Optimized Trend Trading 1,244 replies
What's your TP? Fixed reward vs dynamic reward 5 replies
Risk Equation 2 replies
QuoteDislikedFirst we have lotsizes... after buying 5 lots, brokers, or at least those that I have dealt with, require their employees to confirm your transaction manually. This will increase slippage and possibly spread.
QuoteDislikedI only mention it because if the market gaps over your stops at any point with a heavily compounded position you will lose your account and depending on your broker you may be asked to pay them more than your total account balance.
QuoteDislikedAlso I would like to know what assumptions you are working under. In other words what are the rules to your 'game'? No game can be optimized without a specific rule set
Now granted this is only true if we walk away after the first trade and we are dealing with your 'iff' situation. This is why you need to change your theory to imply the continuity of entries into the market.
Otherwise your theory is:
For the record I do not think either of those two things about your theory; I simply have my doubts.
I very clearly understand that this is not the purpose of your theory and is pretty much word play so I will not mention it a third time; it would simply be a waste of both our time and ever-precious gray-matter.
As for bigvlada... yes you are correct in stating that if the market gaps over your stop and you close it you will not lose money. But 'iff' it lands in-between point c and your gapped stop. However if it moves past it you can still get margin called.
Perhaps there is something I'm missing. But the discussion would be perhaps trivial as there is very little a trader can do against an unexpected gap in the market. So let us speak of it no further. After all it was only meant to caution you and anyone else of what is possible; but not what is probable.
After reading your answer of what you're actually looking for I can safely say it is what I expected you were looking for. It is good that we are on the same wavelength.
My spreadsheet was not meant to prove or disprove anything to do with said theory. It was merely to illustrate how margin plays into an over-leveraged pyramid. In other words it was also meant as a friendly warning to anyone willing to read it.
ASSUMPTIONS I AM MAKING AT THIS POINT:
I say assumptions because they are completely and utterly changeable and only illustrate my thought process.
I suppose the first thing I would begin to look for and try to understand is the relationship between risk and gain. To simplify this further I will assume that spread is at a fixed 0; I will factor it in later.
The following picture sums up my assumptions thus far on the relationship between risk and gain and what it has to do with this theory. It is purely conceptual and has no specific numbers... I just put it on a chart to add to the understanding.
Please correct me if I am at fault.
Thank you twoblink and bigvlada for your timely responses and for this provocative discussion,
Monek
QuoteDislikedYou enter with 1 lot at point A
0 lots at point B
Making SL@C 0 pips away from market.
QuoteDislikedHowever if it moves past it you can still get margin called.
QuoteDislikedMath answer is to bet Kelly every time.. That of course, is the mathematical optimization; and if that's all you are looking for, look no further. Common sense though says that I RARELY go beyond K/3 (Kelly Value / 3) and once in a while I will brave it and go K/2, but I've never gone Kelly.
QuoteDislikedFor example, let's say the optimized math say 5 lots in and 2.3 lots added. Do you have enough capitalization to cover 7.3 lots total risk? Even if you are adding when you are guaranteed profit, do you even have enough $$$ to cover 5 lots? 5 lots is A LOT (pun intended) for the average trader.. I wouldn't trade 5 lots unless you had 6 figures in the trading account. So the optimization is for math, and also tells me what number I eventually have to work up to as far as my account capitalization so I can fully realize the system.
Disliked@monek
I never used the probability in my calculations. That's why I like IFF, you do not have to worry about probabilities. If the price reaches the next level, great; else it will kick me out, I'll take what's on the table and look for next setup. With each new level, the market will have to try harder to kick you out.Ignored