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Taking Profits and drawdowns

  • #1
  • First Post: May 18, 2012 10:01am May 18, 2012 10:01am
Hello,

I look for risk:reward of 1:5 or better and am looking at various ways to manage trades to limit drawdown but still have a reasonable chance of achieving say 1:10.

For instance, once a trade gets to 1:5, the original risk:reward of 1:10 now becomes 1:1 if stop loss at breakeven. Also with three trades open, each risking 0.5%, this means a possible drawdown of 9% (if stop losses not moved) once the trades are at 1:5 ?

Interested in what other people do or any ideas on this.


Also I assume any loss in unrealised profit is considered a drawdown?

So if account balance is £600 and unrealised profit is £60, then if stop losses are hit at the entry price, this is considered a 10% drawdown?

Thanks.
  • #2
  • May 18, 2012 12:53pm May 18, 2012 12:53pm
Quoting Mr Woozel
Hello,

I look for risk:reward of 1:5 or better and am looking at various ways to manage trades to limit drawdown but still have a reasonable chance of achieving say 1:10.

For instance, once a trade gets to 1:5, the original risk:reward of 1:10 now becomes 1:1 if stop loss at breakeven. Also with three trades open, each risking 0.5%, this means a possible drawdown of 9% (if stop losses not moved) once the trades are at 1:5 ?

Interested in what other people do or any ideas on this.


Also I assume any loss in unrealised profit is...
If I were you I would stop trying to work out a method that will give you 5-1 reward risk and look for one that gives you 1-1 with as near 100% reliability as you can.

Learn to trade the M5 charts, they will very often give you high probability repeatable patterns that can be traded with 10 + pip targets and often less than 10 pip stops.

If you hone your skills you will eventually rarely even suffer drawdown at all and you trades will generally be over in 10-20 minutes max. Find a trade like that every day, rinse and repeat the next day.

90% win rate is achievable. Therefore anything above 1-1 rr becomes a bonus.

I only suffer drawdown now if I don't follow my own rules to the letter, if I get lazy I deserve to have losing trades.
  • #3
  • May 18, 2012 1:22pm May 18, 2012 1:22pm
Quoting jag1966
If I were you I would stop trying to work out a method that will give you 5-1 reward risk and look for one that gives you 1-1 with as near 100% reliability as you can.

Learn to trade the M5 charts, they will very often give you high probability repeatable patterns that can be traded with 10 + pip targets and often less than 10 pip stops.

If you hone your skills you will eventually rarely even suffer drawdown at all and you trades will generally be over in 10-20 minutes max. Find a trade like that every day, rinse and repeat the next day.

90%...
Hi,

I have a method that gives me risk:reward of at least 1:5 (see my live trade journal). I only risk 0.5% per trade and have annual targets of ROI>15% and DD<10%. I mainly trade daily timeframes and not yet interested in trading anything lower than the 4 hour (esp with the targets and stop losses you mention). Your trading results must be very impressive!
  • #4
  • May 18, 2012 2:35pm May 18, 2012 2:35pm
Quoting Mr Woozel
Hi,

I have a method that gives me risk:reward of at least 1:5 (see my live trade journal). I only risk 0.5% per trade and have annual targets of ROI>15% and DD<10%. I mainly trade daily timeframes and not yet interested in trading anything lower than the 4 hour (esp with the targets and stop losses you mention). Your trading results must be very impressive!
IF your annual goals are around 15-20% a year, you can easily do it on daily TF with 1:1 with something that has like a 60% accuracy.
  • #5
  • Edited May 19, 2012 3:31am May 18, 2012 3:39pm | Edited May 19, 2012 3:31am
Quoting Mr Woozel
Hi,

I have a method that gives me risk:reward of at least 1:5 (see my live trade journal). I only risk 0.5% per trade and have annual targets of ROI>15% and DD<10%. I mainly trade daily timeframes and not yet interested in trading anything lower than the 4 hour (esp with the targets and stop losses you mention). Your trading results must be very impressive!
Point taken but there will be a day when you realise the daily time frames work in EXACTLY the same way as every other time frame right down to the one minute.

Trading the dailies is a complete waste, (inefficient use) of time and margin.

Why wait days or weeks to risk .5% to win 2.5% 1-5 when you can make five, or 10 .5% winners in a day?

Risk £1 a pip on your long term stressy daily trade to make 150 pips = £150, OR risk £10 a pip on a stress free short term 5 min trade to make 10 pips = £100. It should be a no-brainer.

Intra day traders can make 15% in a week, even a day in some cases without compromising strict rules and money management.

Think outside the box, stop listening to the, "mm rules" spouted by the wannabe trader, stat regurgitaters
  • #6
  • May 19, 2012 5:02am May 19, 2012 5:02am
Quoting jag1966
Point taken but there will be a day when you realise the daily time frames work in EXACTLY the same way as every other time frame right down to the one minute.

Trading the dailies is a complete waste, (inefficient use) of time and margin.

Why wait days or weeks to risk .5% to win 2.5% 1-5 when you can make five, or 10 .5% winners in a day?

Risk £1 a pip on your long term stressy daily trade to make 150 pips = £150, OR risk £10 a pip on a stress free short term 5 min trade to make 10 pips = £100. It should be a no-brainer.

Intra day traders...
Those are topics for a different thread.

Am interested in how traders manage positions in which they are aiming for risk:reward of at least 1:5 (or1:3). Peter Brandt calls them popcorn trades: Price gets close to target but then returns to entry price/stop loss.
  • #7
  • Edited 7:19am May 19, 2012 7:05am | Edited 7:19am
Quoting Mr Woozel
Hello,

I look for risk:reward of 1:5 or better and am looking at various ways to manage trades to limit drawdown but still have a reasonable chance of achieving say 1:10.

For instance, once a trade gets to 1:5, the original risk:reward of 1:10 now becomes 1:1 if stop loss at breakeven. Also with three trades open, each risking 0.5%, this means a possible drawdown of 9% (if stop losses not moved) once the trades are at 1:5 ?
Quoting Mr Woozel
Also I assume any loss in unrealised profit is considered a drawdown?

So if account balance is £600 and unrealised profit is £60, then if stop losses are hit at the entry price, this is considered a 10% drawdown?

Thanks.
Quoting Mr Woozel
Am interested in how traders manage positions in which they are aiming for risk:reward of at least 1:5 (or1:3). Peter Brandt calls them popcorn trades: Price gets close to target but then returns to entry price/stop loss.
I'm not a trader, so IMHO --

That's a high unrealized loss, 9-10%, from what I've read of traders.

So you divide every trade into positions, change the SL and TP of every position, and lose most of your trades because the higher the R:R the lower the W:L? That sounds challenging.

A stop loss at break even means risk:reward is zero, because you risk nothing.

According to investopedia, a drawdown is a loss of one or more trades among lots of trades. Thus, it affects the win:loss ratio, not the risk:reward ratio.
There could be a metric for missing the TP and still making a profit, but it's not drawdown.

I'd imagine, that if you get a lot of 'popcorn trades', then keep your TP at less than where you think it'd normally go. Trailing stops would keep price below the TP, and a retrace close to below TP and hits the stop would capture most of such a trade.
  • #8
  • May 19, 2012 7:41am May 19, 2012 7:41am
Quoting ha-pattern
I'm not a trader, so IMHO --

That's a high unrealized loss, 9-10%, from what I've read of traders.

So you divide every trade into positions, change the SL and TP of every position, and lose most of your trades because the higher the R:R the lower the W:L? That sounds challenging.

A stop loss at break even means risk:reward is zero, because you risk nothing.

According to investopedia, a drawdown is a loss of one or more trades among lots of trades. Thus, it affects...
Hello and thanks for the input.

I need about 17% success rate to breakeven on trades with risk:reward of 1:5. This ignores the spread, commissions and times I move stop loss to breakeven. I am confident my win rate will be at least 22%, so yes a higher risk:reward means low win rate for me. I do not care about win rates anymore, just minimising losses on the way to making at least 15% annual ROI with 0.5% risk per trade.

If stop loss is moved to breakeven I am still risking any unrealised profits so I don't believe my risk:reward is zero. I used to think my risk:reward changed to zero though. For example, I have had one popcorn trade this month. My trade reached 1:4 and then returned to hit my sl at "breakeven" and so guess this is classed as a 2% loss as 0.5% was initially risked on the trade. Once that trade reached 1:4, my risk:reward then becomes 1:0.25 as risking 2% (unrealised profit) to win an extra 0.5% which makes me feel uncomfortable.

If this is not classed as a loss but a breakeven trade, then think I would feel comfortable with just leaving my stop loss at breakeven and aiming for a homerun.
  • #9
  • May 19, 2012 12:36pm May 19, 2012 12:36pm
A few things come to mind here. The first is that I would say that drawdown should be calculated on your closed trades only and not your equity. If you have £600, make £60 and then lose it again your drawdown would be 10% but if your equity reaches that level during the course of an open trade and then you get stopped at break even then it doesn't count as drawdown. That's my interpretation of it.

Secondly, if you are shooting for 5:1 or 10:1 risk/reward then you should be locking in some profit as you go. Find a good technical method to trail your stop. I am currently using the 100 sma to trail my stops behind. It keeps you in for the meat of a good trend and doesn't give too much back in most instances if the price does reverse quickly against you. I'm sure it's not perfect but does the job for now until I can think of anything better.

Lastly, if you are shooting for that size trade then you should definitely be adding to your winners. This will make a massive difference to your overall p/l. If you're trading daily charts I'm guessing you are using 100 to 200 pip stops so your target is going to be anything between 500 and 2000 pips. Let's say the price goes 1000 pips and you just have one entry at the start. That's 1000 pips in the bank. Imagine you have an entry every 100 to 150 pips on the way down. Get the trades to break even and trail them and your initial risk reward doesn't matter, you're magnifying your winners whilst still keeping your losers small.

That last bit is the key to successful trend trading. Pyramiding (adding onto) your trades means that you can risk 0.5% on each individual trade but a successful trend trade with multiple add ons could easily bank you 5 to 15% on one position. Add the overnight swap to that for carry trades and it's even more.
  • #10
  • May 20, 2012 12:27pm May 20, 2012 12:27pm
Quoting Hugh Briss
A few things come to mind here. The first is that I would say that drawdown should be calculated on your closed trades only and not your equity. If you have £600, make £60 and then lose it again your drawdown would be 10% but if your equity reaches that level during the course of an open trade and then you get stopped at break even then it doesn't count as drawdown. That's my interpretation of it.

Secondly, if you are shooting for 5:1 or 10:1 risk/reward then you should be locking in some profit as you go. Find a good technical method to trail...
Thanks Hugh.

It maks a difference to me if loss of unrealised profit isn't considered in calculating drawdown.

I do look for places to lock in profit (and add to positions) but working on whether it is just better to leave stop losses where they are.

I use the daily but my stop losses are usually 30 to 40 pips.

Thanks again for the suggestions, I will look into them.
  • #11
  • May 20, 2012 2:17pm May 20, 2012 2:17pm
Quoting Hugh Briss
A few things come to mind here. The first is that I would say that drawdown should be calculated on your closed trades only and not your equity. If you have £600, make £60 and then lose it again your drawdown would be 10% but if your equity reaches that level during the course of an open trade and then you get stopped at break even then it doesn't count as drawdown. That's my interpretation of it.
Just found out that the open trade would be considered as a 10% drawdown but lots of different ways to calculate drawdown such as month end to month end or 5 day moving average.
  • #12
  • May 20, 2012 4:33pm May 20, 2012 4:33pm
Quoting Mr Woozel
Just found out that the open trade would be considered as a 10% drawdown but lots of different ways to calculate drawdown such as month end to month end or 5 day moving average.
Maybe some people think of it that way but I don't think there's anything to be gained by fretting about your open equity versus drawdown. It's far more important to protect your starting capital and then protect any profits you do make whether in open trades or not. I'll say it again, the add ons are by far the most important thing.
  • #13
  • Last Post: May 22, 2012 5:04am May 22, 2012 5:04am
Quoting Mr Woozel
Hello,

I look for risk:reward of 1:5 or better and am looking at various ways to manage trades to limit drawdown but still have a reasonable chance of achieving say 1:10.

For instance, once a trade gets to 1:5, the original risk:reward of 1:10 now becomes 1:1 if stop loss at breakeven. Also with three trades open, each risking 0.5%, this means a possible drawdown of 9% (if stop losses not moved) once the trades are at 1:5 ?

Interested in what other people do or any ideas on this.


Also I assume any loss in unrealised profit is...
Drawdown means the higher loss you had realized/unrealized. I think that RR of 1:10 or even 1:5 is too hard to achieve. From my experience, I look for trade ideas that provides the minimum of 1:1.5, meaning that I am willing to lose £1 on each £1.5 that I gain.
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