Value of Time, Opportunity vs Risk; Exit, PSize all that Jazz | Forex Factory

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Attachments: Value of Time, Opportunity vs Risk; Exit, PSize all that Jazz
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Value of Time, Opportunity vs Risk; Exit, PSize all that Jazz

  • #1
  • First Post: Mar 30, 2015 12:57pm Mar 30, 2015 12:57pm
Experience of Events is our Best Educator, yet it is also the most 'expensive' and harsh teacher at the same time.

Imagining myself as if I am once again a newly starting, inexperienced trader I feel deep solidarity with the problems and travails which a beginner always has to deal and cope with.

This is my more then modest attempt to share some lessons of my Experiences in Trading and other, more general observations and analysis, that may be related both to trading as well as to other areas.
So to Help and to Share with Other traders my and their views, experiences and thoughts on most central aspects of trading is one of the goals here.

As the title of this thread suggests, another one of the intended goals will be to develop a meaningful and hopefully useful
discussion and analysis of Exit strategies, Position Sizing, Take Profit strategy and Evaluation of Risk of a trade as following from these decisions of a trader.
Siddhartha G
  • #2
  • Mar 30, 2015 1:12pm Mar 30, 2015 1:12pm
A Little Treasury of Knowledge

Many Traders have educated and helped others here in FF by sharing their Experiences, thoughts and wisdom in many threads and posts. I feel strong appreciation of their
sharing of such treasures.
This Treasure of Experience and Wisdom is however more often than not slowly "sinking" into the depths of Huge threads and Multitude of forums here.
So what is in order is to keep and preserve some of the outstanding pearls of knowledge. So here we will Establish a Treasury a Hall of Knowledge, Experience and Personal Views.
This Post will be regularly updated to serve as a directory of posts and threads that would seem more valuable or elegant or useful, or some other special reason to create a permanent link preserving their accessibility to all.
Siddhartha G
  • #3
  • Edited 3:44pm Mar 30, 2015 1:30pm | Edited 3:44pm
Since at this very moment trading, and at the same time being involved in a handful of other as attention-occupying tasks and matters, I have to make an intermission in writing. However, still intending to create a growing knowledge I will start by invitation to all traders and readers here. Before bringing my own views and analysis let us hear from You:

1 Why to Take-Profit in trading ? At which size of Profit ?
In other words - what are the Reasons and the Measures - as YOU see them,
for Exit in a PROFITABLE POSITION; i.e. limiting the profit growth EVEN WHEN IT IS STILL INCREASING ?

2 Why to Stop-Loss in trading? At which size of Loss ?
In other words - what are the reasons and Measures - as YOU see them,
for EXIT in a LOSING POSITION; while there STILL EXISTS A POSSIBILITY OF REDUCTION IN LOSS ?

Surprisingly the most basic Reason both for Taking Profit and Stopping Loss is the Same:
This Reason is ... the same

PRESERVING CAPITAL !!!

or its other name

LIMITING THE RISK.


Let us expand and explain upon that.
Siddhartha G
  • #4
  • Mar 31, 2015 1:00pm Mar 31, 2015 1:00pm
Quoting Isingh
Since at this very moment trading, and at the same time being involved in a handful of other as attention-occupying tasks and matters, I have to make an intermission in writing. However, still intending to create a growing knowledge I will start by invitation to all traders and readers here. Before bringing my own views and analysis let us hear from You: 1 Why to Take-Profit in trading ? At which size of Profit ? In other words - what are the Reasons and the Measures - as YOU see them, for Exit in a PROFITABLE POSITION; i.e. limiting the profit...
Hi Isingh:

As far as trading is concerned, I think the most important question to ask first is this one: Does my trading system have an edge?

If the answer is yes then you can start looking for ways to improve your stop and/or exit strategy. Where to put the stop depends on your trading rules of course. The problem is that if they are not clearly defined from the beginning, the trader will never know where/when to exit the trade exactly.

It is almost impossible to trade if the trading rules have not been clearly defined and tested with historical/live data.
Each losing trade is an opportunity to learn
  • #5
  • Edited 2:13pm Apr 8, 2015 1:44pm | Edited 2:13pm
Quoting Isingh
Since at this very moment trading, and at the same time being involved in a handful of other as attention-occupying tasks and matters, I have to make an intermission in writing. However, still intending to create a growing knowledge I will start by invitation to all traders and readers here. Before bringing my own views and analysis let us hear from You: 1 Why to Take-Profit in trading ? At which size of Profit ? In other words - what are the Reasons and the Measures - as YOU see them, for Exit in a PROFITABLE POSITION; i.e. limiting the profit...
NEVER BUY HIGHER RISK THAN SAFE LIMIT. Period

Consider why doesn't every trader buy 10 full contracts on every position he opens ? He could earn more potentially - couldn't he ?
The Limiting factor is RISK -
the COST OF RISK (Even if it will NOT be realized !!!) IS TOO HIGH - IF ONE ENTERS TOO LARGE OF A POSITION.

_________________________________________________________________________________________________________
Consider Problem 2:
Suppose an Account A with 10000 $ in equity(10 K) has
Profited 200 $ from One position trade
and at same time -

Account B with 1000 $ in equity (1 K) has
Profited 200 $ from One position trade with same position size as Acc. A, same pair as Acc. A.
Assume that further movement of price is Calculated Expectation of 50% UP - 50% Down - EQUALLY FOR BOTH POSITIONS

At this second Both account-traders decide on the Positions:
EXIT or STAY IN ? BASED UPON THE CALCULATED RISK.

And the actual Records show that:
10,000 $ Account STAYED IN
and
1000 $ Account EXITED.

The question is now
How is the RISK COST and RISK LIMITATION involved in the TAKING OF PROFIT ?
Siddhartha G
  • #6
  • Apr 8, 2015 2:14pm Apr 8, 2015 2:14pm
EXIT or STAY IN ? BASED UPON THE CALCULATED RISK.

And the actual Records show that:
10,000 $ Account STAYED IN
and
1000 $ Account EXITED.

(and Pahaleaase ! don't play little pupil games here - i.e. "it could be the opposite". I "surrender" immediately.) And now to the DEEP PROBLEMS)

The question is now
How is the RISK COST and RISK LIMITATION involved in the TAKING OF PROFIT ?
OR RATHER THE SIZING OF TAKE PROFIT ?
Siddhartha G
  • #7
  • Apr 8, 2015 2:15pm Apr 8, 2015 2:15pm
Quoting Isingh
EXIT or STAY IN ? BASED UPON THE CALCULATED RISK.
Your stop and target must be determined by your system, not by the risk you are willing to take, even though the size of your stop should remain small at all times (2 to 3% of trading capital in most cases).
Each losing trade is an opportunity to learn
  • #8
  • Apr 8, 2015 2:18pm Apr 8, 2015 2:18pm
Quoting EarnPipsNow
{quote} Your stop and target must be determined by your system, not by the risk you are willing to take, even though the size of your stop should remain small at all times (2 to 3% of trading capital in most cases).
Thanks for coming to my FAr-Out Hobbit Cabbin Mr. Greed!
You ARE WELCOME!
AND EXCUSE ME FOR A LITTLE TRAP FOR YOU personally I have set here:

I expected your consistent reply - so THE SETTING OF THE PROBLEM IS TRULY
FOR SYSTEM BUILDER
So Let Us Consider ACCOUNT SIZE Eq

FUnction: TkPRFT( Probab Reversal, Eq)
from here onwards shorthanded PrRev, Eq
Siddhartha G
  • #9
  • Edited Apr 9, 2015 6:08am Apr 8, 2015 2:25pm | Edited Apr 9, 2015 6:08am
Claim to be Elucidated:

The Dependence of TkPRft upon the Account Equity is MONOTONICALLY INCREASING, though most sensibly NON-Linearly.
In fact it is proportional to Log(Equity)

Simply said: when your account Grows by some multiple - you should Increase the position size
.MUCH MORE SLOWLY , i.e. by smaller and smaller multiples.

Let's say e.g. - your account has grown by 1.5 times - then increase your Risk size by 1.18 times.
Again - when your account grows by x2 times - then increase your Risk by x1.3 times.

Now Risk has no one unique simple formula.
Just for prelim. demonstration purposes let us assume initially that
RISK = POSITION-SIZE x STOP-LOSS
which means that
Multiple Position x Multile SL = C x Log(Multiple Equity)
Where C is some specific constant number.

Then when you Double your account you can change both PSize and SL keeping the PRODUCT of the Multiples (of these increases) at 1.3.
This is just an ad-hoc choice of constants.
But the main idea is general: when account grows linearly - grow your Risk much more slowly - means Logarithmic-ally.
Attached Image (click to enlarge)
Click to Enlarge Name: Take Profit Stop Loss Kelly graph.jpg Size: 24 KB
Siddhartha G
  • #10
  • Edited 3:25pm Apr 8, 2015 2:39pm | Edited 3:25pm
The Deepest theory of Risk for Investment - unsurprisingly by a Mathematical Fund Manager-Investor + Very Famous Mathematician
All of those ARE ONE MAN !
Who is HE ?

Actually there were two of them (both have been involved in funds and first and foremost - mathematical research) who developed the formula for Risk and Take Profit
The Computer PIONEER GIANT OF A Renaiscance Man was

CLAUDE SHANNON(Link) who also invented the whole of Information Theory

and the Investing-Risk Methods were developed by the Original Inventor (and Winner, mind you)
"BEAT THE DEALER" author (see books) who actually made his First Million or Two By Beating Casinos in Vegas and Atlantic City
(in the Fifties - how Much would it be in today's dollars taking inflation ?..)
.
And then proceeded to foundation of successful multi-Billion Investment Fund
Edward Thorp (Link)


THE KELLY CRITERION FOR OPTIMAL INVESTMENT SIZE
_______________________________________________________________
Their theory has one Remarkably simple and accessible investment-size result.
They called it the Kelly Criterion.
http://epchan.blogspot.co.il/2010/04...ing-kelly.html

Here I have attached this pdf to the post

http://www.eecs.harvard.edu/cs286r/c...terion2007.pdf

Zero Risk of Ruin in Kelly strategy (link)

Kelly Formula for Forex
Attached File(s)
File Type: pdf Thorpe_KellyCriterion2007.pdf   537 KB | 408 downloads
Siddhartha G
  • #11
  • Last Post: Apr 12, 2015 5:38pm Apr 12, 2015 5:38pm
This is not an integrated part of this thread and will never be discussed by me in FF.
As the British say " the proof is in the Pudding", while the Chinese teach from ancients "The name that can be pronounced is Not the True Name".

The meager leaked details in this doc constitute very important information for any citizen of the world, but when meditated and thought about properly are obvious information for every market participant; any and all markets.
Attached File(s)
File Type: pdf SECRETIVE World-Bamk BIS.pdf   384 KB | 444 downloads
Siddhartha G
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