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Isn't 2% per trade massively flawed?

  • #41
  • Mar 30, 2015 6:54pm Mar 30, 2015 6:54pm
Quoting Copernicus
{quote} PS I like many others was a victim of the CHF un-pegging recently and despite slippage with stops in place at 0.5% only managed to cop a 1.0% hit with this significant movement that was just a small blip on performance namely attributed to diversification.
Thanks for getting in touch. would you care to explain how you only had a 1% hit in simpler terms for my inexperienced-ness?
  • #42
  • Mar 30, 2015 7:08pm Mar 30, 2015 7:08pm
A margin call is not the end of your trading career, just a massive set back.
  • #43
  • Mar 30, 2015 7:20pm Mar 30, 2015 7:20pm
Quoting magelordmojo
A margin call is not the end of your trading career, just a massive set back.
In a black swan event like EURCHF, you could consider yourself lucky if you got a margin call.. several thousands in negative equity is more like it!
  • #44
  • Mar 30, 2015 7:26pm Mar 30, 2015 7:26pm
I guess that's true, but if you had stops in place surely wouldn't that stop the risk of losing negative equity?
  • #45
  • Mar 30, 2015 7:31pm Mar 30, 2015 7:31pm
Quoting magelordmojo
I guess that's true, but if you had stops in place surely wouldn't that stop the risk of losing negative equity?
No, that's the problem. A lack of liquidity and massive slippage made people have more than -2000 pips loss even with a Stop Loss in place.. I've seen several people up to -500K negative equity the brokers are now wanting..It's happened in the past, and events like this will happen again, hence this post - trying to establish effective prevention/minimising loss protocols. (Refer to post number 30)
  • #46
  • Mar 30, 2015 7:33pm Mar 30, 2015 7:33pm
Quoting flinx
{quote} Thanks for getting in touch. would you care to explain how you only had a 1% hit in simpler terms for my inexperienced-ness?
My standard stop loss on the approach I used was configured to limit my loss on a single trade to 0.5% of trade capital. For example on a $200K account, a single trade at worst would cost me a loss of $1000. I still place a stop at a position where the technique decides whether the trade is right or wrong, but the exposure is always limited to 0.5% or less.

With the CHF debacle despite having a stop in place at 0.5% the rapid price movement flew directly through the stop without executing but my next available out ....for the trade was a loss of 1.0% or double the risk exposure = $2000 (0.5% of the move was slippage). The whole sorry tale of the USDCHF debacle for me is described in the series of posts following this one and in particular this one.
  • #47
  • Mar 30, 2015 7:45pm Mar 30, 2015 7:45pm
Quoting Copernicus
{quote} My standard stop loss on the approach I used was configured to limit my loss on a single trade to 0.5% of trade capital. For example on a $200K account, a single trade at worst would cost me a loss of $1000. I still place a stop at a position where the technique decides whether the trade is right or wrong, but the exposure is always limited to 0.5% or less.
Interesting, thanks for getting in touch.. would that be 0.5% on a 15 pip stop, as well as on a 300 pip stop?
Meaning you must have had a pretty gigantic stop loss for all the slippage to only account to 1%? (spreads out 0.5% across more pips)

Does this not also mean for you to gain 1%, you'd have to make an enormous amount of pips - almost making it pointless unless you are trading in the millions?
  • #48
  • Mar 30, 2015 7:54pm Mar 30, 2015 7:54pm
Quoting flinx
{quote} Interesting, thanks for getting in touch.. would that be 0.5% on a 15 pip stop, as well as on a 300 pip stop? Meaning you must have had a pretty gigantic stop loss for all the slippage to only account to 1%? (spreads out 0.5% across more pips) Does this not also mean for you to gain 1%, you'd have to make an enormous amount of pips - almost making it pointless unless you are trading in the millions?
He said the key to his protectin was diversification. This is also the key maintaining/increasing profits(you don't lose profits at all like you are claiming and it definitely is not pointless). I recommend you read a lot of his post as he has shared studies statistically proving why and how diversification works.

Most people don't realize it because they are so short sided and never think big picture, but the market moves a lot. I mean a lot. Most pairs move on average 100+ pips a day easy... And 100's to 1000's of pips a month, month after months.
  • #49
  • Mar 30, 2015 7:55pm Mar 30, 2015 7:55pm
Quoting flinx
Interesting, thanks for getting in touch.. would that be 0.5% on a 15 pip stop, as well as on a 300 pip stop?
Yep that in principle is what it is saying. The pip size will vary but the trade risk % stays the same. It therefore as you suggests directly influences position size of the trade.


Quoting flinx
Meaning you must have had a pretty gigantic stop loss for all the slippage to only account to 1%? (spreads out 0.5% across more pips) Does this not also mean for you to gain 1%, you'd have to make an enormous amount of pips - almost making it pointless unless you are trading in the millions?
No, slippage rarely applies as for example a 0.5% stop loss on a single instrument for example often relates to say 200 pips or so. What is affected is the position size. This therefore significantly reduces the profit contribution from a single instrument but what I am looking for is overall total portfolio return given the benefits of the risk management windfall this approach gives me.

It is a diferent way to view things I know, but while you may make a pitiful return per annum on a single instrument, a diversified portfolio allows to to summate the individual returns for each instrument resulting in a very powerful and profitable approach with relatively low risk.

PS...... Hi Sis :-)
  • #50
  • Mar 30, 2015 8:21pm Mar 30, 2015 8:21pm
Quoting Copernicus
{quote} Yep that in principle is what it is saying. The pip size will vary but the trade risk % stays the same. It therefore as you suggests directly influences position size of the trade. {quote} No, slippage rarely applies as for example a 0.5% stop loss on a single instrument for example often relates to say 200 pips or so. What is affected is the position size. This therefore significantly reduces the profit contribution from a single instrument but what I am looking for is overall total portfolio return given the benefits of the risk management...
I 'think' I have a basic understanding..
The post regarding different types of stops was very helpful for me. I was wondering if you have any links to any posts regarding how exactly "Diversification of instruments and low trade risk per trade" works? (Point 4 on your post)

Would be interested in learning and adopting something similar potentially.
  • #51
  • Mar 30, 2015 8:25pm Mar 30, 2015 8:25pm
Hi flinx

I will have a look tonight (my time) and find you some links that might help explain it and post them in this thread. Before you get the benefits of diversification however, you need to ensure that the approach has a chance of positive expectancy. Unfortunately there is no way around the fact no matter what you do if your technique does not have a statistical edge. Diversification only works in managing risk exposure while delivering profitability where expectancy is +ve.

C
  • #52
  • Mar 30, 2015 10:25pm Mar 30, 2015 10:25pm
Here you go flinx.

This post pretty well sums it up.

In my opinion the hardest part of the trading game is to find a strategy that stands the test of time and has a positive expectancy. Once you have this, the diversification part and money management technique is pretty easy and straight forward.

The game here is to find a strategy that is sustainable in the long run across any trading instrument of any asset class and across any extended timeframe of say 5 to 10 years of duration plus.

The easy choice for me then was to adopt a trend following strategy as we have 200 years or so of data that confirms that trends are here to stay across asset classes. This excellent research was brought to my attention by Sis.

The approach I now use is detailed here in this recap.

I hope this helps.

C
  • #53
  • Mar 30, 2015 10:27pm Mar 30, 2015 10:27pm
Good thread and very useful discussion.

Everything in this business would seem flawed because volatility created by margin trading never lets us keep a balance between risk and reward. A currency pair may move only half a percent, but with leveraged trading it is a giant move. No matter what you do, you cannot create a correlation or fixed ratio between risk and reward while trading with leverage.

It is very easy for people like Mark Douglas to suggest probabilistic trading approach with predetermined risk and reward targets for each trade, but risk stemming from exceptions will always be much greater than any windfall profits. There are so many br0ker tactics working against us. Variable spreads in one such tactic. You lose both ways if spreads get widened.

One million dollar question is what to do in such a situation? If we try to play safe, return gets ridiculously small. If we trade for decent profit, either risk becomes obnoxiously high or chances of success become minimal.

A clue to the solution can be found by studying what topmost currency traders do. I am not talking about how financial institutions and their hired traders trade today or people like Jesse Livermore and JP Morgan did in their times , but topmost traders of present time.

There is and cannot be such thing as consistent profits in this market. One can be consistently profitable for years, month after month, but this is sheer luck because structure and behavior of this market does not support this kind of profitability.

One has to think beyond risk per trade, trends, bars and pips to develop a decent trading strategy and tools. Whoever great trader started with scalping and day trading finally settled on swing trading.
The Thief of Wall Street
  • #54
  • Mar 31, 2015 2:05am Mar 31, 2015 2:05am
Quoting flinx
Hi all, Just a thought: People all over the web say only risk 2% per trade which although sounds good, surly is massively flawed, for example: I enter long with a 20 pip SL, risking 2% of my account. There is a black swan event/caught in news event causing slippage (which do, and will happen) I get slipped for lets say... 200 pips (nothing compared to EURCHF recently) And now, 20% of my account is gone? Or even worse, in EURCHF case, you are now in massive negative equity. Wouldn't a better approach to designate a 'realistic worst outcome' say of...
Yeah... absolutely correct.

You can also reserve space at cemetery and start digging before it is too late.
  • #55
  • Mar 31, 2015 3:46am Mar 31, 2015 3:46am
Quoting flinx
{quote} Guaranteed Stops are not really a viable option I don't think, especially as they cost so much. How do you go about reducing the risk? Similar ways I've outlined in post 1?
They DO work ! Yes -you pay more. The alternative is to get hit by a "Black Swan."

Other ways to mitigate risk -don't use leverage.

You cannot have your cake and eat it -so accept you are open to the Black Swan event and either (1) pay to mitigate that risk, or (2) take your chances in the open market.
If you cannot make more than the extra pip for a guaranteed stop then you should not be trading but people in the Uk have been using them profitably for years.
every Saint has a past. Every Sinner has a Future
  • #56
  • Mar 31, 2015 4:27am Mar 31, 2015 4:27am
Quoting flinx
Hi all, Just a thought: People all over the web say only risk 2% per trade which although sounds good, surly is massively flawed, for example: I enter long with a 20 pip SL, risking 2% of my account. There is a black swan event/caught in news event causing slippage (which do, and will happen) I get slipped for lets say... 200 pips (nothing compared to EURCHF recently) And now, 20% of my account is gone? Or even worse, in EURCHF case, you are now in massive negative equity. Wouldn't a better approach to designate a 'realistic worst outcome' say of...
Actually answer is not "DONT USE HIGH LEVERAGE". Its the opposite.

Get a broker with high enough leverage so that you only fund them with 10% of your equity to trade the lotsize that fits your whole account.

For example if you have $1000 to trade with, that means by risking 2% per trade on 20 pips you are trading 1 mini (10k) lot. So get a broker with 400/500 leverage and you only need some $20-$40 to trade that lotsize in which case $100 are quit enough.

Fixed it for ya.
.
  • #57
  • Mar 31, 2015 4:44am Mar 31, 2015 4:44am
Quoting nasir.khan
{quote} Actually answer is not "DONT USE HIGH LEVERAGE". Its the opposite. Get a broker with high enough leverage so that you only fund them with 10% of your equity to trade the lotsize that fits your whole account. For example if you have $1000 to trade with, that means by risking 2% per trade on 20 pips you are trading 1 mini (10k) lot. So get a broker with 400/500 leverage and you only need some $20-$40 to trade that lotsize in which case $100 are quit enough. Fixed it for ya. .
Don't worry about the small print in the brokers agreement relating to negative equity...they never litigate to recover this amount.....or do they?
  • #58
  • Mar 31, 2015 7:15am Mar 31, 2015 7:15am
Quoting Copernicus
{quote} Don't worry about the small print in the brokers agreement relating to negative equity...they never litigate to recover this amount.....or do they?
Is there a documented case of a client made to pay? (there might be but i have;t heard). Just go with ones that do offer protection against neg balance.

and honestly SNB was not a black swan event.

A terrorist attack or an earth quake is a black swan event and those slip you like 200-300 pips at most.

You had ECB constantly pushing the euro down and announcing more QE in next week, you knew the schedules speech timing of SNB, you knew that shorting chf was never worth it interms of Risk:reward ratio.

if anyone was long any chf pairs at that time and think they had a black swan... they had it coming.

Though i will make the point that every time price drops a few hundred pips without any impending signals (very rare) there are people who blow there accounts and that's unfortunate. But thats the risk we take and thats one of the cost of doing business. You would want to mitigate those risk as much as you can but you can't just build you whole trading plan around them and risk 0.010% on a trade.

We all get sick, have accidents, get some income hole here and there and we all die one day. But we dont spend our lives planing for those times do we?
.
  • #59
  • Edited 8:39am Mar 31, 2015 8:21am | Edited 8:39am
Quoting Copernicus
Here you go flinx. This post pretty well sums it up.
Thanks for the input and advice.
I have found a trading strategy that gives me the edge and am confident it will do in years to come.
So it seems you only risk 0.5% however trade a large amount of pairs which increases the returns overal? Is that correct?

If so, isn't that just trying to solve the problem highlighted by Chicky?

"One million dollar question is what to do in such a situation? If we try to play safe, return gets ridiculously small. If we trade for decent profit, either risk becomes obnoxiously high or chances of success become minimal."

Eg, just trying to increase the amount of pips recieved increases the returns when trading at such little volume. Which is obviously not a logical approach as yes, you are making the same, but you are having to make a lot more pips?

EDIT - I also noticed you only got slipped about 400 pips... how did you manage that when most got 2000+?
  • #60
  • Mar 31, 2015 8:23am Mar 31, 2015 8:23am
Quoting turnip15
{quote} If you cannot make more than the extra pip for a guaranteed stop then you should not be trading but people in the Uk have been using them profitably for years.
I've heard not so good things about MM's... let alone Guaranteed stops on this forum which was the first thing to put me off. Apparently they only win when you lose and that doesn't really sound a positive thing?
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