The HOLY grail involves..

If you don't know where to start, start here! Don't be afraid to ask questions.

Moderator: moderators

speed26
rank: <50 posts
rank: <50 posts
Posts: 38
Joined: Tue Mar 29, 2011 6:26 pm
Reputation: 0
Gender: None specified

Postby speed26 » Wed Jan 02, 2013 12:23 pm

So ive been thinking a lot about what Xtreme says 'a good system can profit buying in a bear market and selling in a bull market'...

Question is:

When "buying in a bear market", is this EXCLUSIVELY buying is there some kind of selling going on aswell?

If only buying in a bear market, is one continually averaging down?

How does one decide to take profits; grids, s/r,...?

Please add www.kreslik.com to your ad blocker white list.
Thank you for your support.

xtremeforex
rank: 50+ posts
rank: 50+ posts
Posts: 114
Joined: Mon Nov 16, 2009 7:43 pm
Reputation: 0
Location: Toronto
Gender: None specified

Test #2

Postby xtremeforex » Thu Jan 03, 2013 9:22 pm

Sorry people, I was on holidays.

In actual practice, I don't blow the entire account on purpose and then refill it, the idea was to illustrate to learn how to trade without a stop-loss such that you familiarize yourself with the size of trades and/or leverage you should be using so that you can avoid blowing out the account.

It is the discipline and risk management you develop all while not using a stop loss that is important. When you learn to trade this way, when you do blow out your account, by that time you would have already moved your profits elsewhere (see my thread on black-swan) - because there WILL be a time when that DOES happen (black-swan events) and you will be welcoming it with open arms.

Ok so a few more questions to think about:

Note: Whenever *I* say draw-down. I'm referring to a floating-loss.

TEST #2

1.

Scenario A
-------------
Say you have $10,000. There is a road, that road splits into two other roads, we don't know where each road will end up. But we do know that. One road will end up in you losing all of your $10,000. The other road will lead you to now having altogether $20,000. What is the probability of selecting the profitable road? Should you embark on selecting a road or turning back?

Scenario B
-------------
Now lets use the same example. One road will lead you to losing all of your $10,000. The other road will lead you to now having $50,000. What is the probability of selecting the profitable road? Should you embark on selecting a road or turning back?

How do these two scenario's differ? What is the probability of selecting the right road in each scenario? Would your choice differ from scenario 1 compared to scenario 2? When do probabilities start to matter in your decision making? When do they start - not - to matter?

2. Suppose you had a system, that allows you to grow up to 1000%/year but the problem is, that system during perfect backtesting experiences a -70% draw-down - but does - recover from it. Is this system too RISKY? If yes, Why? If not, Why? What does a 70% draw-down mean? If you - wanted - to fix this, how could this be fixed easily? (drawdown reduced without using a stop-loss).

3. Suppose you have a system that is able to gain 300% in a few months (and with no stop-loss) but suddenly blows up due to a mini-black-swan style event and makes your account go back to zero. What strategy or modification in strategy would you use to not lose it all? Would you consider this a bad strategy and discard it because one-day you know it will all blow-up (i.e. through back-testing) and send you back to square one?

4. Say you have $10,000. You use a stop-loss and set your trade risk to 2% per trade and you lose 4 trades consecutively. Is this better or worse than not using a stop-loss with a RED 8% draw-down? Which one *feels* better psychologically? Which one is worse in *reality* & why?

5. If we know that the market is mean reverting. When the market moves farther away from the mean, what happens to the probability of that trend continuing as it continues farther away from the mean? How does this affect your buying/selling decision? What happens to the probability of trend continuation with trends that go away from the mean and trends that go toward the mean? Which trends (away from mean or toward mean) is better to follow? Say a trend turns around and goes back to the mean now, when that trend crosses the mean, what happens to the probability of that trend continuing?

(I will get into the different time frames later, since we know there are different trends in all time frames (but price the same in all frames), lets assume for now any time-frame that you want to think about.)

6. Say you're flipping a coin. And the following outcome is this.

H H H T T H H H H ?

What is the next outcome ? "Education" says the probability of heads or tails is 50% and independent of past outcomes i.e. they should be equal chance no matter what, however why would it still be BETTER to guess Tails over Heads? Do I lose anything if I do that?

If the probability of heads or tails is 50%. Why is it that in real life, it is possible to get the series of outcomes above, why doesn't it look like H T H T H T H T H T instead?

Why is believing the probability of heads or tails 50% flawed? Flip a coin and try it, it is unlikely you will get H T H T...etc combination. However, how does the TRUTH of 50% probability of heads/tails connect to mean-reversion?

How can this be integrated in your RISK management? Notice that I didn't say trading (buy or sell direction) decisions.

I will post more interesting questions to think about (trust me it gets better) but ONLY after ALL these questions are answered by somebody. I don't want to feel like I'm wasting my time, otherwise I assume it's going on deaf ears.. If you choose to answer them, please reply back in the numbered format.

Xtreme
Last edited by xtremeforex on Fri Jan 04, 2013 1:19 am, edited 2 times in total.

xtremeforex
rank: 50+ posts
rank: 50+ posts
Posts: 114
Joined: Mon Nov 16, 2009 7:43 pm
Reputation: 0
Location: Toronto
Gender: None specified

Postby xtremeforex » Fri Jan 04, 2013 1:09 am

Speed26:

A- on test #1! :)

"Which SITUATION is better to be in and WHY?"

When trade closed in profit we 'realized' the profit (balance) as opposed to have it floating in the open market, which could turn around back into a loss.

Taking profits is a better position to be in, providing theres a solid underlying reason as to WHY to take profit at such point.

"Which EQUITY and PL is more STABLE (less at risk)?"

The one we took profit on, for reasons above (could turn into a floating loss).

-----------------------------------------------------------------------------


You answered your first question to me in your answer to the second question.

xtremeforex
rank: 50+ posts
rank: 50+ posts
Posts: 114
Joined: Mon Nov 16, 2009 7:43 pm
Reputation: 0
Location: Toronto
Gender: None specified

Postby xtremeforex » Fri Jan 04, 2013 5:15 am

ESPIPS and ALL:

Sorry if I came out sounding aggressive. When I re-read that it seems that way.

Changing on the fly means you're not sticking to the system. Oddly enough, I do agree that there are times where going off the plan is important i.e. discretion.

I agree that Humans are still more intelligent than computers, computers just follow the prescribed routine with no deviation. However, competent programmers can program robust intelligence in their system, it's difficult but not impossible. I also want to make the distinction that having a robust intelligence system doesn't necessarily mean the trading strategy is complicated too.

However, the difference becomes how far off the plan do you go and how often does this happen? If it's too often, the strategy has a problem.

What I am advocating is an automatic system with minor human discretion, so I guess it is semi-automatic.

An example of human discretion that is allowed in my system is NEWS. Because my system can be in the market 24/7 including Sundays, news events at all hours can cause abnormal spikes in regular market behaviour that would appear random for the bot (since the bot doesn't know what/why its' happening suddenly). My bot does not like this.

I'm back on Kreslik to develop ways to incorporate NEWS LOGIC to stop the bot and - avoid - the news. Since I'm not aware of any "automatic" way of getting news data/feeds that could be 'wired' into my system, I rely on myself manually to stop/pause the system (for sudden breaking news) or manually enter times in advance for news releases and wait out the news before resuming again. This could be automated if there was some kind of news signal that could be fed to the bot. Another issue with that would be how reliable and thorough this news source is. It is the damn news that is stopping it from being completely hands-free and operating 24/7.

What I do is get the timings of "major news" from the Dukascopy's videos and economic calendar and act accordingly - tell the bot avoid trading then. I have programmed logic where the bot will try its' best to close out any positions and have zero net exposure when the news event arrives. I also watch/read Television and Internet news for any breaking news and I've gone the extra step to even attempt to read/watch foreign news directly from foreign news websites with varied success. I can handle French but Japanese..nope! The bot requires me to manually enter "times of avoidance."

Luckily, I don't need a regular job any more so I shouldn't really complain because this task is simpler than it sounds. But for anybody wondering. I have kept my regular job, leaving would be a heart-break for my students, especially if they found out it was for "more money." Being a Physics teacher is now a social responsibility not a career. I believe that I am a rare positive outlier in this profession, that's why I stay. People with my qualifications would laugh at teaching HS. I take my HS students to compete in the F.I.R.S.T. robotics competition every year, who would do that if I leave?

When away from my "bot computer." I control my news inputs, ON/OFF/PAUSE to the bot on my phone through a web-site (coldfusion based) that passes the input through a simple database (SQL) that is read continuously by the bot on every tick. However, I've trained my retired father to do most of this now, as I rather not be preoccupied at school.

I think for people that are back-testing, they really need to consider the major effect news releases can make to their strategy. News releases can behave like a mini-black-swans. Given that news releases are "predictable" in some sense when forward-testing, it is possible to avoid these mini-black swans in real-life/forward-testing that are difficult to avoid in a back-testing over years of data (since you don't have record of what/when those news releases occurred), this lack of info could easily disturb the back-test results of what may actually be a good/decent system.

For the most part, I've developed/modeled my system so that it *could* trade through the news unattended - but only until you go live - do you realize how just stopping this risk altogether is better on your psychology.

I believe at the end of the day, most successful automated systems will not be 100% fully automatic with no discretion. I believe, eventually people are hired for these situations and human intelligence can not be fully replaced - yet.


EDIT: I've managed to fix the news situation. We'll see how it goes.
Last edited by xtremeforex on Fri Jan 11, 2013 5:30 pm, edited 1 time in total.

JogieFX
rank: <50 posts
rank: <50 posts
Posts: 8
Joined: Tue Jan 08, 2013 4:51 pm
Reputation: 0
Gender: None specified

Re: Test #2

Postby JogieFX » Tue Jan 08, 2013 7:07 pm

xtremeforex wrote:Sorry people, I was on holidays.

In actual practice, I don't blow the entire account on purpose and then refill it, the idea was to illustrate to learn how to trade without a stop-loss such that you familiarize yourself with the size of trades and/or leverage you should be using so that you can avoid blowing out the account.

It is the discipline and risk management you develop all while not using a stop loss that is important. When you learn to trade this way, when you do blow out your account, by that time you would have already moved your profits elsewhere (see my thread on black-swan) - because there WILL be a time when that DOES happen (black-swan events) and you will be welcoming it with open arms.

Ok so a few more questions to think about:

Note: Whenever *I* say draw-down. I'm referring to a floating-loss.

TEST #2

1.

Scenario A
-------------
Say you have $10,000. There is a road, that road splits into two other roads, we don't know where each road will end up. But we do know that. One road will end up in you losing all of your $10,000. The other road will lead you to now having altogether $20,000. What is the probability of selecting the profitable road? Should you embark on selecting a road or turning back?

Scenario B
-------------
Now lets use the same example. One road will lead you to losing all of your $10,000. The other road will lead you to now having $50,000. What is the probability of selecting the profitable road? Should you embark on selecting a road or turning back?

How do these two scenario's differ? What is the probability of selecting the right road in each scenario? Would your choice differ from scenario 1 compared to scenario 2? When do probabilities start to matter in your decision making? When do they start - not - to matter?

2. Suppose you had a system, that allows you to grow up to 1000%/year but the problem is, that system during perfect backtesting experiences a -70% draw-down - but does - recover from it. Is this system too RISKY? If yes, Why? If not, Why? What does a 70% draw-down mean? If you - wanted - to fix this, how could this be fixed easily? (drawdown reduced without using a stop-loss).

3. Suppose you have a system that is able to gain 300% in a few months (and with no stop-loss) but suddenly blows up due to a mini-black-swan style event and makes your account go back to zero. What strategy or modification in strategy would you use to not lose it all? Would you consider this a bad strategy and discard it because one-day you know it will all blow-up (i.e. through back-testing) and send you back to square one?

4. Say you have $10,000. You use a stop-loss and set your trade risk to 2% per trade and you lose 4 trades consecutively. Is this better or worse than not using a stop-loss with a RED 8% draw-down? Which one *feels* better psychologically? Which one is worse in *reality* & why?

5. If we know that the market is mean reverting. When the market moves farther away from the mean, what happens to the probability of that trend continuing as it continues farther away from the mean? How does this affect your buying/selling decision? What happens to the probability of trend continuation with trends that go away from the mean and trends that go toward the mean? Which trends (away from mean or toward mean) is better to follow? Say a trend turns around and goes back to the mean now, when that trend crosses the mean, what happens to the probability of that trend continuing?

(I will get into the different time frames later, since we know there are different trends in all time frames (but price the same in all frames), lets assume for now any time-frame that you want to think about.)

6. Say you're flipping a coin. And the following outcome is this.

H H H T T H H H H ?

What is the next outcome ? "Education" says the probability of heads or tails is 50% and independent of past outcomes i.e. they should be equal chance no matter what, however why would it still be BETTER to guess Tails over Heads? Do I lose anything if I do that?

If the probability of heads or tails is 50%. Why is it that in real life, it is possible to get the series of outcomes above, why doesn't it look like H T H T H T H T H T instead?

Why is believing the probability of heads or tails 50% flawed? Flip a coin and try it, it is unlikely you will get H T H T...etc combination. However, how does the TRUTH of 50% probability of heads/tails connect to mean-reversion?

How can this be integrated in your RISK management? Notice that I didn't say trading (buy or sell direction) decisions.

I will post more interesting questions to think about (trust me it gets better) but ONLY after ALL these questions are answered by somebody. I don't want to feel like I'm wasting my time, otherwise I assume it's going on deaf ears.. If you choose to answer them, please reply back in the numbered format.

Xtreme




[B]Hello Xtreme interesting read please keep posting. I was not able to answer all your questions but maybe you can help on that. Here are my answers to you questions:
[/B]

TEST #2

1.

Scenario A
-------------
Say you have $10,000. There is a road, that road splits into two other roads, we don't know where each road will end up. But we do know that. One road will end up in you losing all of your $10,000. The other road will lead you to now having altogether $20,000. What is the probability of selecting the profitable road? Should you embark on selecting a road or turning back?

the pobability is 50% on this. It is like flipping a coin 1 time.
I would not do this because i have only one try an maybe after that all my trading money is gone.....



Scenario B
-------------
Now lets use the same example. One road will lead you to losing all of your $10,000. The other road will lead you to now having $50,000. What is the probability of selecting the profitable road? Should you embark on selecting a road or turning back?

the pobability is again 50% on this. It is like flipping a coin 1 time.
I would not do this because i have only one try an maybe after that all my trading money is gone.....


How do these two scenario's differ? What is the probability of selecting the right road in each scenario? Would your choice differ from scenario 1 compared to scenario 2? When do probabilities start to matter in your decision making? When do they start - not - to matter?

They do not differ. Both have the same probability of 50%.
My choice would differ if i had more trys (more coinflips) on both scenarios.
probabilities matter if your capital is not gone after one try.


2. Suppose you had a system, that allows you to grow up to 1000%/year but the problem is, that system during perfect backtesting experiences a -70% draw-down - but does - recover from it. Is this system too RISKY? If yes, Why? If not, Why? What does a 70% draw-down mean? If you - wanted - to fix this, how could this be fixed easily? (drawdown reduced without using a stop-loss).

If you bet not all your money on this system it is not too risky.


3. Suppose you have a system that is able to gain 300% in a few months (and with no stop-loss) but suddenly blows up due to a mini-black-swan style event and makes your account go back to zero. What strategy or modification in strategy would you use to not lose it all? Would you consider this a bad strategy and discard it because one-day you know it will all blow-up (i.e. through back-testing) and send you back to square one?

If you bet not all your money on this system it is not too risky.

4. Say you have $10,000. You use a stop-loss and set your trade risk to 2% per trade and you lose 4 trades consecutively. Is this better or worse than not using a stop-loss with a RED 8% draw-down? Which one *feels* better psychologically? Which one is worse in *reality* & why?

the stop-loss gives me a feeling of safety. Sometimes it is good to have a stop and sometimes not because draw-down can turn positive. Your trading method matters on this i think.

5. If we know that the market is mean reverting. When the market moves farther away from the mean, what happens to the probability of that trend continuing as it continues farther away from the mean? How does this affect your buying/selling decision? What happens to the probability of trend continuation with trends that go away from the mean and trends that go toward the mean? Which trends (away from mean or toward mean) is better to follow? Say a trend turns around and goes back to the mean now, when that trend crosses the mean, what happens to the probability of that trend continuing?

what is the mean on Forex?weekly highlow/2 ?



6. Say you're flipping a coin. And the following outcome is this.

H H H T T H H H H ?

What is the next outcome ? "Education" says the probability of heads or tails is 50% and independent of past outcomes i.e. they should be equal chance no matter what, however why would it still be BETTER to guess Tails over Heads? Do I lose anything if I do that?

I dont know...maybe you can give us a hint on the rest of the questions. :oops:


Jogie

Please add www.kreslik.com to your ad blocker white list.
Thank you for your support.

User avatar
Dillinger
rank: <50 posts
rank: <50 posts
Posts: 32
Joined: Fri Feb 17, 2012 1:23 am
Reputation: 0
Gender: None specified

Postby Dillinger » Tue Jan 08, 2013 8:24 pm

6. Say you're flipping a coin. And the following outcome is this.

H H H T T H H H H ?

What is the next outcome ? "Education" says the probability of heads or tails is 50% and independent of past outcomes i.e. they should be equal chance no matter what, however why would it still be BETTER to guess Tails over Heads? Do I lose anything if I do that?

It is better to pick tails because as the sample size gets bigger or the coin is flipped more we know the numbers of heads and tails will be equal eventually and there has been a lot more heads so far. A string of tails needs to come to revert it back to its mean.

Why is believing the probability of heads or tails 50% flawed? Flip a coin and try it, it is unlikely you will get H T H T...etc combination. However, how does the TRUTH of 50% probability of heads/tails connect to mean-reversion?

How can this be integrated in your RISK management? Notice that I didn't say trading (buy or sell direction) decisions.

Its is flawed because all the 50% guarantees is over time and a large sample size you will land on that outcome of 50/50. IT does not predict the order or how many times you have to do it until you see the 50/50 results. The truth of the 50% probabiliy connects by "the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far". So the more bear candles you see in a row the more likely you are to see a bull even though the probability is still 50/50. you can use this to manage risk by knowing that if price is going against you and you can withstand it long enough, odds will play out and you will eventually get some candles your way and be able to get out at a better price,breakeven, or profitable???

xtremeforex
rank: 50+ posts
rank: 50+ posts
Posts: 114
Joined: Mon Nov 16, 2009 7:43 pm
Reputation: 0
Location: Toronto
Gender: None specified

Postby xtremeforex » Fri Jan 11, 2013 2:27 pm

Hello friends!

Just recovered from a cold.

I want to mention something. I hope people realize that I have no intention of divulging my exact strategy step by step. You wouldn't either. Doing so, would be helpful to nobody because such a strategy would become obsolete as the market adapts to become efficient again and ultimately ineffective for me in the end. Just being honest.

HOWEVER.

I want to show you a way to think about profitability - particularly over the long-term. The logic & philosophy behind decisions, probabilities, statistics, risk management and LOSS. Once you've thought deeply about these questions and ideas, you will know exactly how to build your own unique system. Only unique systems succeed.

Now some people might wonder, why am I doing this? I hope by demonstrating this method of discussion, that it would encourage other winning traders to follow the same style and format, without feeling pressure to disclose their strategies/indicators/EA's etc. I also want my frame of thought challenged because it will force me to reflect more.

Lazy people want ENTRY/EXIT signals, motivated/serious people want reasons for them. It is the REASONS that are more important.

To be clear, this thread will have an AUTOMATED focus, some ideas may be impractical with manual trading.

I remember a forum member named SignalBender that came here long time ago and started an interesting thread, then suddenly changed his tune and behaved arrogantly/selfishly and disappeared, 40+ pages that lead to absolutely nothing. I have no intention of doing that. (I know his ideas was wrong too.)

I hope our discussion will actually be entertaining and devoid of charts on drugs attachments.

Camaron
rank: <50 posts
rank: <50 posts
Posts: 1
Joined: Fri Jan 11, 2013 2:55 pm
Reputation: 0
Gender: Male

Postby Camaron » Fri Jan 11, 2013 3:03 pm

Okay.
So let's get going then
:)

xtremeforex
rank: 50+ posts
rank: 50+ posts
Posts: 114
Joined: Mon Nov 16, 2009 7:43 pm
Reputation: 0
Location: Toronto
Gender: None specified

Postby xtremeforex » Fri Jan 11, 2013 3:21 pm

JogieFX:

B+ on TEST #2. :)

the pobability is 50% on this. It is like flipping a coin 1 time.
I would not do this because i have only one try an maybe after that all my trading money is gone....


In Scenario A you are correct. The probability is 50/50 and taking such a risk is useless because you could lose as much as you could gain. There is no *overwhelming* reason to take this risk.

In Scenario B, I disagree with your answer. Consider the "weight" of the risk/reward. Lets say instead of $50,000, the other road offered $2,000,000 instead (or say 2,000,000,000). So either you lose $10,000 or you gain $2,000,000 (or 2,000,000,000).

Would this change your decision? It's still 50/50. Lose ALL or gain 2 million (or 2 billion). Is there any lottery/investment/business that for the COST of $10,000, a person could earn $2,000,000 or $2,000,000,00? Or in other words, is there any other opportunity that gives you a FAIR chance at getting $2,000,000(,000) for $10,000. When do you say to yourself - "This is good. I'm ALL in."

Everybody will have their own/unique reward threshold level in which 50/50 chance has a reduced significance compared to a reward that is disproportionate to the risk, making the choice of not taking the risk, risky itself! (The reverse dis-proportionality is true too, if say one road you lose your 10,000 and the other road you gain only $2000, 50/50 wouldn't matter here either - your choice is clear - a very bad risk/reward scenario)

So the considerations are:

Perhaps $50,000 is not good enough reward for some people to sway them to pick a road. So the question is, what value of reward is? There IS a number.

or

Perhaps, it is the $10,000 they don't want to lose in one go, which is reasonable too. I will get into this later. I just want everybody to see from an ALL or NOTHING point of view first (the MAX/MIN). This is deliberate.

* Note * I've deliberately exaggerated it to 2 billion to ensure a majority of readers would see the logic in picking a road, even though they have an equal chance of losing it all.


Lets now EXTEND these scenarios and make it more interesting.

Scenario
-------------

You are walking along this road and TRIP AND FALL. When you regain consciousness, you forgot which way you came from. All you remember is that one road leads to losing $10,000, another leads to gaining $50,000 and the third leads you back home (keeping your $10,000) - but you don't remember what road that was.. You're at a fork between three roads.

What is the probability of selecting a good road?

What is the probability of selecting a bad road?

How is this different from the original question?

What does this say about NOT TAKING ACTION (not choosing a road in the original question)?

How does your AMNESIA (not knowing what road you came from) make it more likely for you to gain $50,000 than if you had known what road you came from? (I'm serious.)



*Note* These last two questions may have similar answers, just trying to hint slightly.


#2.

You can reduce the draw-down by ensuring adequate account capitalization. 70% drawdown can be reduced to 7% drawdown if you had 10x more money in the account. I.e $10,000 to $100,000.

People might think "DUH?" but the true benefit isn't obvious until closer examination, keep reading.

Some people would argue that by doing this, our gain of 1000% will be reduced to 100% (by a factor of 10) the same way the draw-down was reduced because it is all "relative."

Does it make a difference? Calculate it.

1000% gain on $10,000 is $110,000. A 100% gain on $100,000 is $200,000. Both have increased the account by $100,000. Same amount of profit!

The difference is, when properly capitalized instead of risking 70% of your account to acquire $100,000. You've only risked 7%. Same gain - lower risk (of the ACCOUNT), and plenty of room away from a margin-call. (In both cases, the absolute risk is $7,000).

This illustrates the importance of being properly capitalized. Notice that there was no change in strategy whatsoever (later on we will talk about modifications in strategy). This was a 'quick-fix.' Not the only fix. Importantly this only focused on fixing the draw-down as the question asks. Profit (money in your pocket) is $100,000 for both situations, however the risk is now improved by 10 times. More on ROI later.

We turned what would be considered an insanely crazy/risky strategy into a very good (profitable) strategy (with risk/reward of 7:100 or equivalently ~1:14) by simply being properly capitalized.

Likewise, if you can't increase your capitalization like that, the same effect can be generated by reducing the trade lot size by a factor of 10 instead and the result would be the same 7% draw-down. However size of absolute profit will be lower because now your return will be 100% on $10,000 not 1000%

The moral of the story? If you get good ROI but at the same time a large draw-down (or even margin-call) in the process, think about capitalization or trade-size (lots). Check the mechanics of the strategy AFTER. When your ROI is *significantly* higher than your overall draw-down (the max-drawdown being 100%) then you may have something good.

The 70% draw-down would have scared most people into dismissing it. Interestingly too, many would expect that by adding more money to reduce the draw-down would consequently reduce the absolute profit too - but it doesn't. This is why I think some advanced traders may overlook this simple solution.

#3.

You are correct. Why bet all our money on this system? The simplest modification to this strategy would be to WITHDRAW funds consistently before it does blow-up.

#4.

You are correct. 8% floating loss is similar to losing four 2% trades in a row (with SL). The difference is, the loss is permanent in the latter. Whereas the 8% floating loss could turn around. Taking the loss with SL for some people is ideal because they don't have to see scary red numbers in their P/L, so this may be easier on people psychologically however in reality their loss is permanent. If I decided that when my floating loss got to 8% I have a choice after giving a fair chance (more time) to my trades. My strategy does have this type of element but there are conditions when I do take the loss. However, I don't use a SL for this.

* Knowing how to DELAY a loss is important!

#5. The further you go away from the mean, the probability of continuation of that "trend" should decrease (even if it is very slightly), it should NEVER get higher as it continues away from the mean. Likewise, the probability of reversal INCREASES (even if slightly) as it moves away from the mean, it should NEVER DECREASE. Try to imagine the MEAN as being a MAGNET trying to pull price to it. If price crosses the mean, the same happens again. The probability of reversal increases the further price moves away from the mean (even if so slightly).

The logical question then is, WHAT MEAN? WHICH ONE? Every time-frame has its' own mean. Technically speaking there are infinite number of time-frames, since a time-frame is just an organization of data. If we were so inclined, they could have a 7h TF or a 18 min TF etc. So what is the TRUE MEAN?? More on this later. (This is where herd psychology comes in and YES psychology/psychological factors can be coded.)

#6 I'll answer this one to Dillinger.

JogieFX
rank: <50 posts
rank: <50 posts
Posts: 8
Joined: Tue Jan 08, 2013 4:51 pm
Reputation: 0
Gender: None specified

Postby JogieFX » Fri Jan 11, 2013 8:06 pm

xtremeforex wrote:JogieFX:

B+ on TEST #2. :)

the pobability is 50% on this. It is like flipping a coin 1 time.
I would not do this because i have only one try an maybe after that all my trading money is gone....


In Scenario A you are correct. The probability is 50/50 and taking such a risk is useless because you could lose as much as you could gain. There is no *overwhelming* reason to take this risk.

In Scenario B, I disagree with your answer. Consider the "weight" of the risk/reward. Lets say instead of $50,000, the other road offered $2,000,000 instead (or say 2,000,000,000). So either you lose $10,000 or you gain $2,000,000 (or 2,000,000,000).

Would this change your decision? It's still 50/50. Lose ALL or gain 2 million (or 2 billion). Is there any lottery/investment/business that for the COST of $10,000, a person could earn $2,000,000 or $2,000,000,00? Or in other words, is there any other opportunity that gives you a FAIR chance at getting $2,000,000(,000) for $10,000. When do you say to yourself - "This is good. I'm ALL in."

Everybody will have their own/unique reward threshold level in which 50/50 chance has a reduced significance compared to a reward that is disproportionate to the risk, making the choice of not taking the risk, risky itself! (The reverse dis-proportionality is true too, if say one road you lose your 10,000 and the other road you gain only $2000, 50/50 wouldn't matter here either - your choice is clear - a very bad risk/reward scenario)

So the considerations are:

Perhaps $50,000 is not good enough reward for some people to sway them to pick a road. So the question is, what value of reward is? There IS a number.

or

Perhaps, it is the $10,000 they don't want to lose in one go, which is reasonable too. I will get into this later. I just want everybody to see from an ALL or NOTHING point of view first (the MAX/MIN). This is deliberate.

* Note * I've deliberately exaggerated it to 2 billion to ensure a majority of readers would see the logic in picking a road, even though they have an equal chance of losing it all.


Lets now EXTEND these scenarios and make it more interesting.

Scenario
-------------

You are walking along this road and TRIP AND FALL. When you regain consciousness, you forgot which way you came from. All you remember is that one road leads to losing $10,000, another leads to gaining $50,000 and the third leads you back home (keeping your $10,000) - but you don't remember what road that was.. You're at a fork between three roads.

What is the probability of selecting a good road?

What is the probability of selecting a bad road?

How is this different from the original question?

What does this say about NOT TAKING ACTION (not choosing a road in the original question)?

How does your AMNESIA (not knowing what road you came from) make it more likely for you to gain $50,000 than if you had known what road you came from? (I'm serious.)



*Note* These last two questions may have similar answers, just trying to hint slightly.


#2.

You can reduce the draw-down by ensuring adequate account capitalization. 70% drawdown can be reduced to 7% drawdown if you had 10x more money in the account. I.e $10,000 to $100,000.

People might think "DUH?" but the true benefit isn't obvious until closer examination, keep reading.

Some people would argue that by doing this, our gain of 1000% will be reduced to 100% (by a factor of 10) the same way the draw-down was reduced because it is all "relative."

Does it make a difference? Calculate it.

1000% gain on $10,000 is $110,000. A 100% gain on $100,000 is $200,000. Both have increased the account by $100,000. Same amount of profit!

The difference is, when properly capitalized instead of risking 70% of your account to acquire $100,000. You've only risked 7%. Same gain - lower risk (of the ACCOUNT), and plenty of room away from a margin-call. (In both cases, the absolute risk is $7,000).

This illustrates the importance of being properly capitalized. Notice that there was no change in strategy whatsoever (later on we will talk about modifications in strategy). This was a 'quick-fix.' Not the only fix. Importantly this only focused on fixing the draw-down as the question asks. Profit (money in your pocket) is $100,000 for both situations, however the risk is now improved by 10 times. More on ROI later.

We turned what would be considered an insanely crazy/risky strategy into a very good (profitable) strategy (with risk/reward of 7:100 or equivalently ~1:14) by simply being properly capitalized.

Likewise, if you can't increase your capitalization like that, the same effect can be generated by reducing the trade lot size by a factor of 10 instead and the result would be the same 7% draw-down. However size of absolute profit will be lower because now your return will be 100% on $10,000 not 1000%

The moral of the story? If you get good ROI but at the same time a large draw-down (or even margin-call) in the process, think about capitalization or trade-size (lots). Check the mechanics of the strategy AFTER. When your ROI is *significantly* higher than your overall draw-down (the max-drawdown being 100%) then you may have something good.

The 70% draw-down would have scared most people into dismissing it. Interestingly too, many would expect that by adding more money to reduce the draw-down would consequently reduce the absolute profit too - but it doesn't. This is why I think some advanced traders may overlook this simple solution.

#3.

You are correct. Why bet all our money on this system? The simplest modification to this strategy would be to WITHDRAW funds consistently before it does blow-up.

#4.

You are correct. 8% floating loss is similar to losing four 2% trades in a row (with SL). The difference is, the loss is permanent in the latter. Whereas the 8% floating loss could turn around. Taking the loss with SL for some people is ideal because they don't have to see scary red numbers in their P/L, so this may be easier on people psychologically however in reality their loss is permanent. If I decided that when my floating loss got to 8% I have a choice after giving a fair chance (more time) to my trades. My strategy does have this type of element but there are conditions when I do take the loss. However, I don't use a SL for this.

* Knowing how to DELAY a loss is important!

#5. The further you go away from the mean, the probability of continuation of that "trend" should decrease (even if it is very slightly), it should NEVER get higher as it continues away from the mean. Likewise, the probability of reversal INCREASES (even if slightly) as it moves away from the mean, it should NEVER DECREASE. Try to imagine the MEAN as being a MAGNET trying to pull price to it. If price crosses the mean, the same happens again. The probability of reversal increases the further price moves away from the mean (even if so slightly).

The logical question then is, WHAT MEAN? WHICH ONE? Every time-frame has its' own mean. Technically speaking there are infinite number of time-frames, since a time-frame is just an organization of data. If we were so inclined, they could have a 7h TF or a 18 min TF etc. So what is the TRUE MEAN?? More on this later. (This is where herd psychology comes in and YES psychology/psychological factors can be coded.)

#6 I'll answer this one to Dillinger.




Hi Xtreme

I understand what you say. But on Scenario B you only asked for probabilitiy not risk/reward :lol: . And 10000$ is much money for me , it would take me many years to save that kind of money again. But i see what you mean with risk/reward.

If you need 5-10 years to save 10000$ then you would not bring ALL that money to risk with just one try (coinflip) even if there is 2000000$ reward waiting for you on head.
:wink:

You are walking along this road and TRIP AND FALL. When you regain consciousness, you forgot which way you came from. All you remember is that one road leads to losing $10,000, another leads to gaining $50,000 and the third leads you back home (keeping your $10,000) - but you don't remember what road that was.. You're at a fork between three roads.

What is the probability of selecting a good road?

the probabiltiy is 66,6%

What is the probability of selecting a bad road?

the probability is 33,3%

How is this different from the original question?

our chance on selecting a good road increases because there is now a 3rd road thats leads us back to our money at risk. So i think the risk of loosing all our money is reduced from 50% to 33,3%.

What does this say about NOT TAKING ACTION (not choosing a road in the original question)?

How does your AMNESIA (not knowing what road you came from) make it more likely for you to gain $50,000 than if you had known what road you came from? (I'm serious.)

I can not bring the BE road into my probaility calculation if i know there is waiting my money at risk. I can only calculate with two roads then, and then we are at 50/50 probability again.


hope everything is understandable, because my english is not the best.
will reread your last post maybe i overlooked some questions...

Please add www.kreslik.com to your ad blocker white list.
Thank you for your support.


Return to “beginners forum”