Building an equity millipede

Longs added @ 1.2620
Previous longs @ 1.2440
and 1.2040

What I dont understand is how can he have so many legs on all pairs, when the market is moving, lot of pairs have strong moves at the same time. So he just manages it well stacking in e.g. 3 pairs at the same time?

I think this is where I differ in opinion. As I have said in my earlier posts, Account Balance and floating Profit/Loss (in MT4 terms) holds no meaningful purpose. I am of the opinion that the most (and only) thing that requires absolute focus to your advantage is the Account Equity...

The sole purpose of Account Balance is (or should be!) to:
- track/reflect 'accounting' of fees, deposits, withdrawals, commissions, swaps etc.
- Risk/Reward/MM/RM if you are an intraday trader calculating % profit/loss targets on a daily/weekly/Monthly basis.

With this long term 'investing' strategy, all one needs to focus on is just the Floating Equity Balance. If this is agreeable to your mindset then would you agree it is more important to have a MM based on Equity and not Balance? After all, we don't want our MM rules to force us to realize profits just to reflect growth in Account Balance. You will be hurting your long term growth in my opinion.

I believe what you have described can easily be applied to your Weekend / MonthEnd / QuarterEnd Account Equity if I understand your MM strategy correctly. I think, the compounding effect AND limiting risk further (in real time) would be more beneficial. I will also go on a limb here and say that drawdown/account balance curve reflected in your MT4 statement is detrimental to your phycology. One needs to focus only on Equity Curve within the context of the Millipede approach. I have spent a long time thinking about this sh*t.

This is the hardest part for me when it comes to discipline. I always value ROI of anything I do in terms of payout per hour/day of my time spent. Trading Microlots is just painful for me even for demo purposes. I have approached this by keeping some spare funds in another account for emergency funding.

My two centz

You shouldnt focus on profits when offsetting legs
Profits take care of them selfes , they come alone

Instead u should focus on staying in the game and
Take care of losses and ongoing costs

Simple example , lets say you have managed to build a small
Millipede and during that u made some losses now u could either
Say if you reached a DD of 5% u close as manny positions needed
To make back the 5% and then some ,for example 2 or 3 times
The loss... Different form of RR , right ?

Or u can manage this time based like at the end of the month
You make back your losses plus three times that! Be creative!

Ofcourse that could mean that u will often have to close out all legs
At the beginning but patience will be a virtue here aswell, as if the
Edge/odds or mechanic of your trading kicks in ,wich can happen in 100
Or 1000 trades ( random distribution) your millipde will grow
Just be dispicplined and patient. , the rest takes care of its self

You can handle the risk and exposure in terms of making back the losses back
And stay in the game ,Till you edge kicks in.....

Sorry for the spelling , and format typed this with my phone

Agree on averaging down as a bad concept in general terms. What I meant was this... Stacking is usually employed as a multi-timeframe based strategy. I typically do not move SL to BE until I get a good PA confirmation in my direction to warrant opening another position (which could be 30-50 pips of floating profit on D1/H8/H4 TF). If I find a good setup on H1/M30/M15, I will take those as well while the other position(s) is in profit but not moved to BE. I find it extremely frustrating to move SL to BE too quickly (like under 20 pips) just to see them die by market noise.

What has not been discussed in depth in this thread (and still unclear to me) is this....

- How do you determine the number of positions that can be SAFELY opened across pairs without risking getting a Margin call?

It is very hard to determine the safety net of available margin to allow positions to die on BE especially when you broker does not charge margin on hedged positions or perhaps charges only once.

Consider this scenario from my current stats...

- I have 27 (9 Long and 19 Shorts) positions across 20 pairs at the moment. - All of them are in profit
- 13 of the 20 pairs have positions in BOTH directions with profits unevenly frozen... meaning a pair could have 3 long and 1 short, 4 short and 3 long etc
- All positions are in profit and SL set to BE.
- Position size is always the same

BROKER Info: 50:1 leverage, $0 margin charged on Hedged positions, let's use MT4 terminology to keep it simple. Let's talk only in terms of % Margin Level. Margin call is triggered at 100%.

With the above scenario, what would be the safe level of Margin Level % to minimize any possibility of Margin Call? As we all know, avoidance of a Margin Call is of topmost precedence as the entire Millipede will be crushed forcing us back to stone age ;-

In my experience, it becomes VERY difficult in real time to maintain a razor sharp focus during a stacking episode on one pair when you don't know what other pairs are doing to my open positions and their impact on available margin. The ONLY way (for me) is to watch the % Margin Available (shown at the bottom of the Account Window) and have a HARD MENTAL STOP to stop stacking once the % reaches to a certain level. After playing and blowing a dozen demo accounts trying this out, I am reluctantly using under 200% of Margin Level as a mental stop for adding more positions. I am hoping someone here with stronger Math background could tell me if 200% is a decent mental stop for me to use.

This aspect of MM rule is what I think it not thoroughly discussed in this thread as it varies by broker to broker. If I recall correctly, Graeme mentioned once in his post to open no more than 5-6 mini positions per $5000 capital. I could use this rule blindly but prefer to have some mathematical justifications for it.

Nice input Vee. I love it when people disagree with me. Helps me reexamine my current point of view.

Many of my previous posts have been extracted by admin due to some reasons per regulations of this forum. Which is a good thing since the focus can be on trading. If someone missed out on my post on my proposed money management approach, then I will just post that portion of it at another appropriate time.

Correct me if I am wrong but I can recall you having screenshots of negative balance but positive equity. Since your experience is way above and beyond what I have gone through so far, it is most likely that your thoughts in MM in terms of equity is more suited for this millipede approach. I think you were trying to address the issue of "oppotunity cost".

In my case I tried to propose a universal method that keeps a person alive in the game for as long as possible, regardless of their trading style. That was my primary focus. One of the points mentioned mentioned by the founder of this thread was:

"INCREASED RISK DOES NOT INCREASE PROFITS"

Now this phrase could be understood differently to different individuals depending on how they define and understand risk. Infact some of those who think rigorously in terms of high risk/high return would disagree with this very statement. They would be like:

"No way! Trading 1.0 could return 10x amount compared to trading 0.1."

The importance here is that traders may not only see opportunities differently, but they may also see risk differently.

I will point out the reason why I placed the most important rule of increasing size based on balance and not equity. I will say in advance that my reasons could be wrong due to a lack of experience relatively speaking. Thus if someone points it out, then it is more than welcome. I am going to point out the obvious along the way.

Lets consider this method in light of the millipede approach.

Firstly position trading involves getting stopped out ALOT if you want to particpate using low risk entries. Low risk entries implied in this thread seemed like the usage of tighter forms of stops (either price or time duration based). But then you have others widening their stops to avoid whipsaws. As for who makes bigger overall losses really depends on the skills of the trader. You can make legs either way.
It really comes down to:

Many small losses vs Few big losses

If a person using wider stops has an overall loss that is less than the person who uses tight stops, then the person using wider stops may argue that his/her approach is lower risk. If you think carefully about why pro traders trade less and profit more, this also addresses the issue of risk.

Now getting back to the point. If you have a capital of size X that you wish to trade, then your initial balance will be:

Balance = X

Now, given that substantial amount of entries involving with stopouts is inevitable until some of the surviving positions catch a trend, your balance will inevitably be:

Balance = X - (realized loss from stopouts)

This is the stage where amatuers start looking for another trading system, while closing their surviving legs for a small profit.

Now this millipede approach is setting positions to breakeven while awaiting another opportunity to add positions. Now as we continue to successfully add further surviving positions, your balance will become:

Balance = X - (further realized loss from stopouts)

Eventually, the balance could also turn negative from the realized losses.
Equity on the other hand is as follows:

Equity = X + (unrealized profit or loss)

If you have a negative balance but the MT4 platform allows you to keep adding more positions, it is safe to assume that you have a substantial amount of unrealized profit. If you have sufficient amount of positions surviving a trend, then it is most likely that:

Equity > X

This means that you are in a postion where if you liquidate all positions then your current balance will become larger than your initial capital. This then leads to the question, should we consider increasing lot size since our unrealized profits go beyond our initial balance?

First consider the worst case scenario. For me, the most important rule in risk management is taking into account of the worst case scenario. Otherwise blowing your account is inevitable. Now although the surviving positions we have at breakeven, the future is uncertain and we cannot guarentee that the positions will survive the next days/weeks/months.

The worst case scenario in this instance is that if you lose all your positions at breakeven, then all your unrealized profits are gone. This means you end up with a balance much lower than your initial balance.
Now if you increase lot size due to an increase in equity, you are simply speeding up the process of reducing your balance in 0.

Now we know that the more surviving positions we have, the crazier the fluctuation of our equity. One we start adding positions of greater lot size, the faster the equity will approach 0 if the latter surviving positions go against us.

This is why I do not ignore balance based on my current understanding. When the worst case scenario of our surviving positions ending up at breakeven, we would want our balance to have enough capital to put us back in the game. If your balance becomes negative and your positions are all stopped out at breakeven, this worst case scenario is no different to blowing your account.

Yon

I think your interpretation to combine low risk and tight stops is not right.

Low risk situations were there sometimes when for instance price HAD to break out of a range and a stop loss in that situation was often not even needed.

So its not the tight stop loss that was the low risk, but the situation on the chart.

Why you people are arguing on basic things......,....... You should be looking for Graeme. He is now MIA.

Fxcm's office is the right place to look for him.

I don't get what an account balance is good for except a historic snap shot of equity. A two page write up on this can only be an argument.

Thanks Yon. Perhaps my last post to discuss the topic of negative balance to prevent further distraction as Graeme advocates smooth account balance curve through diversifications.

Based on certain assumptions, my account equity will never go to zero if I :

1. can stop caring about Account Balance once my equity has reached 2x of account balance (i.e. sum of all my initial deposits).
2. am able to derive the most optimum % available margin level (200% as an example in my previous post) to prevent a margin call.
3. am able to continuously participate at a CONSTANT Frequency on chosen timeframe (concept similar to Warbug post http://www.forexfactory.com/showthre...44#post3928844
4. Keep lot size constant across all pairs regardless the account size or equity. As equity grows, the number of pairs and positions can grow up to the optimum level of available margin % level.
5. Improve my edge in placing positions at extreme levels that survive for atleast 2-3 months

#2 continues to haunt me for months now.

Why even both to know wht your real equity is - keep your own balances.

For example -

 

1. Start with $10,000
2. Risk $50 per trade (keep this constant for simplicities sake)
3. Trade 3 times today, reduce your balance by $150
4. Assume all those trades go into a nice profit, move stops to BE, add back $150 to account
5. Then, when you take profits on the trades (assume they all work) add in that profit to your balance (this might not be till several months later)
6. if the 3 trades all lost then as you took the loss when the positions were established there's no loss to be added to your account

Keep very good records, then you won't need to look at the balances your broker shows. Sure, swap rates and/or commissions will have to be taken into account but we know what these are going to be.

For most traders if they keep looking at their brokers balance it will probably do more harm than good especially if bit built up profits are there. Open profits can of course go higher but also a lot lower and in extreme cases a big profit can be given 100% back.

What would G do in some a circumstance, probably shrug, realise it's part of the game and then get back to trading the market.

What would many here do? Probably -

 

1. Panic
2. Get depressed
3. Think the strategy is 'useless'
4. Say it 'won't happen again' and then try to build all sorts of complex trailing stop strategies which of course won't work and will make the future trading of this method all but impossible

And all because they followed their broker's running balance too closely....

VEEFX, nice stacking results as I see from your pic. congrats

how can i set vertical lines to the first candle of the day (in hr, 4hr charts), like in G's platform?

quite a few people in this thread are complaining about giving back big profits when trades are stopped out at BE.

but that`s not what G does: G will already be in with a couple of trades the other way.

so if longs are up in profit for say 400 pips and are closed out @ BE, no tears for G, `cos he already will have a few trades short.

those short trades will hedge the diminishing profits on the longs in a way. very smart, but not easy to do if you have no experience.

Yep...Once you learn not to factor your open positions in your hindsight analysis, you will have a fabulous light bulb moment! It really isn't rocket science once you close your eyes for 30 minutes and visualize positions in both directions and explore your creativity in finding ways to prevent the drain on your floating profits. Graeme has done a fantastic job of explaining all this with his charts also.

Could someone please point me to the post where Graeme mentions his statistical average weekly/monthly realized loss? I faintly recall being 300 pips per week (or month??). Unfortunately I can't find that post !

I know exactly what you are talking about. The problem I find is determining WHEN do you liquidate/diversify?

If your long position gets stopped out, do you close you short position immediately?

Too often I have established positions both ways with a good profit supposedly locked in only to see them both get stopped out.

When? You could either (1) let the market decide by simply participating and following the price or (2) take some profit off the table after 2-3 weeks of growth or (3) after 500+pips of floating pips.

Both? This can ONLY happen when a pennant triangle is eventually formed on weekly. Before a pennant forms, PA should give you plenty of indications (remember wick interpretations.... descending upper wick AND ascending lower wick formation). Graeme would not care with his legs dying at BE for any positions under 2 weeks old. That's the mindset required which is only possible if you don't have immediate needs to withdraw your profits :-

EDIT: a bit clarification to what I said above... pennant triangle "followed by a strong whipsaw'd breakout in both directions taking out your long and short positions". You could also time your exit before price comes to a pennant trend line ripe for potential breakout. Possibilities are endless

Yes, I agree that as positions are put on both sides any large open profit (long) will be offset 'somewhat'.

'Somewhat' is the important word though because IF the market had been in a long uptrend then loads of long positions should have been built up. Now, if the market takes its time to turn around then yes, a trader would probably have time to build a reasonable short position.

But what happens if the markets go crazy and suddenly crater like 2007/08?

Then years of built up long profits would be given back with very few chances to build a reasonable amount of short positions. Maybe you'd find you had just 1 short for every 10 long positions built up.

For anyone trading this method during the 2007-08 crisis that would have been the ultimate test of your intestinal fortitude.

Think about this point everyone because it's critical to properly understand how it can happen and why it's going to happen to you at sometime in the future (if you trade this method for a number of years).

Go look in the mirror and ask yourself HONESTLY how you will feel as years of open profit goes up in smoke (the amount my equate to several hundred percent of your account).

DON'T BULLSHIT YOURSELF that you'd be able to handle it when you know deep down you won't because if you can't handle such an event you probably only have 2 options -

1. Forget this trading strategy as at some time in the future you'll fail with it as the physcology will get ya!

2. Modify it to take smaller profits via diversification. As ever though this strategy has a sting in the tail. If/when the markets make a massive move, you'll only take say a maximum of 33% of the movement. How will you feel if/when that happens? Will you shrug it off or will it knore at you? If so you're probably snookered with this method because whichever way you turn the physcology will get ya!

We can't have it both ways in this game, whatever way you spin anything it always comes with associated advantages and disadvantages. You can normally change the 'disadvantage' to an 'advantage' but when you do the advantage you first had now automatically changes to be a disadvantage.

Think hard about this point because it will play a big role in your success or failure with this trading strategy.

how can i set vertical lines to the first candle of the day (in hr, 4hr charts), like in G's platform?