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Popular Trading Tips: Truths or Myths

  • #21
  • Nov 1, 2013 12:25pm Nov 1, 2013 12:25pm
The whole thing about risking only 2 percent of your account is silly. Who only risks $2 per $100 account? come on? really? hah! At the end of the day like OP said if you have a proper system which is proven to be profitable it really doesn't matter what you risk so long as you can afford to take the losses on your account. That is all.
  • #22
  • Nov 1, 2013 12:28pm Nov 1, 2013 12:28pm
When you break it down, trading is mostly an exercise in patience. Of course you need to have a method you believe has an edge, but assuming you do, then it all comes down to entering/exiting trades like a machine and patience.

As for risk:reward, it doesn't really matter over the long-term (years). If you study historical price movements (charts), you will see there are periods where a 1:3 did better than 1:1 and vice versa. Since none of us know which R:R is going to do best into the future, just pick one and stick with it forever. In the end it all evens out.
  • #23
  • Nov 1, 2013 2:14pm Nov 1, 2013 2:14pm
Quoting ReyesWhite
The whole thing about risking only 2 percent of your account is silly. Who only risks $2 per $100 account? come on? really? hah! At the end of the day like OP said if you have a proper system which is proven to be profitable it really doesn't matter what you risk so long as you can afford to take the losses on your account. That is all.
Silly, is it? Not everyone is trading 100 bucks accounts. Would you really feel OK being 50K in the red on a 100K account? Afterall there's still room for taking more losses, right? Can you ever know with certainty that your profitable system is not going to generate more losses on top of those -50K? Have you ever thought that recovering those 50K (50% closed drawdown) will now take a 100% gain just to get the account to break even? What's the effect disregarding drawdown control will have on your ability to compound/consistency?

I'm sorry if it sounds melodramatic, but the implications of what we're talking here are huge!

Money management (better yet, risk control) has the potential to kill an edge. Controlling drawdown is just as important as making new equity highs, in every sense. It will keep both your account and your mind healthy. You want to make money think how much you can win, you want to keep it think how much you stand to lose. The implications of being able to keep what you've earned on previous trades are that now you can compound your account to new highs while your mind remains peaceful.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #24
  • Nov 1, 2013 2:19pm Nov 1, 2013 2:19pm
@ AlastorFate: Sometimes it is better to listen than to talk. Listening requires less effort too.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #25
  • Edited Nov 2, 2013 12:58pm Nov 1, 2013 2:23pm | Edited Nov 2, 2013 12:58pm
Quoting AlastorFate
Let's say 8 out of 10 trades you make are winners, wouldn't a slightly bigger position size yield a bigger return? Of course, you might say that you might get 8 out of 10 losing trades or whatever other figures that would incur one overall loss. ......Win rate over 80% and still lose overall indicates problems with one's trading system. ...... If the probability derived fall short of 80 percent or more, I would consider it too risky to use.
Attached is the trading result of an EA that I wrote a couple of weeks ago, one of several 'unconventional' ideas that I've recently been fooling around with.

Of course I realize that 2 weeks and 76 trades proves absolutely nothing. It would take several hundred trades across a few years of changing markets, to achieve anything that's meaningful statistically.

But here's my point: the results show a 17% win rate, and a sequence of 32 consecutive losses in only 76 trades, yet the EA still generated a 31% ROE gain over the two week period. It's perfectly possible to be profitable with a low win rate; win rate in itself is meaningless. On the one hand, there are profitable trend following systems with win rates < 50% (see this thread for examples). On the other hand, there are systems with win rates > 90% (or something that's effectively equivalent) that will eventually blow an account, because they use excessively wide stoplosses, average down indiscriminately, or use dodgy MMs like martingale.

With the EA, the average win was $753, average loss $105, i.e. an average risk/reward of more than 1:7
The biggest RRR trade was 20.2 (310.4 pips profit for 15.4 pips initial risk); there were also trades of 15.4, 13.2, 13.0 and 12.1, and another 7 trades at bigger than 1:3

In general, with any system, the higher the win rate, the lower the RRR; they tend to operate in approximately inverse proportion to one another.

The EA varied its risk from 0.5% to 3.0% per trade, depending on how it perceived the quality of the setup. This resulted in the account balance falling from $10k to around $2,900 at one point, i.e. more than 70% drawdown. Hence for this type of system, the 0.5%—3.0% spread seems about 5 times too high; something around 0.1%—0.6% would have generated 14% drawdown, and still returned 6% over the two weeks: much more acceptable for somebody with my appetite for risk. Somewhat less than the textbook 2%.

Of course the EA uses only TA-based patterns; it can not perform FA or complex 'contextual' or interpretive analysis. And it still needs a lot of improvement; the risks that it takes are unacceptable to me; and I have a couple of filters to add, that should eliminate many of the losing trades. But I'm merely using it as an example here.

If 'dumb' EAs can be profitable using TA patterns, then what about an experienced discretionary trader, whose analysis is more intelligent, comprehensive, adaptable, etc etc?

I'm not saying that my approach to trading is right and yours is wrong. What I am trying to say is that statements like "you need an 80% win rate", "2% risk per trade is too low", "TA patterns don't work", "RRs of 1:3 are unprofitable" are generalizations that might apply to your own trading approach, but there are many ways of potentially skinning the forex cat. "Truths or myths", if they are being presented as absolute facts, should be universally applicable.
Attached Image (click to enlarge)
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  • #26
  • Edited 4:49pm Nov 1, 2013 4:21pm | Edited 4:49pm
Quoting vox dei
{quote} Silly, is it? Not everyone is trading 100 bucks accounts.
Agreed.

However, I can't help wonder how many of these $100 accounts are the results of br0kers (or their shills?) promoting the idea that trading is all about psychology, and then something like "you'll never learn psychology by trading a demo account. But the great news is that we offer starting accounts from as low as $100". Now the newbie trader has already created his spreadsheet telling him that if he can make 20% per month, then he'll compound his $100 into $1 million in around 4 years, and $1 billion in less than 8 years. And after all, how difficult can it be to scalp 10 pips by picking direction correctly on a better than 50/50 basis? Hence he starts out on this new venture with great optimism and excitement. But very soon he starts to fall behind his 20% target, and to catch up, he starts to overtrade and overleverage himself way beyond the textbook 2% risk per trade, quickly resulting in a blown account. After repeating this failure with maybe three or four $100 accounts, he concludes that trading forex profitably is impossible, discovers Forex Factory, and starts a thread saying exactly that.
  • #27
  • Nov 1, 2013 4:43pm Nov 1, 2013 4:43pm
Quoting hanover
{quote} Agreed. However, I can't help wonder how many of these $100 accounts are the results of br0kers (or their shills?) promoting the idea that trading is all about psychology, and then something like \"you'll never learn psychology by trading a demo account. But the great news is that we offer starting accounts from as low as $100\". Now the newbie trader has already created his spreadsheet telling him that if he can make 20% per month, then he'll compound his $100 into $1 million in around 4 years, and $1 billion in less than 8 years. And after...
Very true. Considering most brokers keep orders in-house, they end up killing two birds with one stone using those kind of commercial adds. They bring in new costumers, and at the same time, limit their ability to perceive the risks, and that ultimately will give a broker that keeps orders in-house it's edge.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #28
  • Nov 1, 2013 8:07pm Nov 1, 2013 8:07pm
Quoting hanover
{quote} Attached is the trading result of an EA that I wrote a couple of weeks ago, one of several unconventional ideas that I've recently been fooling around with. Of course I realize that 2 weeks and 76 trades proves absolutely nothing. It would take several hundred trades across a few years of changing markets, to achieve anything that's meaningful statistically. But here's my point: the results show a 17% win rate, and a sequence of 32 consecutive losses in only 76 trades, yet the EA still generated a 31% ROE gain over the two week period. It's...

Quoting vox dei
{quote} Silly, is it? Not everyone is trading 100 bucks accounts. Would you really feel OK being 50K in the red on a 100K account? Afterall there's still room for taking more losses, right? Can you ever know with certainty that your profitable system is not going to generate more losses on top of those -50K? Have you ever thought that recovering those 50K (50% closed drawdown) will now take a 100% gain just to get the account to break even? What's the effect disregarding drawdown control will have on your ability to compound/consistency? I'm sorry...
Nothing wrong with risk management.


I will just say with the methodology I am using now to trade the market, limiting the position size to a small amount (2% risk or less) is unnecessary. It would be just a difference between a bigger profit and a smaller one. The key for me being able to trade this way is I trade like a extremely careful driver on a road with many other vehicles. I put extreme care not to hit any of them.


- by keeping an ultra safe distance between my car and other vehicles (I enter trades at ultra conservative levels)

eg Price is now at 1.030. Trader A places an order to short at 1.250. Trader B places an order to short at 1.070.

Scenario 1
Both traders' orders get filled eventually. Price reverses around at a certain point.

Trader B will get into the trade more easily and definitely will have a much larger stop loss than Trader A (unless he does uses a tight stop loss, but he will end up with a loss inevitably), his profit potential will also be smaller than Trader A. At the price level 1.250. If both traders were to stay in the trade, trader B would have a potential loss of 180 pips. Trader A would be at a comfortable breakeven position. Of course trader B might have been already been out of the trade before price hits 1.250. The difference is that Trader B took a risk while Trader A took none at all in this scenario.

Scenario 2
The market does an insane upward move that take out both traders' positions. The price surges up by 500 pips.

This kind of move statistically speaking occurs no more than 2 (?) times a year, implying it is extremely rare, to the point that I can 'safely' ignore this possibility.



Scenario 3
Trader B's order got filled. Price reverses around at 1.090. Trader As' order did not get filled.

Trader B got into the trade. He might either take a profit or a loss from the trade. Trader A's account balance remains the same. No profit for Trader A, but also no loss, no risk for him as well.

The rationale here is I opted to follow the guideline that protecting my capital is more important than getting into trades too easily (risk) to get profit.



- by traveling at an extremely slow speed (not greedy; extreme patience)

I do not move towards my destination as close to it as some other vehicles may do (less pips potential in a given set of time compared to other traders) In return I have reduced the risk that I take to the minimum possible level I possibly could.




That is how I get into my trade. Because of my ultra conservative entry, I take way less risk than traders who typically get into trades at a level which is closer to the current price level. I am able to trade a bigger position size with a fair amount of confidence. I will still monitor the trade though and look to get out of the trade at a good price if the price moves against my position.

There is another reason why my entry usually turns out to be good ones. If the price does hit the level where I get into, it will usually shows up as a very extended pattern on the chart. The chance of reversal is higher than normal in this kind of pattern. The price is also at a late stage of the current trend. A breakdown to the downside is a pretty high possibility.

So far, I am doing very well statistically in my trading. Using my current approach, I can only get into very few trades a month, but they are all winning trades/single digit pips loss. My winning trades' profit are ranges from 40 pips to 80 pips.

Ironically, I did get a good r/r ratio in my trading, but it requires active trade managing on my part to get that.

There is another factor which I use in my trading that makes it possible to get that kind of result, but I am not willing to reveal it. Yeah, as a result I would consider myself to be trading using a system with high probability winning rate. You can verify what I have said with my P&L.

Attached files
My P&L Statement of my live account for the month of Oct 2013
Position size: 1 Mini Lot (I use Micro Lots in my actual trading)
I usually place several positions (close to one another in price level) on a 'single' trade for easier trade management.
3rd set of trade: Got into short position in the blue circle on the chart. Took profit at about 60+ pips at 1.3479. Price continues to move downward another 100 over pips to 1.3361. Oh well . . .
Attached Image(s) (click to enlarge)
Click to Enlarge Name: Screenshot5.png Size: 144 KB
Click to Enlarge Name: 2013 Chart Oct.png Size: 49 KB
'For the market to work, it needs people who think that they can beat it.'
  • #29
  • Nov 1, 2013 8:43pm Nov 1, 2013 8:43pm
Quoting AlastorFate
So far, I am doing very well statistically in my trading.
Congratulations, and I wish you continued success.

My only query is that you presented your ideas in post #1 as if they were universal truths, when in reality they are applicable only to approaches that are similar to your own. As the saying goes "there are a thousand different ways to be profitable (and a million ways to fail)".

If you are able to safely maintain a risk per trade > 2% consistently throughout your trading career, then you're a very proficient trader.
  • #30
  • Nov 1, 2013 9:14pm Nov 1, 2013 9:14pm
In trading, there are no universal truths nor universal lies.
And there is no way to predetermine either.

"Approaches" are applicable to one's personal way of trading.

I might add that someone's approach could differ greatly from
your own and be hugely successful.

Happy New Month
When the Joker is in the deck.. fear not and play it well
  • #31
  • Nov 1, 2013 9:25pm Nov 1, 2013 9:25pm
Quoting hanover
{quote} Congratulations, and I wish you continued success. My only query is that you presented your ideas in post #1 as if they were universal truths, when in reality they are applicable only to approaches that are similar to your own. As the saying goes \\"there are a thousand different ways to be profitable (and a million ways to fail)\\". If you are able to safely maintain a risk per trade > 2% consistently throughout your trading career, then you're a very proficient trader.
Those are just arguments/opinions. No truths. People should ignore what I say if what I have said doesn't work for them. People can trade whatever way they want. :3

Thanks. I still have much to learn. ;;;

On the other hand, you brought up your arguments very well in a professional way. I can tell you are an excellent trader with very sharp trading skills.
'For the market to work, it needs people who think that they can beat it.'
  • #32
  • Nov 1, 2013 9:43pm Nov 1, 2013 9:43pm
Quoting AlastorFate
{quote} Those are just arguments/opinions. No truths.




People can trade whatever way they want. :3 [/quote]And not get all bent out'ta shape when someone's opinion differs ?
When the Joker is in the deck.. fear not and play it well
  • #33
  • Nov 1, 2013 9:56pm Nov 1, 2013 9:56pm
"All that you need is in your soul. And you can do this if you try"

The very best to all !!


Inserted Video
When the Joker is in the deck.. fear not and play it well
  • #34
  • Nov 1, 2013 10:33pm Nov 1, 2013 10:33pm
Quoting AlastorFate
Nothing wrong with risk management. I will just say with the methodology I am using now to trade the market, limiting the position size to a small amount (2% risk or less) is unnecessary. It would be just a difference between a bigger profit and a smaller one.(...)
As a rule of thumb, I find trading something like 2% risk per trade HAZARDOUS, because almost invariably this will cause profitable systems to generate undesired high drawdowns. Just to give you an idea, we (my team) have this rule that says drawdown cannot exceed 15% at any given time. Our risk% per trade reflects this rule. As you can imagine, profitable systems that can trade >2% risk per trade while keeping low drawdown (say <15%) are a very rare exception. In fact, from a bunch there is only one strategy we trade with >2% risk. As Hanover pointed out, the ideas you've presented may work well within your trading framework, but they are not universal truths. That said, I find that presenting the idea "2% risk per trade is OK" as a maxim, especially harmful, a great disservice to new traders.

Anyway, what you're doing seems to be working well for you so keep doing it! Congratulations on current success and Good luck for future

EDIT:

Quoting AlastorFate
{quote} Those are just arguments/opinions. No truths. People should ignore what I say if what I have said doesn't work for them. People can trade whatever way they want. :3 Thanks. I still have much to learn. ;;; On the other hand, you brought up your arguments very well in a professional way. I can tell you are an excellent trader with very sharp trading skills.
All right. Unfortunate choice of header/expression on first post then.
"To hold, you must first open your hand. Let go." - Lao Tzu
  • #35
  • Nov 2, 2013 2:28pm Nov 2, 2013 2:28pm
Quote
At the end of the day like OP said if you have a proper system which is proven to be profitable it really doesn't matter what you risk so long as you can afford to take the losses on your account.
This is not true. Take a look at Kelly criterion.

I want to add myth that drives me nuts whenever I see someone say that:

Conspiracy theories about smart money, banks etc. manipulating prices to attack specifically retail trader positions.

Quote
That holy grail exists.
Buy low, see high, wtp?

Quote
That some martigale-based trading systems are superior to others.
I would agree if there wasn't that word "some". "Some" might as well be superior. e.g. anti-martingale for position sizes (increase position size for same setup trades after each winning trade and reduce position size after each losing trade). I don't have any proof that chance to win trade if last trade of the same type was a winning one, but I suppose it could work that way.

Quote
That either entries are more important that exits or vica versa
Realistically it is tough to compare these two things.
Quote
Entries and exits are nothing more than vehicles to adjust net position, and are therefore equally important.
Formally speaking I don't agree with this connlusion. Lets examine accelerator and break. For comfortable driving you need both, but can you really say that they are equally important? I would say that break is more important e.g. you could push your car.. but how are you going to stop it when it starts accelerating dgoing down the hill? (And you are more likely to stay alive if you are already driving.)
  • #36
  • Nov 3, 2013 2:06am Nov 3, 2013 2:06am
Quoting Slim Buffett
Quote
People can trade whatever way they want. :3


And not get all bent out'ta shape when someone's opinion differs ?
Being open to different perspectives is crucial to growth and breakthrough. Understanding and evaluation of differing ideas even though the ideas might seem contradict one another in ideology is what gives rise to even better ideas. Different styles (schools) of trading, different as they are from one another, they are all here to stay. Every single idea counts and serves as stepping stone to the next level.

It has nothing to do with shapes or looking good.
'For the market to work, it needs people who think that they can beat it.'
  • #37
  • Last Post: Nov 3, 2013 2:25am Nov 3, 2013 2:25am
Quoting vox dei
{quote} As a rule of thumb, I find trading something like 2% risk per trade HAZARDOUS, because almost invariably this will cause profitable systems to generate undesired high drawdowns. Just to give you an idea, we (my team) have this rule that says drawdown cannot exceed 15% at any given time. Our risk% per trade reflects this rule. As you can imagine, profitable systems that can trade >2% risk per trade while keeping low drawdown (say <15%) are a very rare exception. In fact, from a bunch there is only one strategy we trade with >2% risk. As Hanover...
Yes, respecting the risk is important. My approach may differ a bit from yours but our objectives are pretty much the same. Trading survivability and consistent profits in the long run.

And thanks. : )
'For the market to work, it needs people who think that they can beat it.'
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