The HOLY grail involves..

[speed26]

Dont want to deviate this thread as there is thought inspiring stuff here (lots to sit and think about) but i do have a question pertaining BALANCE and EQUITY.

Lets say that in my business i have a float in my till of 150 euros.

This float always stays in the red, because it came from my funds (it aint profit). However, as i sell stock, my takings increase above and beyond the initial 150 euros float in my till.

If my earnings are 500 euros, i take out 350 euros and LEAVE my float reset at 150euros.

Essentially my BALANCE is 500 euros.
My FLOAT is 150 euros.
The difference is 350 euros - which i pocket.

So my question here is how come this cannot be done with a broker?

Lets say i have a float of aprox. 150 euros invested in the market at any given time (many multiple trades running simultaneously).

Now lets say my BALANCE goes up to 500 euros.

I STILL have aprox. 150 euros in the market as it continues to place orders, but, my balance has increased significantly.

So how come i cannot take the 350euros FROM my BALANCE and place it into a seperate account, meanwhile i continue with my float of 150 euros?

Hope this makes sense...in conventional business its typical...in trading...well...dont get it.

Regards.

EDIT: Here is maybe a more realistic example...

--- Equity = 150 euros.

--- BALANCE = 150 euros.

trades are placed....

--- Equity = 120 euros.
--- BALANCE = 175 euros.

So starting balance is 150euros and it went upto 175euros.

Can the difference (25euros) be taken out and put into a seperate account?

yeah, this is a clearer example.

[xtremeforex]

JogieFX,

You're English is fantastic. No worries.

Correct on all questions.

Notice how, removing the choice/knowledge to go back home from the situation increased the probability of winning 50,000.

Because 2/3 of the time you will select a good road and between those good roads the probability is 50/50, either win 50,000 or maintain the same 10,000. Now we re subjected to the "internal 50/50" probability of winning 50,000 or maintaining 10,000 with no control here. However, the result of this "internal probability" will always be positive.

Being forced to choose a road randomly, has increased our probability of winning 50,000 - even if we initially didn't like the 50,000 reward. If we had knowledge of what road heads back home, our dislike for the reward would almost certainly make us pick that road back home every time, nullifying all possibility of ever winning anything.

If in this situation, if you happen to pick the rewarding road - I doubt that you would complain.

The moral of this story is that, not taking action (choosing the road back home) must also be factored in your risk analysis. When presented an opportunity of good risk:reward, we also need to factor in the effect of not going with the opportunity as well. It can't be assumed that not taking action has no long-term effects.

Not trading CAN affect your results in the long-term.

By not trading on good risk:reward situations, we do affect the overall probability of winning in the long-term. Those same opportunities may not ever come again or in the same frequency or size the same way.

The same example could be changed such that you know this time one of the roads will give you 50,000. If you learnt that, if you choose instead to go back home this time but then another time come back down this path again, the reward COULD be 50,000 or 20,000. Knowing that later it may be reduced only be 20,000. May make you pick the road this time.

In trading, your goal is not to avoid losing. Your goal is to develop a risk:reward scenarios that are so grossly disproportionate that taking the risk on a >>50/50 chance<< of losing it all is still worth it.

Understand how to develop excellent risk/reward *assuming* a 50/50 chance, BEFORE trying to improve these *fundamental* odds - do that after.

[xtremeforex]

Dillinger,

A-.

You're correct on basically everything.

It is safer to pick TAILS simply because of the mean-reverting nature of the large sample. Even if the coin has no memory technically, if both heads and tails have even chance, and more heads came out so far, why not try to utilize the nature of mean-reversion and just pick Tails! It won't affect the "individual" probability anyways! It would COST nothing to pick Tails over Heads.

So although past history shouldn't have an effect, there would be a logical purpose to use past history anyways - because you lose nothing except gain a better REASON to pick Tails.

So although, mathematicians would say the coin has no memory.

ANY EVENT that has no memory and has a probability of 50/50 - you CAN use past history to decide the next event. Because, you would lose nothing doing that anyways, since the outcome is equally likely anyways. At least you have a better REASON to do it.

ANY EVENT.

This can be incorporated into trading by thinking about how to develop trade sizes.

If you're constantly winning, what should each consecutive trade size look like? <-- This is more important to focus on.

As OPPOSED to, if you're losing, what should each consecutive trade look like?

How can we PRESERVE our winnings when we are winning trades (not knowing if the next one will lose) with each consecutive trade size?

[xtremeforex]

Speed26.

Technically, if your equity is below your balance at the same time, that would imply you have a floating loss. If you close the floating loss, the Equity = Balance (but reduced). Likewise, if your Equity was above the Balance, you would have a floating profit and if you close the floating profit, the Equity= Balance (but increased).

Your balance represents the maximum amount you would have if your floating loss goes to zero, and the minimum amount if your floating loss is above zero (i.e. profit), which would make your equity above your balance.

Technically speaking, your equity is what you really have. Your balance is what you COULD have.

However, it is important to keep increasing your balance as you trade because you've increased your maximum and minimum values of what you CAN have on a on-going basis.

This is why it is important to close trades when equity is in profit. Even if other trades are losing. It can only help - not damage and consequently it will always increase your maximum/min values of what you CAN have.

As for withdrawing money, you should only be able to withdraw what is available in your equity not balance.

i.e Balance = 100,000
Equity = 25,000.

You would not be able to withdraw 60,000, because you only have 25,000 there and 75,000 in floating loss. If they allowed such a thing, anybody that is losing money would immediately withdraw an amount greater than the equity and run, leaving the broker with the bag.

There is really NO NEED to have a floating profit because that profit when closed will be integrated in your balance anyway and become the new point of reference for the equity. Even better if you close a trade in floating profit and then opened another trade in the same direction, would have secured the profit trade while maintaining/continuing the same move (letting the 'winner run') with the new trade. There is no difference.

So many people prescribe to this idea of "let your winners run.." but they don't see that there is no difference in closing the winner and opening another trade of the same size in the same direction has the same net effect. The difference is, when you close a trade. The RISK of that trade losing is gone, its' profit is secure.

Although, you should let your winners run to some extent, to a point where the profit of the trade is significantly larger than the expense for it, i.e. spread/commissions etc. But don't allow the winners run too far that they run back.

[Dillinger]

So as you win more in a row you should start reducing your trade size knowing it is more likely a loser is coming and with each consecutive loss you should increase you trade size knowing a win is more likely. You can preserve capital by reducing your trade size after a series of wins. After each win reduce it even more knowing that it is even more likely the loss is coming

[xtremeforex]

Dillinger,

Yes. How should we reduce trade sizes as we win? How do we increase trade sizes as we lose?

How big should these increments be?

I definitely do NOT agree that we should be DOUBLING up as we lose or "halving" down if we win. Doing so is incorrect because that would assume the probability of the next outcome as being twice as high (100%). This is retarded. This is why Martingal'ing has such a bad rep, it is used incorrectly and not calibrated with probability. When calibrated with the *fluctuating* probability - then it is fine.

If we have 10 heads in a row, the probability of Tails showing up is not 90+% (that's what martingaling assumes), but the probability would be more like 50.1% etc.

We could have another 25 heads in a row before the tails show up. But as this happens, probability of Tails will increase, but NEVER twice as high. This is why people get destroyed in martingaling.

To determine the increments, this is where frequency distribution and your trading strategy/style must be considered.

The simplest way to assess this is by running your strategy/back-testing it and LOOK at how many wins, how many losses occur and in what order. How many maximum consecutive losses, how many minimum consecutive losses and the same for wins. When doing this, be careful of curve-fitting. The information used should be utilized to develop a trade-size increment strategy, not to optimize it.

Utilizing this information will help determine what are the most reasonable trade size increments/decrements before you "reset" to the original/initial size - and start over.

There will be many variations because this specifically depends on your strategy/trading style.

[JogieFX]

Dillinger,

Yes. How should we reduce trade sizes as we win? How do we increase trade sizes as we lose?

How big should these increments be?

I definitely do NOT agree that we should be DOUBLING up as we lose or "halving" down if we win. Doing so is incorrect because that would assume the probability of the next outcome as being twice as high (100%). This is retarded. This is why Martingal'ing has such a bad rep, it is used incorrectly and not calibrated with probability. When calibrated with the *fluctuating* probability - then it is fine.

If we have 10 heads in a row, the probability of Tails showing up is not 90+% (that's what martingaling assumes), but the probability would be more like 50.1% etc.

We could have another 25 heads in a row before the tails show up. But as this happens, probability of Tails will increase, but NEVER twice as high. This is why people get destroyed in martingaling.

To determine the increments, this is where frequency distribution and your trading strategy/style must be considered.

The simplest way to assess this is by running your strategy/back-testing it and LOOK at how many wins, how many losses occur and in what order. How many maximum consecutive losses, how many minimum consecutive losses and the same for wins. When doing this, be careful of curve-fitting. The information used should be utilized to develop a trade-size increment strategy, not to optimize it.

Utilizing this information will help determine what are the most reasonable trade size increments/decrements before you "reset" to the original/initial size - and start over.

There will be many variations because this specifically depends on your strategy/trading style.

hmm interesting....

reduce trade sizes as we win..... increase trade sizes as we lose


Is this only applicable to a method that is always in the market or can i use this also for a method that lets say only opens 1 trade per day that ends either as a win or a loss?

can you give us an example?

[bredin]

Statistics are meaningless to the individual.

and also:
http://en.wikipedia.org/wiki/Regression_toward_the_mean

This means that if you had a run of losses then if you took a second equal sized sample then that sample would be probabilistically closer to the mean of 50%, thanks to the normal distribution (probability) curve. It does not mean that you are statistically or probably likely to have a sample of winners, which would be simply a sample on the other side of the mean. You are still equally likely to have a losing sample as a winning one.

It does not imply that the next individual trade will be more likely to be a winner.

Bluntly this is hokey math.

Also adding a third option that is identical in outcome to failing to take action at all, means that that option is void in terms of the distribution. Put simply if some of your trades come out at b/e then they should be excluded from your samples.

G.

[speed26]

Heres another thought and example about comparing cashflow in trading vs cashflow in conventional business...im going to use a personal experience here:

Lets say we have an 'investment' opportunity in acquiring a rental property.

Cost = 50.000 euros.

Deposit/Margin = 20.000 euros.

Mortgage = 30.000 euros over 10 years = 250 euros / month.

I rent the unit out for 500 euros / month.

Month to month cashflow = 250 euros gross profit.

However, the true VALUE of my unit will fluctuate; it will go up (more than 50.000 euros) and down (below 50.000 euros).

All im doing is collecting the difference between mortgage/interest rates and the income from rent. But the underlying VALUE of my unit will go against me and in favor of me.

But the key is here is that as long as im cash flow positive month to month, the actual underlying value of the unit becomes irrelenvant.

So how does this resemble cash flow in currency trading?
This is what i cannot comprehend (if someone would like to explain?).

Lets say i place a long on E/U and it goes against me. Right now this is a weight on my margin, however, contrary to property, i cannot be cashflow positive from this ONE trade. (meanwhile in property i am).

So in order to regain positive cash flow trading currencies i have to diversify and open more trades to COMPENSATE for the first trade that is negative.

It would be like if i had to purchase ANOTHER property to potentially compensate for the lack of positive cashflow from the first property.

How does business cashflow compare to trading cashflow?

Any thoughts on this?

[dojirock]

Here is the major difference to me.....

Im a business owner and I have never made the 8000 plus annual return on my business that trading gives....

simple.......
buy low, sell high, dump when in profit....
repeat,
repeat,
repeat.