R multiple is that it allows the reader to understand each traders risk without having to know exactly HOW much of that trader's equity was on the line.

You could flip a coin, decide to buy, decide that a proper stop is 100 pips, and then you could buy how ever many lots you want to achieve your desired risk. If you closed the trade at 400 pips profit... you would report it as a 4R profit. This lets any reader quickly understand that you made 4 x your initial risk on the trade. It makes it irrelevant to discuss percentages or pips etc...
  • #43
  • Apr 30, 2008 7:22pm Apr 30, 2008 7:22pm
Quoting longhornxtreme
Hipster, the whole point of the R multiple is that it allows the reader to understand each traders risk without having to know exactly HOW much of that trader's equity was on the line.

You could flip a coin, decide to buy, decide that a proper stop is 100 pips, and then you could buy how ever many lots you want to achieve your desired risk. If you closed the trade at 400 pips profit... you would report it as a 4R profit. This lets any reader quickly understand that you made 4 x your initial risk on the trade. It makes it irrelevant to discuss percentages or pips etc...
I understand this and calculate risk in relation to my investment/capital, and so yes, I look at my multiple of R gained or losed. What I am trying to say is that multiple R profit/loss per trade, system, whatever, does not tell me whether or not I would really invest with a person. It does not give me a sufficient picture of the system=trader. I don't care what multiple of R you gain, until I see history in relation to maximum drawdown. This would give one a better idea of the true risk to reward. Or maybe we are just speaking in terms of outcome per trade for conversation?
  • #44
  • Apr 30, 2008 7:25pm Apr 30, 2008 7:25pm
@Hipster... if you want drawdowns, just give it in R...

Example:

My 'system' over 200 trades made 150R with a 25R maximum drawdown.

That's similar to how a fund would report its gains with respect to the risks taken.
  • #45
  • Apr 30, 2008 9:33pm Apr 30, 2008 9:33pm
Quoting longhornxtreme
@Hipster... if you want drawdowns, just give it in R...

Example:

My 'system' over 200 trades made 150R with a 25R maximum drawdown.

That's similar to how a fund would report its gains with respect to the risks taken.
That works great, I like it! Thanks.
  • #46
  • May 1, 2008 1:26am May 1, 2008 1:26am
Hi John,

could you pls share with me your system...thanks.

mohan]]

[email protected]
  • #47
  • Edited 5:55pm May 2, 2008 5:40pm | Edited 5:55pm
There are two types of risk often discussed and it sometimes clouds the picture.

There is trade risk and then there is account risk. This are just my words and you may use a different term for each but they are very different animals. What I've been referring to is picking a reporting method that conveys trade risk, i.e. how the system performs. Imagine being given a chart of the equity curve of a system with no scale or values. A trade risk measure would be able to describe the characteristics of that curve. There are myriad ways to look at this from the Sharpe ratio, the expectancy, R multiples, % of exposure, return to drawdown ratios, profit factor etc.

Account risk, on the other hand, is a measure of how much of the equity is being risked. This as nothing to do with the system being traded and everything to with the trader. A trade with a 20 pip stop loss can represent any amount of a given traders equity depending on how many units or lots you type into the order ticket. But no matter how much you do or don't risk of your equity, the system doesn't change. It still has the same inherent qualities. It's those qualities that the risk-adjusted measures attempt to bring out so that traders can then compare one system with the next to say, "That system is better given the data so far." Only then does the trader decide that each trade will be leveraged up or down to fit there goals (or insanity in some cases).

I hope this distinction is helpful.
  • #48
  • May 3, 2008 3:41am May 3, 2008 3:41am
Well put neverfox.

I'll make these 2 different concepts appear in my trading journal.
  • #49
  • May 3, 2008 3:04pm May 3, 2008 3:04pm
Quoting neverfox
There are two types of risk often discussed and it sometimes clouds the picture.

There is trade risk and then there is account risk. This are just my words and you may use a different term for each but they are very different animals. What I've been referring to is picking a reporting method that conveys trade risk, i.e. how the system performs. Imagine being given a chart of the equity curve of a system with no scale or values. A trade risk measure would be able to describe the characteristics of that curve. There are myriad ways to look at this from the Sharpe ratio, the expectancy, R multiples, % of exposure, return to drawdown ratios, profit factor etc.

Account risk, on the other hand, is a measure of how much of the equity is being risked. This as nothing to do with the system being traded and everything to with the trader. A trade with a 20 pip stop loss can represent any amount of a given traders equity depending on how many units or lots you type into the order ticket. But no matter how much you do or don't risk of your equity, the system doesn't change. It still has the same inherent qualities. It's those qualities that the risk-adjusted measures attempt to bring out so that traders can then compare one system with the next to say, "That system is better given the data so far." Only then does the trader decide that each trade will be leveraged up or down to fit there goals (or insanity in some cases).

I hope this distinction is helpful.
Thank you for your discussion neverfox.
  • #50
  • May 3, 2008 5:07pm May 3, 2008 5:07pm
Quoting tonyo524
Well maybe we shouldn't be so concerned about what the next person is doing, and just focus on ourselves.
I agree with the OP on the merits of the argument regarding pips. On my journal I report results as a percentage of the starting value of the account (or a portion thereof).

However, I have to second this remark by tonyo524 as well. What do I care how other posters report their results, or how high their leverage is? These types of "now I'll tell everyone what they're doing wrong" rants are becoming the "new black." They're popping up all over the place now.
  • #51
  • May 3, 2008 11:18pm May 3, 2008 11:18pm
Quoting Micro-MiniMe
I too, am guilty of reporting in pips with little or no regard for % 'earned' (as opposed to luck) Recently I've begun to realize that a truly successful system focuses on % just like my savings account and 401K. I've made almost 1000 pips since Feb, but my account is up only 15%. 5% per month sucks when you account for the taxes owed, overhead and the fact that my 401K does that well with very little risk involved. I realize now that my next step should be to up the % of equity used on high percentage moves. (easier said than done) but necessary neverless.

Reality is often a bitter pill to swallow.

Thanks for making me think
Sorry, but you bring up something here that is the root of most pain in the Forex world.

"5% per month sucks when you account for taxes owed......." is a very dangerous statement.

Unlike your 401k, that's a ton of earnings. Your 401k probably does something like 15% a YEAR. I know, taxes aren't paid on it....at the moment. But the government gets it's money sooner or later.

You can incorporate....and taxes are a little different and easy to deal with. However, that's a different post.

But......take that "sucky" 5% return and multiply it into ten years of consistent gains.

500 USD turns into something along the lines of 59,000. Not too bad really. 10,000 USD turns into something along the lines of a million.

Never, ever knock the power of compound interest. I believe it was Edison that called it "The eighth wonder of the world." (could be wrong.)

Ok, sorry......rant over. Now go and celebrate your success mate.....buy yourself a drink or two.

Clockwork

(By the way.....I know those figures because I worked them out on a spreadsheet once....I am getting that same "sucking" return roughly. )
  • #52
  • Last Post: May 3, 2008 11:22pm May 3, 2008 11:22pm
Quoting JohnW
During the month of April I lost over 1000 pips, but my account grew 20%. So who wants my system?http://www.forexfactory.com/images/icons/icon10.gif
Simple, you added funds to the account after losing.
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