Buy Zone on Hour Bars?

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greaterreturn
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Postby greaterreturn » Fri Mar 21, 2008 6:36 pm

BlowFish,

My risk of loss on each trade is 8% of my account. But that doesn't mean that a 12 loss losing streak erases my account. Instead 12 losses on at $1,000 account looks like this: $1,000 -> $920 -> $846 -> $779 -> $716 -> $659 -> $606 -> $558 -> $513 -> $472

Also, the margin required is variable depending on how much currency you buy. A mini lot means $10,000 worth. But MBT lets you lot sizes all the way done to buying $1 worth of a currency. The margin on that would be only a few cents.

In fact, since MBT allows fractional lots, it means mathematically that my account could never go to zero. However, since I can only trade 1 mini lot with $100 balance, I would consider the account wiped if it got below that. I calculated it would take 33 losing trades in a row to take my account that low.

So thanks BlowFish. After analyzing this. I want to keep my risk per trade to only 5% of my account. So I will use only half my margin per trade.

That would take a 66 losing streak to erase my account.

Sincerely,
Wayne

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khalid
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Postby khalid » Sun Mar 23, 2008 7:04 am

Wayne,

5% is STILL A LOT of risk! Unless your percentage of winning trades multiplied by the product of your average win divided by your average loss is greater than, I GUESS, at least 130. For EXAMPLE, you get greater than 130 if you win 6 times out of 10 and your average win is 2.2 while your average loss is 1. OR you win 8 times out of 10 and your average win is 1.63 while your average loss is 1.

Please consider that the only thing that will make you money in the long run is how judiciously you manage your money and not be the quality of your indicators, the state of the art of your software, etc.

Your percentage of risk MUST be such that your account is NEVER busted.

Khalid

greaterreturn
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Postby greaterreturn » Sun Mar 23, 2008 5:11 pm

Khalid,

Thanks very much. How much do you recommend risking? Here's my thought. When I had $100,000 in my account, I would probably only risk 1% per trade since that would be $1000. And if the trade wins, it could make $1,000 to $2,000.

But with an account of $1,000 it seems I need to risk 5% which is only $50.00 to make anything significant. 1% would be only $10.00 and a potential reward of only $10 to $20. That's doesn't seem worth my time.

Does that make sense?

FYI, I did some analysis this weekend and found that if I use the TRO Dynamic SR indicator along with the Buy Zone, it works better.

Rather than 60% win/loss, it goes to almost 80%. Plus the number of pips almost triples. Why? It's because the SR shows whether the buy zone falls in the middle of a range and therefore more risky or else at the bottom or top and ripe for a breakout or retracement.

Do any of you use filters to guide you with the Buy Zone?

This week I'm going to forward test with 5 pip SL and 21 pip TP, one trade per morning of the first or second 10 minute bar at 8 am.

Looking back over March and April, it appease I can get 20 pips at least twice a week with either scratch or 5 pip losses on other days.

That means that with 4 to 1 risk to reward, less risk can still provide decent profit according to spreadsheet projections.

Wayne

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Postby eudamonia » Sun Mar 23, 2008 6:03 pm

Wayne,

Even with an 80% win ratio you still have an 2% risk of blowing your account for every 100 trades you take (assuming a 5% risk taken per trade) according to my simulation of 10000 monte carlo runs.

Although that doesn't sound like much 100 trades is a small fraction of the number of trades you will take with the BuyZone on an annual basis (maybe as much as 1000 trades per year). So your risk of blowout could potentially be much higher.

Since it is only $1000 perhaps you don't care if you blow out that account. If so then you can definitely achieve higher returns - but at a potential risk of blowout.

As Ed Seykota says it doesn't matter if you risk 1%, 5% or 10% of your account on each trade - the greater the amount you risk the greater the volatility of your returns.

Edward
Eudaimonia (pron.: you-die-moan-e-a) (Greek: εὐδαιμονία) is a classical Greek word commonly translated as 'happiness'. The less subjective "human flourishing" is often preferred as a translation.

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Postby greaterreturn » Sun Mar 23, 2008 8:30 pm

Edward,

I'm fascinated by your post and DEEPLY grateful you shared this. I was totally ignorant of monte carlo runs but researched it and found a link for doing a simple monte carlo run in Excel. So I did one that way.

But I have several questions:

1. What software do you use to repeat 10,000 monte carlo runs? I guess I could write a little program to do this. But is there a free tool available already?

2. Does the tool also calculate probabilities on draw downs? In other words, besides probability of blowing the account, I'd like probabilities on 25% draw down, 30% draw down, etc.

3. You mention 80% win ratio, 100 trades, and 5% risk for 10,000 iterations. But what do you use for potential profits per trade? Or does that matter?

4. Does the tool you use allow entering actual trades to randomize?

The way I did the simple monte carlo run in Excel uses the actual trades I calculated from the last 2 months and randomizes the order of occurrence.

So some of the winning trades show 21 pips profit, others only 11 or 5.

Please. I wait with baited breath for answers. I have googled the web fiercely to find the answers to no avail so far.

Thanks!
Wayne

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Postby RicG » Sun Mar 23, 2008 10:34 pm

greaterreturn wrote:Edward,

I'm fascinated by your post and DEEPLY grateful you shared this. I was totally ignorant of monte carlo runs but researched it and found a link for doing a simple monte carlo run in Excel. So I did one that way.

But I have several questions:

1. What software do you use to repeat 10,000 monte carlo runs? I guess I could write a little program to do this. But is there a free tool available already?

2. Does the tool also calculate probabilities on draw downs? In other words, besides probability of blowing the account, I'd like probabilities on 25% draw down, 30% draw down, etc.

3. You mention 80% win ratio, 100 trades, and 5% risk for 10,000 iterations. But what do you use for potential profits per trade? Or does that matter?

4. Does the tool you use allow entering actual trades to randomize?

The way I did the simple monte carlo run in Excel uses the actual trades I calculated from the last 2 months and randomizes the order of occurrence.

So some of the winning trades show 21 pips profit, others only 11 or 5.

Please. I wait with baited breath for answers. I have googled the web fiercely to find the answers to no avail so far.

Thanks!
Wayne
Hi Wayne,

I am interested in learning about Monte Carlo runs. Would you either post the link to the Excel file you found, or upload it here so I can download it?

Thanks,
Ric
(Disclaimer - This post is for educational purposes only. Always consult a licensed investment professional before taking any trade. Any trade you take is at your own risk.)

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Postby greaterreturn » Mon Mar 24, 2008 12:43 am


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eudamonia
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Postby eudamonia » Mon Mar 24, 2008 12:43 am

Wayne,

I use a couple pieces of different software to do my Monte Carlo analysis. The example I talked to you about was custom written in C++ by an associate of mine. I'm afraid I can't give out the software (since it isn't mine to give), however, I can tell you basically how it works.

All it does is take your net expectancy i.e your Avg winner * win % - Avg loser * losing % to get expectancy. Once it has that it generates random trades within these parameters doing batches of 100 trades at a time for a total of 10,000 simulated trades. Based on your account size and percentage of account risked it will determine what percentage of the time your account will blow out (or go past a certain threshold like 20%) based on your inputs.

I'm sure this could be done in excel or something simple. It's not really anything genius. However, most of us just don't dig very deeply into the matter of what Van Tharp calls "risk of ruin".

Hope that helps.

Edward
Eudaimonia (pron.: you-die-moan-e-a) (Greek: εὐδαιμονία) is a classical Greek word commonly translated as 'happiness'. The less subjective "human flourishing" is often preferred as a translation.

khalid
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Postby khalid » Mon Mar 24, 2008 4:00 am

Trading is ? must ? a business. Therefore, regardless of the account size one MUST CARE what happens.

Monte Carlo analysis must be useful; your broker account statement is BETTER; quite simply it is a matter of actual against simulation.

Just keep analysing your account statements REGULARLY, and you will know how much risk you should take.

I use a very simple rule: percentage of winners * ratio of average win to average loss * 0.04 gives me the MAXIMUM risk to take. This rule is not a product of higher mathematics but a result of long examinations of my broker statements.

March 2008 is my first BuyZone month. I have made 18 BuyZone trades out of which 17 ? 94.44% -- have been profitable. But my only loss got away from me for reason which was entirely random, very rare in occurrence and in my opinion not quite factorable in any simulation. I was minus 145.3 dollars after costs before I could get out. My 17 winners average 52.7 dollars after costs.

Therefore, the maximum risk I should take is 1.4% -- 94.44 * 0.36 * 0.04

I only BuyZone emini S&P, and since 5 March do not take greater than 3 ticks risk. I credit LUCK and this low risk approach to 10 successive winners since accounting for 90% of my BuyZone profits.

I write to encourage others and reinforce myself; quite realising 18 trades are way too small a number to base judgment AND that my win ratio is a VERY POOR 34 ? 94.44 * 0.36.

Khalid

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Postby khalid » Mon Mar 24, 2008 8:06 am

My apologies; the last part of the last sentence should have been: my Win Multiple is a VERY POOR 34 = 94.44 * 0.36.

WIN MULTIPLE is the result of percentage of winners multiplied by average win divided by average loss.

And believe, for long term success, this number must be greater than 100.

Khalid

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