How would you lot manage in this situation? | Forex Factory

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How would you lot manage in this situation?

  • #1
  • First Post: Sep 16, 2011 10:33pm Sep 16, 2011 10:33pm
Imagine that prior to entering the market you know beforehand the profit factor of similar situations. How would you manage your lot sizes based on this number?

For example:
trades similar to TRADE 1 have yielded a 1.2 pf
trades similar to TRADE 2 have yielded a 2.0 pf

How would you manage the lot sizes for the two different trades relative to each other?

The obvious thing to do is
TRADE 1 Lots = X*1.2
TRADE 2 Lots = X*2.0

but I am not sure if this is the smartest move.
  • #2
  • Sep 16, 2011 10:52pm Sep 16, 2011 10:52pm
Maybe look for the probability of trade 1 happening compared to how many times trade 2 would happen? Then make your bets higher, based on the higher win rate, vs the size of win (either way)?
  • #3
  • Sep 16, 2011 11:57pm Sep 16, 2011 11:57pm
Quoting mfurlend
Imagine that prior to entering the market you know beforehand the profit factor of similar situations. How would you manage your lot sizes based on this number?
IMHO...... trading isn't an exercise in mathematical formula nor a study of "quantum physics", if you will. You can calculate all the probabilities that you want but how, exactly do you calculate market sentiment with any mathematical formula?

Based on your own experience of your own trading method you should increase the lot size times the confidence that you have in that particular trade. 100% sure ??? Bet 'em all (but when are you, really).
  • #4
  • Sep 17, 2011 12:21am Sep 17, 2011 12:21am
egadsforex, I am not talking about a mathematical formula for market sentiment. I am just asking for the most logical way to increment lot sizes based solely on the situation I described in my post.

When you say "multiplied by the confidence" - my confidence is always the same.
  • #5
  • Sep 17, 2011 1:05am Sep 17, 2011 1:05am
Quoting mfurlend
egadsforex, I am just asking for the most logical way to increment lot sizes based solely on the situation I described in my post.
Logic. Logic in FX is hard to define. But if you've gained confidence through experience then logically, you know a poor 'bet" from a "good bet" to a "great bet". Of course, everyone will say that trading is not a "bet". Try telling that to George Soros.

Back to the beginning....... You've established your "standard" trading "risk and method". Based on all knowledge and experience that you have, you see a great trade (as it appears to you) so you "bet big" which has to be your own definition.

Let's look at it another way. Someone has 100k to invest in the stock market. The intention is to invest THE ENTIRE 100k and reap whatever returns the market provides.

Would you NOT INVEST MORE IN THE STOCK THAT YOU BELIEVED TO BE MOST PROFITABLE??
Would you invest more in the best trade you thought possible in FX ??
  • #6
  • Sep 17, 2011 1:16am Sep 17, 2011 1:16am
Yes, of course you need to bet more if it is a better trade. The question is "how much more?" It does not have to be linear.

For example, if TRADE A = 1.5 pf and TRADE B = 3.0 pf it may make sense to bet MORE than double.
  • #7
  • Sep 17, 2011 1:48am Sep 17, 2011 1:48am
Quoting mfurlend
Yes, of course you need to bet more if it is a better trade. The question is "how much more?" It does not have to be linear.

For example, if TRADE A = 1.5 pf and TRADE B = 3.0 pf it may make sense to bet MORE than double.
You can be as "scientific and mathematical" as you want to be. You can lay all the "what if A =" scenarios on me that you want to.

Well, "what if" in my previous scenario, my fund manager told me I should invest 10% equally into different segments of the market (10k each).

I told my fund manager that I respected his input which was very logical but according to my due diligence I believed one of his choices were wrong.

Therefore, I'm going to invest 20% in that great stock and fore-go the other trade. In a way, the same difference except I'm not as diversified.

However, I was SO confident that I leveraged up on that one bet. In a short time, that one trade returned more than all the trades my fund manager had recommended, COMBINED

Lo and behold, it was prolonged study of the marketplace that made me take that trade. I forgot to formulate A=7by+3Z2. My bad.

I still made a million and that's what matters to me?
  • #8
  • Sep 17, 2011 3:20am Sep 17, 2011 3:20am
Quoting mfurlend
Imagine that prior to entering the market you know beforehand the profit factor of similar situations. How would you manage your lot sizes based on this number?
For example:
trades similar to TRADE 1 have yielded a 1.2 pf
trades similar to TRADE 2 have yielded a 2.0 pf
How would you manage the lot sizes for the two different trades relative to each other?
The obvious thing to do is
TRADE 1 Lots = X*1.2
TRADE 2 Lots = X*2.0
but I am not sure if this is the smartest......
[color=red] You, and all that attempt to give you an answer for this question, seriously need to read the book "TRADING IN THE ZONE"

Once you understand, and accept, the concept that "anything can happen" in the the market, seems obvious enough, then the question above becomes superfluous at least and ridiculous at most.

In other words, seems like you are concentrating on profits rather than the only thing you can control = RISK

When you are saying this trade has 1.2 or 2.0 profit factor, how do you calculate that? Just changing the % risk, or lot size will will increase profitabilty, of a winning trade.

Or do you mean this trade has 1.2 or 2.0 better chance of making profit? Please share that calculation with the Forex world, you will make a million $$$$ in short time.

Mark Douglas explains it so much better than me.

All I, and many others do is, risk 2% of account, lot size is adjusted relative to stop loss distance, hence $ risk per trade never changes, only lot size; if you have a better way, please share
OPPORTUNITY IS NOWHERE
  • #9
  • Sep 17, 2011 4:04am Sep 17, 2011 4:04am
Quoting mfurlend
Imagine that prior to entering the market you know beforehand the profit factor of similar situations. How would you manage your lot sizes based on this number?

For example:
trades similar to TRADE 1 have yielded a 1.2 pf
trades similar to TRADE 2 have yielded a 2.0 pf

How would you manage the lot sizes for the two different trades relative to each other?

The obvious thing to do is
TRADE 1 Lots = X*1.2
TRADE 2 Lots = X*2.0

but I am not sure if this is the smartest move.
The smart move is to use
1.2 lots for trades similar to trade 1 and
2.0 lots for trades similar to trade 2

A smarter move is to allocate
1.0 lots for trades similar to trade 1 and
5.0 lots for trades similar to trade 2

But the smartest move is to
take only trades similar to trade 2

King.
  • #10
  • Sep 17, 2011 4:31am Sep 17, 2011 4:31am
Quoting kingsurfer
The smart move is to use
1.2 lots for trades similar to trade 1 and
2.0 lots for trades similar to trade 2

A smarter move is to allocate
1.0 lots for trades similar to trade 1 and
5.0 lots for trades similar to trade 2

But the smartest move is to
take only trades similar to trade 2

King.
So you just accept his "theory" that trade setup risk can be quantified?

Once you start thinking your analysis is that good, pretty soon you will be thinking that your trades are 100%, you won't even need to control risk or use stop loss; then you will run over, like many were, with the Swiss National Bank annoucement!

Every moment in the market is unique, every circumstance is completely different from any other time in the market, different traders, different positions, different opinions, sorry, not for me, I'll wait until mfurlend demonstrates how one setup is 2.0 times better than another setup before I believe it.

Think about it; being short the Swissy probably seemed to be the 2.0 trade while going long would be the 1.2 trade, look what happened there.
OPPORTUNITY IS NOWHERE
  • #11
  • Sep 17, 2011 5:47am Sep 17, 2011 5:47am
Quoting Callisto
So you just accept his "theory" that trade setup risk can be quantified?

Once you start thinking your analysis is that good, pretty soon you will be thinking that your trades are 100%, you won't even need to control risk or use stop loss; then you will run over, like many were, with the Swiss National Bank annoucement!

Every moment in the market is unique, every circumstance is completely different from any other time in the market, different traders, different positions, different opinions, sorry, not for me, I'll wait until mfurlend demonstrates...
I don't know how you trade but I believe you do not enter the market completely randomly. If you use any kind of filter, by implication you have just admitted that you believe some set-ups are better than others.

Mfurlend only tried to quantify his already known outcomes based on a method, strategy, whatever, he used to make the trades. Using that he is asking about future similar trades. I believe forex is probability.

I do not know all his parameter and I'm not about asking. I answered his question as it were. I believe in, and trade the answer I gave him.

What makes you think I would have been shorting swissy at that time? By my trading strategy I should have been long if I was trading it at that time. (I have parted ways with the trend a long time ago).

And Yes, I trade without stop loss. That does not mean I do not know how to cut a bad trade. Each to his own. This is not the thread for that.

I maintain my stand. Probability of any setups decide how much I'm willing to risk on them. And if certain setups have consistently proven profitable I will trade them to the exclusion of all others.

King.
  • #12
  • Sep 17, 2011 6:10am Sep 17, 2011 6:10am
Quoting kingsurfer
I don't know how you trade but I believe you do not enter the market completely randomly. If you use any kind of filter, by implication you have just admitted that you believe some set-ups are better than others.

King.
How do you figure that? I cannot follow your reasoning there.

Sure, I use setups, but a setup or mechanical signal for me, is just that - a trade signal; how could it be anything else? What you are talking about "believe some set-ups are better than others" is applying subjectivity to the signal, and how can you put a number on it?

Take a Moving Average Crossover method, every time it closes below the crossover, go short (or long as the case may be) where does the STRENGTH of the signal appear? That is a subjective matter and he is trying to apply a qualitive measure to it, think about it.

In any case, mfurlend has really answered his own question - if he truly knows beforehand the profit factor is 1.2 or 2.0 better than a normal 1.0 trade setup, all he has to do is multiple his % risk by that amount.

Do that for 100 trades and get back to us, I'm eager to hear the results!
OPPORTUNITY IS NOWHERE
  • #13
  • Sep 17, 2011 7:28am Sep 17, 2011 7:28am
Quoting Callisto
How do you figure that? I cannot follow your reasoning there.

Sure, I use setups, but a setup or mechanical signal for me, is just that - a trade signal; how could it be anything else? What you are talking about "believe some set-ups are better than others" is applying subjectivity to the signal, and how can you put a number on it?

Take a Moving Average Crossover method, every time it closes below the crossover, go short (or long as the case may be) where does the STRENGTH of the signal appear? That is a subjective matter and he is...
Time allows you to "put a number on it". All setups are based on breakouts, continuations, reversals or pull backs. How long it takes for each or any of these to to occur will determine its quality.
  • #14
  • Sep 17, 2011 7:35am Sep 17, 2011 7:35am
Quoting orderphlow
Time allows you to "put a number on it". All setups are based on breakouts, continuations, reversals or pull backs. How long it takes for each or any of these to to occur will determine its quality.
Time ...... "put a number on it" ??? = SUBJECTIVE

I anxiously await for examples
OPPORTUNITY IS NOWHERE
  • #15
  • Edited 10:33am Sep 17, 2011 8:21am | Edited 10:33am
Quoting Callisto
Time ...... "put a number on it" ??? = SUBJECTIVE

I anxiously await for examples
Sure. Any trade will have a quality about it. If your trade takes a couple days to yield a $100 profit, or a few minutes or seconds to yield the same profit, this can give you the quality of a trade. This is one way to do it, amongst others.

Each mechanical set up will last anywhere from a few seconds to several hours, or days. You have to factor in cost of time for profit. With some mechanical signals you are better off doing something else than to spend the time making Y amount of dollars per X amount of time.

Times of high volatility can provide opportunities with higher quality mechanical setups.
  • #16
  • Sep 17, 2011 9:38am Sep 17, 2011 9:38am
In my humble opinion, FX is a game of percentages. I personally set a goal of X% gain a month, and X% risk per trade. Stop value determines lot size. Why not just only take the more reliable entry and ignore the ones that warrant more risk.
  • #17
  • Sep 17, 2011 10:49am Sep 17, 2011 10:49am
Quoting nick818
In my humble opinion, FX is a game of percentages. I personally set a goal of X% gain a month, and X% risk per trade. Stop value determines lot size. Why not just only take the more reliable entry and ignore the ones that warrant more risk.
So if you hit that once a month, home run trade on the first days, you stop trading for the rest of the month?

X% per trade = Agree

Stop value determines lot size = Agree, as mentioned by Callisto too

more reliable entry = How do you define "reliable" in a mechanical trade method? Seems subjective to me.

In trading, anything can happen, every moment is unique, no one "knows" more than anyone else; is this a psychic ability of yours? If you have doubts about a signal, why not just reduce risk to 1% of account instead of 2% - it could just be that home run!
It takes a lot for me to IGNORE you, but you can try.
  • #18
  • Sep 17, 2011 10:50am Sep 17, 2011 10:50am
Quoting Callisto
When you are saying this trade has 1.2 or 2.0 profit factor, how do you calculate that?
Or do you mean this trade has 1.2 or 2.0 better chance of making profit? Please share that calculation with the Forex world, you will make a million $$$$ in short time.
Profit factor is the ratio of your winnings (in real money) to your losses over a period of time. Now that I have shown you the calculation, when I'm I getting my million $$$$ ?

When you ask for detailed summary of your account it produces amongst other things your profit factor. If you have been trading a certain way in one account you can compare this to another one with different strategy (and profit factor). You can now ask and attempt to answer the the OP.

Quoting Callisto
All I, and many others do is, risk 2% of account, lot size is adjusted relative to stop loss distance, hence $ risk per trade never changes, only lot size; if you have a better way, please share.
Sure not every one trades this way. And certainly there are better ways.


Quoting Callisto
...That is a subjective matter and he is trying to apply a qualitive measure to it, think about it...

... if he truly knows beforehand the profit factor is 1.2 or 2.0 better than a normal 1.0 trade setup...
I believe you now realise its possible to know beforehand the profit factor of a trade similar to...

Quoting Callisto
How do you figure that? ...
...What you are talking about "believe some set-ups are better than others" is applying subjectivity to the signal, and how can you put a number on it?
...Do that for 100 trades and get back to us, I'm eager to hear the results!
If someone has a profit factor of say 3.2 for a strategy I believe you will advice him to continue on this strategy rather than risk 2% of his account on every setup even if he knows that setup has a pf of 0.8.

As an aside, risk reward is not the only way of assessing the quality of a trade. Many traders do not believe in it.

King.
  • #19
  • Last Post: Sep 17, 2011 2:07pm Sep 17, 2011 2:07pm
I had to re-read the whole post to make sure I didnt miss anything. My feelings now are that, a traders job is to measure risk and thats what I would do. In your examples I personally would ask myself how much more am I willing to RISK on these different type of entry signals and then calculate your lot size accordingly. There are many traders who change their risk profile based on their confidence of signal reliability. So if you change your risk profile this will automatically give you the contract size to trade. There is no right or wrong its just what works.
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