Trading Game System Discussion

Welcome all your post .....

I would like to share my "Game Management" and "Trade Management" Techniques here, as these are my 40% (20% + 20%) contribution to one system.
Please note that there is not 100% winning system, don't ever think about it. The only solution is to combine with multiple techniques.
I will post all my known techniques one by one from basic to complex without confusing you. It may be too complex for new traders, but experience traders will find it easy to catch-up. So Please be patient.


Game Management Techniques
This method couldn't alter the trading outcome (Win or lose) and couldn't manipulate the RR ratio. However this method is for managing the next trade with/without the past trade's statistical result.

1. Strategy System Expectancy = Post #2
2. Money Management = Post #3
3. Martingale and Anti-Martingale = Post #4
4. Risking 1 contract for every $10,000 = Post #5
5. Fixed Fractional = Post #6 to 7
6. Optimal and Secure f = Post #8
7. Fixed Ratio = Post #12 to 14
8. Cost Averaging = Post #27
9. Pyramiding = Post #39
10.Scaling Out = Post #40 to 42
11.Unique system: MS = Post #48 to 49 & 51 to 54

Game Management Discussion is end.
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Trade Management Techniques
This method could able to alter the trading outcome (Win or lose) with manipulate the RR ratio. One trade could consist of multiple positions in order to control the RR, so to divert one trade into some predicted scenarios. Simply saying, this method is about controlling a trade outcome.

Basic Model = Post #78
1. Stop loss and Target
2. Trailing stop
3. Hold position

Complex Model
1. Model 1: Martingale (Mygrid method) + Grid = Post #80
2. Model 2: Averaging up/down + Grid = Post #81
3. Model 3: Averaging up/down + Trailing BE + Grid = Post #81
4. Model 4: Averaging up + Trailing BE + Grid + Hedging
5. Model 5A: Averaging Up + Averaging Down + Trailing BE + Grid + Hedging
6. Model 5B: Averaging Up + Averaging Down + Trailing BE + Grid + Hedging
7. Model 6A: Averaging Up + Martingale 1P + Trailing BE + Grid + Hedging
8. Model 6B: Averaging Up + Martingale 1P + Trailing BE + Grid + Hedging
9. Model 7: Averaging Up + Additional 1P + Trailing BE + Grid + Hedging
10. Model 8: Hedging + Correlation + with/without basket trading + any model 4/5/6/7
11.

Trade Management Discussion is now begin...
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Expectancy is used to measure a strategy ability/performance and tell if could generate profit. Let us say your expectancy is defined by Formula below:

Expectancy = (PW * AW) - (PL * AL)
PW is the probability of a winning trade;
FL is the probability of a losing trade;
AW refers to the average gain:
AL refers to the average loss


System A
PW = 60%
PL = 40%
AW = $1.00
AL = $1.00
Win/lose ratio = 1:1

Expectancy = (0.6 * 1) - (0.4 * 1) = 0.6 - 0.4 = +0.2

In this particular example, you could earn $0.20 cents per trade for the expected return with the winning probability of 60% and win/lose ratio 1:1. A positive expectancy would expect your strategy system is a earning system. Conversely, a losing system is a negative expectancy.


System B
PW = 60%
PL = 40%
AW = $2.00
AL = $1.00
Win/lose ratio = 2:1

Expectancy = (0.6 * 2) - (0.4 * 1) = 1.2 - 0.4 = +0.8

So this system generate $0.80 cents return per trade with the win/lose ratio 2:1. Let see further the system C

System C
PW = 40%
PL = 60%
AW = $2.00
AL = $1.00
Win/lose ratio = 2:1

Expectancy = (0.4 * 2) - (0.6 * 1) = 0.8 - 0.6 = +0.2

The result is $0.20 cents profit per trade. IF your strategy probability is not so good but with a good win/lose ratio, this still could produce positive expectancy if you are risking $1.00 per trade.


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Only positive expectancy of strategy system is a profitable system. However, this does not mean a strategy do not require a high probability of winning trade. It should have the optimized value to compromise with other system.

I do not want to explain too much about MM here since this is so basic to everyone, but i still put some example here to illustrate why you need this system for your trading.


Table 1 :Left hand side
If you had a 38 consecutive profit windfall, would you rather use money management? I think so, almost a $100,000 gain in profits is the difference between the two approaches.

Money management allows your profits to grow geometrically. However, at the same time it limits your losses, take for instance the same hypothetical scenario applied to a string of losses.


Table 2 :Right hand side
This is for risking 3% on each trade. After 33 trades, when using no money management the trading account would be at $1,000, a 99% drawdown. On the other hand, when using MM, after 33 losing trades, the account balance would be at $35,599 a 63% drawdown.

The results are self-evident, MM allows our capital to grow geometrically but at the same time it avoids the risk of ruin.

Another important reason to use money management is that not every trade will be a winner. Even the best systems are only right about 60 or 70% of the time. For every 10 trades there will be around 3 or 4 trades that end up in red. If we do not learn to take controlled risks, we could blow up our trading account losing only 3 or 4 trades out of ten.

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So in a few words, on every kind of strategy. It should be applied when day trading, position trading, scalping, long term trading, and every type of trading approach. If you trade, then you should apply MM.
MM helps you regardless of the strategy you are using, if you trade breakouts, or do trend following trades, countertrend trades, MM will help you.

Let me share about Martingale and Anti-Martingale here. I think every traders should know the pros and cons well.


Martingale :Left hand side
This approach states that as the account balance of the trading account decreases, the size of the trade should increase.The basic principle of this approach is that as the account suffers losses, its ability to recover increases.

Imagine a trader that has an account of $100,000. He would start risking $1,000 on his first trade and doubling up on each following trade.

After the sixth consecutive loss, his trading balance would be at $37,000 and would need to risk $63,000 on his or her next trade. To do this, additional funds are required.


Anti-martingale :Right hand side
This approach is exactly the opposite to the martingale. This one states that as the account increases in value, the amount risked should also increase, and when the account decreases in value, the trade size should decrease. The basic principle of this approach is that it permits the geometric growth of the account during strings of consecutive winning trades, and at the same time, it limits the losses during a drawdown period.

Imagine a trading account starting at $10,000. If we risk say 2% on each trade, after 5 consecutive losses our account would be at $9039.21 (a loss of 9.60% of the account.) However, to get back to break even we will need an increase of 10.63% of the new account level.

This is the example of how is the effect of risking 1 contract for every $10,000. I do not want explain too much, picture will explain everything.

Win : $600 per contract
Lose : $200 per contract
Win/Lose Ratio : 3

As you can see the difference when MM is applied the balance keeps growing geometrically and the trader takes advantage of it increasing the trading size.

When these results are extrapolated over a longer time span, the difference could be much more noticeable. The difference on the winning side is $3,000 just over 13 trades, but what would it be in a 130 trade sample? Could it be $30,000? On the losing side, the difference is $1,400; could it be $14,000 over a 130 trade sample? If you spend a minute thinking about that it will bring home the point how effective good MM can be.



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Well, as you have seen now a trading game system is very important, so you could "BLOW UP" your trading account for the underlying profit and control the given of risk.

This MM is called "Fixed Fractional" system. This particular MM technique states that a trader should risk a fixed percentage of the trading account on each trade. The greatest advantage about this technique is that you are able to change the parameters according to your risk profile.

A conservative trader could use 1% or even 0.5% of risk per trade. While traders with a higher risk profile could take that percentage up to 5%. The parameters could also be changed based on how many and what currency pairs you trade.

For example, maybe you only trade two currency pairs, the pound and the euro. You also know that the pound is more volatile than the euro, so you are willing to risk less on pound trades than on euro trades. You also want to keep your overall risk below 2% of your trading account. In this case you will set the following parameters:

EUR/USD risk per trade = 1.25%
GBP/USD risk per trade = 0.75%

This way you can keep your overall risk below 2%, but also the parameters are weighted so you increase your chances of profitability.

So take a look the pictures.

With MM
Risk : 2% on each trade
Reward : 6% on each trade
Risk to reward ratio = 1:3

Without MM
Risk : $1,000 on each trade
Reward : $3,000 on each trade
Risk to reward ratio = 1:3

There is not much difference on losing side, when not using MM at all the loss would be $8,000 vs. $7,462 when we used MM. Remember though this is only an 8 trade sample. This is interesting even if apply same risk to reward ratio 1:3 for both system.

What is interesting about this technique is the boost it has in profits. When no MM was used at all, the account ended up at $74,000. On the other hand, when MM was used the account ended up at $79,692. This is a difference of $5,692 just over 8 trades. Imagine what it can do for you after 100 trades.

To be continue....

Continue from Fixed Fractional #1
Let me put some comparison's example for losing & winning streak with this MM and without this MM.

Losing Streak/Drawdown
When no MM technique is applied, the balance ends up at $35,000, while when using MM the balance ends up at $36,414.


Winning Streak
Using the same sample number of trades, the results are very interesting.

When no MM is applied, there is $69,000 in profits; on the other hand, using the fixed fractional technique the profits go up to $139,208 with the same sequence of trades!!! A difference of $70,208, this is what MM can really do for every trader.

These techniques were developed by Ralph Vince. These MM techniques claim that there is an optimal fraction that would produce better results for any given set of trades.

Optimal f can surely have phenomenal effects when it comes to profits, but it can also have devastating effects when it comes to losses.

Secure f is only a “safer” variation of the optimal f.

The most important drawback of these techniques is that the optimal fraction is obtained from a given set of trades’ historical results. In other words, it would have produced outstanding results on those historical trades. This does not mean that it will have the same results for the next set of trades.

They do not really tell us how much to risk on our next trade, for this reason i am not going through these two techniques. However, if you would like to check this out (Formula,calculation,theory....), please click the link below for your understanding.

http://www.tsresearch.com/public/mon...y_management3/

Add 3 more techniques to my discussion. There are more techniques will be updated into post #1. Please be patient.

8. Cost Averaging
9. Pyramiding
10.Scaling Out

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The next technique i am going to BOOST UP your account is Fixed Ratio System

nice read!!
can t wait to see more..

Fixed frac is as good as it gets IMO. Risk is kept at a consistent X%, while the account grows exponentially due to the inherent compounding, and contracts during drawdown, to help preserve the remaining capital.

BTW, there's also a great thread on different MM types here.

This technique was developed by Ryan Jones.This methodology uses one variable, what Ryan Jones calls delta. This variable determines how aggressively or conservatively the MM is applied. The lower the delta, the more aggressive the MM is, the higher the delta, the more conservative the MM is.

The formula to calculate the levels in which the trader should increase contracts is calculated as follows:

Previous required equity + [# of contracts traded * delta] = Next level in which the trader should increase contracts.

For instance, in a $50,000 trading account and a delta equal to $5,000
$50,000 + (1 * 5,000) = $55,000. This means that at $55,000 we should increase our trading size from one contract to two contracts

The next calculation starts at $55,000
$55,000 + [2 * $5,000] = $65,000. When we reach $65,000 we should increase our trading size to three contracts.

And so on.
What would happen to our profits in a streak of winning trades with different deltas? Take profit level fixed at $3,000 in a $50,000 trading account. Let see these at below pictures.



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But, what would happen if a drawdown occurs before any winning trade? It would have the same results than using no money management at all. Ryan Jones does not mention what to do in this case.

The best thing to do is to use another MM technique should this happen. For instance, we could use a fixed fractional approach, but as soon as we recover back the losses, apply again the fixed ratio approach.

To be continue....

Continue from Fixed Ratio #1
Now let us take a look at the results using the same sequence of trades used with the other MM techniques.

Risk : $1,000 on each trade
Reward : $3,000 on each trade
Risk to reward ratio = 1:3


As you can see, the results with both deltas is the same, the reason for this is because the fixed ratio technique never makes it to trade two contracts with either delta.


To be continue....

Continue from Fixed Ratio #2
Now, we apply the same risk and reward amounts with the ratio. Let us take a look at the consecutive winning streak as shown below.

Risk : $1,000 on each trade
Reward : $3,000 on each trade
Risk to reward ratio = 1:3


As we can see, the difference is self-evident. Using a delta of $5,000 the balance ends up at $98,000 and with a delta of $10,000, the balance ends up at $89,000 against $73,000 when no MM is applied.


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Well, we have seen several MM techniques by now, but which one is better? Even if trader assign risk to reward ratio as 1:2 or greater, it doesn't mean could boost up the profit effectively, rather then combine with another techniques as mention here. However, it also depends on each trader strategy, capital and flexibility. So it up to trader to design and build their system by applying these systems.

This has to be one of my favorite threads in this forum! Nice work. I just read your pdf regarding candle stick probability of CO- and CO+, and saw how you applied ATR and you noticed that price behaves more like trading. Can you define trending, ranging, breakout, and expand. I know this is a bit outside of what your trying to explain here, which I am also very interested about.

Using risk approach is better then?

Hi Supertrader9! I couldn't say that using what kind of system is the best because this depends on each traders objective and capital. You may combine the various MM system here to become another unique systems which may suit to you personally.

As you know that risk to rewards ratio is very popular technique among many traders, however this just seem like not sufficient to boost up the available profits with the underlying of risks, if the whole trading account is not compromised.

Anywhere, system "Fixed Ratio", i found it useful to boost up profits faster with the consecutive of winning streak and Anti-martingale technique could manage better risk for a series of losing streak.

very good explanation on RM and MM. Thank you ~bull.bear~

I may misunderstand your post but I'm afraid you're mix and matching two different things. The R:R is a component of the expectancy of a system. That's nothing to do with MM. MM just multiplies the gains and the losses. MM tries to optimize the yield of a winning system. It cannot turn a loser into a profitable stuff.

Proof: MM is a modulation of the position size. The position size is a positive number. If you multiply a negative value (expectancy of a loser) by a positive value (lot size) you get a negative value (new expectancy).

Hi PipMeUp! I think i may not explain clearly for my statement. So let me clarify here. Honestly, MM system only optimize positive expectancy's strategy and of course it cannot change the outcome from losing to become winning.

For RR, different RR ratio contributes to various result and this has to depend on strategy and optimizing parameters. And RR is also considered a technique to manage better trading outcome, it could change a game from losing to winning if everything are compromised well (Example: A winning game could turn into losing game if not proper optimized the strategy with RR). So i mentioned that this is not sufficient to boost up profits since there are more available technique out there.