Lot Sizing (Money Management System) - Which one you prefer? - page 3
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Enigma71fx: ...And there is still one more very important yet simple point which people often overlook - the above rule of limited % risk per trade has another important implication. With 2% risk per trade, after 10 losses in a row you are 20% down from you initial capital, but it is still possible that you will fully recover as you need 25% gain to do that - and this is quite close to the loss that you incurred. 25-30% is a boundary value of drawdown which still gives some chances of recovering - but below 30% drawdown, there is usually no chance. See below table for a simple example...
By recommending 2%->3% risk per trade, there's an assumption that the trader has an Edge of 2%->3%. If their actual Edge is less then 2% then they'll be Over-Betting according to Kelly. This would cause them to suffer Deeper_Drawdowns or just hit Ruin. A simple example of this would be someone who's using a Losing system. Like Open_Positions at Random with 10-pips (Sl & Tp). Telling him to Risk 2% on his 10_Pips wouldn't help at all.
Whats the Optimum% for Kelly upon a Losing_System..... 0% or simple put ... do-not trade. Kelly would work if there was such a thing as Fixed_Probabilities within Trading but there isn't. However, telling someone 2% would do the trick is also mis-leading. If someone performs a Back-test with fixed lots ... and is wondering which Money-Management or LotSizing could they use on this (Identical) back-test to produce the best result. The Answer would be Full-Kelly% ..... Period.
If all their Statistics like WinRate and AverageWin holds true in the future then Yes ... Kelly will be the %Risk_Of_Choice instead of 2%.
One last note: allot of traders like to perform small sample sizes and base Kelly upon the stats they gather from this small back-test. This IMO is where the whole Kelly (I hate you) with traders comes from. Do a proper back-test .. on all Data, Time Length and Symbols. Now if you can still get a positive Kelly_Bet or a Winning System after that ... then I tip my Hat to you.
Wrong. You only have control over the StopLoss and TakeProfit. You have NO control over the Win-Rate in your example. Do-not assume you're guaranteed 40% wins.
Further more the Sl && Tp are also not guarantee because of stuff like Weekend_Gaps and News_Gaps. Also..... factor in your Costs of doing business.
if you have method like price action trading http://www.learntotradethemarket.com than it is possible to take profit 60 ,40 ration
Interesting discussion, however:
1. I'd love to see someone sizing his position using Kelly criterion and not going bankrupt in the long term - as Kelly criterion usually results in double-digit figures of recommended % risk per trade.
2. Mr4Rana: As I have already said, using fixed lots is far from optimal, as:
- you will never reach your earning potential while winning (as 300$ might become 0.1% or 0.01% of your capital, and such trades won't have any considerable impact on your earnings)
- you will take way too much risk when losing (as 300$ might become 10% or 20% of your capital and you could wipe out your account completely before you even realize it)
I had told you risk per trade that you are comfortable with ... First you need to decide how much money in dollars (or whatever your national currency is) you are COMFORTABLE WITH LOSING on the trade setup. This is not something you should take lightly. You need to genuinely be OK with losing on any ONE trade, b cz you could indeed lose on ANY trade; you never know which trade will be a winner and which will be a loser.
-Next, you need to enter the number of lots or mini-lots that will give you the $ risk you want with the stop loss distance you have decided is the most logical. One mini-lot is typically about $1 per pip, so if your pre-defined risk amount is $100 and your stop loss distance 50 pips, you will trade 2 mini-lots; $2 per pip x 50 pip stop loss = $100 risked.
-The three steps above describe how to properly use position sizing. The biggest point to remember is that you NEVER adjust your stop loss to meet your desired position size; instead you ALWAYS adjust your position size to meet your pre-defined risk and logical stop loss placement. This is VERY IMPORTANT, read it again.
One simple rule…if you can’t go to sleep at night feeling comfortable and at ease with the trade(s) you have on…
1) You’re either trading too big of a position size / risking too much at your stop level
2) Or, you have no idea what you’re doing and lack confidence in your trades
I am also trader and I learned from here http://www.learntotradethemarket.com/ and everything is free here and I like to share what I have learned here ..
I just want to help all traders .........
I get the following numbers:
Note that both the 2% and Kelly will out perform the fixed_lots (due to compounding) as the number of trades increases (assuming the stats stays the same). The Kelly is already out-performing the fixed_lots @ just 25 trades.
Also highlights that more isn't necessarily better as the 25% over-betting performs the worse on this small sample.
Well it'll make for a dull conversation if everyone agrees. From what I've read within articles on this forum, machine learning systems add to the complexity but do-not produce any additional benefits compared to traditional methods. But I guess you'll dis-agree with that too.
https://www.mql5.com/en/articles/525
Sorry to disagree again (it is clear that you are uncomfortable with this), but note, this article is talking about Neural Networks applied to historical prices, this is just one limited algorithm for machine learning applied to the area of finance, please take a look here https://en.wikipedia.org/wiki/List_of_machine_learning_algorithms for a brief overview of the broad spectrum of this area.
Also, we are required to use only the price data and volumes of instruments? We can not cross the most varied techniques of machine learning with the most varied market data?
I may be wrong, and I'm always open to learn and discuss about, but my vision is that by joining deterministic and probabilistic money management factors and most varied techniques of machine learning with the most varied historical and real time market data you will probably discover new market/economics/financial/mathematics /physics laws that are not yet written, and also double check any other written method, like Kelly and even Martingale.
And to prove this joining, as I stated before, we just need discover and hard test it using backtesting, forward testing and real testing.
Anyway, I agree with you that this is not the topic for such discussion.
Well taking 2% risk per trade with 1:1 reward to risk, you can increase your account by 10% per month with as low as 5 trades (considering all are winners).
Considering 20 trading days you would require to trade only 25% of the time.
At 1:2 Risk:Reward you can get 12% in as low as 3 trades with 2% risk per trade. Best case scenario- You need to trade only 10% of the trading days
At 1:3 Risk:Reward you need to have 2 winning trades with 2% risk, Best case scenario- trading on only 6% of the trading days
We all find some sure shot trades in our analysis once every few days. Also some dicey ones and some iffy too. What is needed to have tremendous self restrain with little skill and everyone can win. I have tried learning from my experience too and learning everyday. But one thing for sure, I don't want to loose more than 2% on my mistakes.
Happy Trading!!
It certainly sounds interesting and I'll encourage you to pursue your interest because this is how new discoveries are made. Hopefully we'll all benefit from your findings in the future by sharing ideas.