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TheRumpledOne
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Postby TheRumpledOne » Wed Dec 24, 2008 3:46 pm

Money Management Method Based on Las Vegas Horse/Sports Betting - Part 2 - Tom D'Angelo


In my first article, (Vol 3-8), I described how traders can utilize the Profit Center technique of business organization in developing a personalized money management plan, specifically tailored to his style of trading. Now I will describe the reports I create and how I use those reports in developing my personalized money management plan.

In my final article, I will tie all the statistical reports and calculations together into three management reports:
1. The Performance Report
2. The Trading Plan
3. The Trade Journal

The Performance Report is the summarization of all the important statistics for each Profit Center and is designed for the trader who desires to attain a professional skill level in the discipline of money management.

The information from the Performance Report is then used to complete the Trading Plan. The Trading Plan is the trading strategy for the next trade in that Profit Center.

The Trade Journal is an "after the fact" critique of the Trading Plan after the trade is completed.

In my last article, I described how to file these reports so that the trader is managing his trading in professional, disciplined environment.

Before reading on, be warned that this article is geared for the serious trader seeking long-term profitability and a professional skill level of trading expertise. Those looking for trading systems or the latest system fad are best advised to save time and skip to the next article.

I create the following nine reports for each Profit Canter. These reports are created by my software called The Manager which was reviewed in 3/95 Futures magazine. Each report displays an important money management concept and contributes to my decision as to: 1. if I will trade that Profit Center and; 2. how many contracts to trade if I do decide to trade that Center.

1. Drawdown Analysis - $ drawdown and % drawdown is calculated after each trade. Every trader (successful or unsuccessful) is in a drawdown mode at least 85% of the time. This creates psychological problems since a successful trader feels he is always losing money even though he is a long-term profitable trader. Real-time monitoring of the drawdown situation currently in effect for each Profit Canter is a major factor in overcoming the psychological problems inherent in speculation.

2. Series of winning and losing trades - Calculate the consecutive series of winning trades and losing trades and the $ won or lost in the series. For example, a trader has the following five trades, +500, +700, +200, -100, -600. He has a series of three consecutive winning trades and a total of $1400 won in the series followed by a series of two losing trades with a total of $700 lost in the series.

Having a history of consecutive winning and losing trades is the second most important piece of information in the trader's money management plan. The trader must have some type of idea what to expect concerning the worst series of consecutive losers and best series of consecutive winners.

Having this information will assist the trader in preparing for the inevitable future series of consecutive losers since he will know what occurred in the past and can be psychologically prepared for its recurrence in the future.

3. Optimum number of contracts to trade - Formula found in Ralph Vince's book Portfolio Money Management Formulas

Also calculate % of bankroll required for margin and % of profits in that Center which will be lost if you are stopped out of the trade.

Trade close to the optimum in profitable Profit Centers with up-trending profitability (you will also require graphs to determine the trend of the profitability - see my next article). Trade less than optimum in profitable Centers with downward trending profitability. Do not trade unprofitable Centers.

This subject requires deeper explanation which I will attempt to perform in my next article. Knowing when, where, why and how much to trade distinguishes the professional, confident, successful trader from the 95% floundering novices who will inevitably go broke.

4. Pessimistic Return Ratio - Formula found in Vince's book mentioned above. Calculate after each trade for each Profit Center. Excellent measurement of profitability.

5. Centers comparison - I generate a report which instantly compares any four Profit Centers I select, displaying the following statistics:

Beginning Capital - Net profit or loss - Current capital - % winners - % losers - Average profitable trade - Average unprofitable trade - Ratio average profitable trade/Average losing trade - Largest winning trade - Largest losing trade - Standard deviation - Kelly percentage

Hint - If you establish different trading systems as Profit Centers, you have an excellent means of instantly comparing four trading systems.

6. Percentage analysis - Calculate total profit and losses in a Center and then determine the % each winner or loser was of the total profits or losses. For example, a Center has two winning trades, +500 and +300. Total profits are $800 in the Center. Trade #1 comprised 63% of profits in the Center (500/800) and trade #2 comprised 37% or profits in the Center (300/800).

Some Centers demand consistency in trading results, winning or losing the same amount on each trade (example - daytrading system where one tries to obtain the same dollar profit or loss on each trade). Percentage analysis reveals your success or failure in achieving consistency. If you're consistent, all percentages will be about equal. Excellent measurement of trading performance for daytraders who attempt to realize the profit or loss on each trade.

7. Portfolio construction - Sorry, I can't explain this concept in a few words. Basically, I select commodities in various Centers in which I have a positive Sharpe Ratio and then create a new Profit Center composed of these commodities. I select the best of the best and put these commodities into a separate Center (portfolio) and then establish a bankroll for that Center and then trade the Center. This ensures I'm taking trades in areas where I have been very profitable in the past. Great confidence builder.

8. Statistical Analysis - I calculate the following statistics after each trade for each Profit Canter. The statistics are eventually incorporated into my Performance Report:

Trading Efficiency-
A. % Profitable Trades
B. % Unprofitable Trades
C. Average Profitable Trade
D. Average Unprofitable trade
E. Ratio Profitable Trade / Unprofitable Trade

Risk Management -
A. Unprofitable trade as % of Capital
B. Profitable trade as % of Capital
Profitability -
A. Profit Factor
B. Expected Next Trade
C. Pessimistic Return Ratio (Mentioned above)

Operating Efficiency -

A. Trade Tracker - My simple invention. Divide last profitable trade by current average profitable trade. If last profitable trade was $500 and the average profitable trade at that time was $250, the Trade Tracker ratio=500/250=2.0. Perform the same calculation for losing trades. The ratio for profitable trades should ideally be above 1.0 and increasing. This means you are taking profits greater than you average profit. The Ratio for losing trades should ideally be below 1.0 and decreasing. This means you are taking losses lower than your average loss.

Great info when displayed in graph format with 1.0 marked off as the boundary line.

9. Sort trades - I sort my profitable trades from biggest to smallest and print out the report. I can instantly see the range of my biggest to smallest winners for each Profit Center. I do the same for losing trades. Very handy info to have.

Some of you may recognize the basic thrust of the Money Management plan is to: 1. distinguish a positive expectation game (Profit Center) from a negative expectation game (Profit Center); 2. Play only positive expectation games and; 3. structure bet size (number of contracts to trade) according to trend of profitability.

Final comments:

1. Sorry if I couldn't go into depth regarding some of these concepts, but there obviously is a space limitation. Contact me and I will send you a free book with the reports. Call 1-800-666-3930.

2. Next article, I will describe the money management statistics I graph and how I use the graphs to determine when, where, why and how much to trade. I will also attempt to tie everything together into the Performance Report, Trading Plan and Trade Journal.

3. If the above methodology sounds like a lot of work, I felt the same way myself until I realized that without this type of analysis, the chances of achieving long-term success in speculation is close to zero.

4. If you would like to know the most important ingredient in achieving long-term success in speculation, read Marty Schwartz's answer to the question "Is there anything to add to that list" found on page 275 of the hardcover of Market Wizards by Jack Schwager.

5. The concepts described above were obtained from and work extremely well for professional sports and horse players in Las Vegas. The same techniques apply to speculation. I don't argue with success.
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!

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MightyOne
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ART IN MOTION

Postby MightyOne » Wed Dec 24, 2008 7:11 pm

I just focus on making 25 trades in a row without a loss and then focus on my next set.

I trade toward some goal greater than the hourly like a 4H or D1 ZL and keep a close eye on H1 ZL's that I can use for getting a really good price or avoid getting screwed over.

I almost always try and demand a better price (5M) to enter in the direction I wish to trade.
If a candle closes and I am sitting with a loss then I know to ask for an even better price on the next trade.
If 2 candles close and I have been sitting with a loss since the first then I am just looking to exit at the best price.

Hopefully if candle 1 was a bear candle then candle 2 is a bull candle and I exit. If not then look for candle 3 to pull back in my favor and if that does not work then I will exit.
Keep in mind that this is a 5m chart and I am asking for a better price to begin with so usually when candle 2 closes to further kick my ass I am down ~8-12 pips with a 20 pip mental and 40 SL.

So:

1: know where you are heading
2: demand a better price to enter in that direction
3: Shift your attn to the best price to exit when a candle closes against you.

Do the above and take as many pips out as the market will give you and you will do just fine.

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Postby Sweet Pip » Wed Dec 24, 2008 8:00 pm

[align=center]Merry Christmas Everyone!![/align]


[align=center]May you get all the pips you wish for[/align] :)
It's not always about getting what you want...it's wanting what you've got!

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Postby MightyOne » Wed Dec 24, 2008 8:02 pm

[glow=red]
Merry Christmas to you too Sweet Pip![/glow]

I already know I am getting coal :cry:

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Postby MightyOne » Wed Dec 24, 2008 8:28 pm

Don't worry about what could have happened if you held after price came back toward you.
You are not considering profit after a candle closes against you you are just trying to bring your loss as close to zero as you can!


This is how it is done (shorting from the ACTION of an H1 BO):


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Postby MightyOne » Wed Dec 24, 2008 8:37 pm

Move my stops to BE? Are you friggen crazy!
Either take your profit or take your loss!
Don't give out easy money!



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razorboy
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Idiot's guide to trading

Postby razorboy » Thu Dec 25, 2008 4:28 pm

Bruce,

How is the zen working out for you :)

Seriously, give this a try - seems to work for me

First Get TRO's dynamic fib plug in and the custom candle plug in

Now crack open a 1h chart - Find and draw two obvious trend lines one up and one down.

Now zoom down to the 1 minute level and set the dynamic fibs to 30 to 35 periods - use the short and long lines as entry points - 20 pt stop loss - take profit level depends on the steepness of the trend lines you drew before (and how close price is to them when you get your entry signal)- you need to get out quicker on the side that is steeper - lower take profit level - in other words when you trade against the trend (fade the trend as i believe it is called), get out faster!

Just so you dont get your underwear in a bunch about trading off of a 1 minute chart - you are using it to see the impact of the higher time frame on the lower time frame" - the 1 minute chart just helps with price granularity. You aren't looking to pick up every one minute gyration

As one trend line get steeper, you will notice that the corresponding trading range gets tighter until price violates the steeper trend line - for example if price has been trending down - consecutively lower high - initially going short becomes more profitable - then the lows start getting higher and then at one point price pops thru the down trend - the market may be changing direction - higher highs and higher lows. -

If you want more certainty, increase the look back periods of the fib lines

Bruce wrote:
MightyOne wrote: Zero is the new "50%" :lol:


MightyOne,

Could you step by step take us through a trade using your ZL concept, so that we can see what you consider the setup and execution of the trade?
Much appreciated.

Bruce

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Working with Hourly Statistics - Hourly Range

Postby razorboy » Sat Dec 27, 2008 5:34 pm

I would love some input for you characters who make use of the hourly range statistics. Specifically, how to you use them to your benefit - I put together this little set of rules that seem to work for me - From what I have seen, if the H1 price moves in one direction more than 30% (this came from Mighty - thanks for pointing it out) of its average range and then reverses, don't use the reversal of color candle as confirmation for a trade and if price has moved to an extreme of an hourly range and then either consolidated near the new price level or retraces to near the original price - trade in the direction of the candle color. Just wondering if I am interpreting the hourly stats in the right way

Basic Rules

1minute chart with Dynamic Fibs 30 period look back and custom candle indicator
Use 1 Hour chart to plot major up trend and down trend. Use the most recent obvious highs and lows

Watch for erratic price behavior as M1 price gets compressed between the trends of the higher time frames. Chances are that trend line that will break in the same direction as the either the support or resistance is show the most severe moves eg - if lows are getting higher, faster than highs are getting lower look for price to pop up


Trade off Sup/Res with candle color - 20 pip S/L 5 to 20 TP

Price Trend up

New Support higher than previous - go long if H1 candle is green. If H1 has turned Red initially, only go long when candle turns green if the candle has used less than 30% of its average range chances are this was a retrace before a move up. If this transition happens fast, chances are price will go back your way. Momentum is on your side

If it happens slowly, you have just transitioned into a consolidation and the candle may not turn back your color. What will most likely happen is that a new lower resistance line will form giving a potential short sign

If when you are are in a trade and candle color is going your way initially, retraces against you, changes color, is within your stop loss limit, but used up less than 30% of its average range in your direction, get out when range exceeds 30% if price moves against you (In other words, doesn't retrace). Price is either going against you or is consolidating

Riskier move - Can also go long if price uses up over 70% of its average H1 range, formed a new resistance ( a go short sign without the confirmation of H1 candle color) , retraced to near initial support line and the candle is still green

Riskiest Move Going long off of resistance lines Price is surging up and is at 100% of its average range

Price Trend down

New Resistance lower than previous go short if H1 candle is red. If H1 has turned green initially, only go short when candle turns red if the candle has used less than 30% of its average range chance are this was a retrace. If this transition happens fast, chances are price will go back your way.If it happens slowly, you have just transitioned into a consolidation and the candle may not turn back your color, but wont move against your intended trade too much. What will most likely happen is that a new lower higher line will form giving a potential long sign

Risker - Can also go short if price uses up over 70% of its average H1 range, formed a new support ( a go long sign without the confirmation of H1 candle color) , retraced to near initial resistance line and the candle is still red

Riskiest Move Going short off of support lines Price is surging down and is at 100% of its average range


Upside of this approach will probably keep you out of big moves against you. - for example when you get a go short signal in the middle of a strong surge up not trading against H1 color or going into a trade when the H1 has moved a great deal of its range in one particular direction
Down side you will only get partial moves of large surges.

Stuck in a consolidating market

Take the next opposite trade signal chances are the market will open up gradually hitting your TP levels before the SL levels

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Re: Working with Hourly Statistics - Hourly Range

Postby MightyOne » Sun Dec 28, 2008 7:52 am

Well you definitely gave this a lot of thought Razor!

First thing I would like to respond with is the method I use for SL:

I use TRO_RANGE_COUNT:

I just drop to the 5 minute chart and check the last 288 bars (1 day) for a candle size that is not made 90% or more of the time and use that as my SL size.

For the EURUSD a 5m candle is less than 20 pips 99% of the time.
For the GBPCHF a 5m candle is less than 40 pips 95% of the time.
For the GBPUSD a 5m candle is less than 30 pips 93% of the time.

I would use: 20SL for the EURUSD, 30SL for the GBPUSD, & 40SL for the GBPCHF.
Risk any more than these numbers and you will have a hard time making a decent profit during your trading session.


I would caution against using less than 5m bars for short term picture all though when considering a continuation of a trend as a close above an extreme then I have no objections with using a 1m candle close beyond a 5m bar.

Consider this:

What is the one thing, when using a mental SL, that if it never happened would lead to a 100% success rate?

The answer is a CLOSE in a negative direction beyond your entry point.

Your only goals aside from deciding upon which way to trade is figuring out how to get "wicked in" to the market similar to how traders are getting "wicked out" of the market and knowing when to just enter.

Price can only move so far so fast statistically and that is why we use this information.
In a profitable burst of momentum to the up side price will not overlap the previous bar by more than 30% and if it does then expect to go long as price nears the lows of green candles and short as price nears the high of red candles.

Most wildly profitable day trades are based not on what the market did, but on what the market DID NOT DO!

If the market breaks higher on greater range and:

Wicks any ZL on a red and fails to close beyond it: go long

Shows a red candle with weak range and makes little attempt to move to the ZL: go long

Price closes above the ZL and then closes a weak 5m bar or a 1m bar beyond the extreme of that close: go long

Massive profit is made through bold decisions.
There is no confirmation until after the fact so act now!

Most of the time if you are wrong you can get out with little to no damage!
Especially if your risk is based on a 5m range that statistically happens 10% or less of the time.

Be confirmed wrong when price closes against you...
and even if price should close against you did it fulfill one
of the above reasons for entering based on this new information?

Exit when you are confirmed wrong
(the fact you must take your loss or die! That there is no other option available; there is no new trade potential)

Find what the market did not do and do the opposite.

It broke above 1H extreme but did not show increased momentum
It broke out and did not make an honest attempt to move back to the extreme.
It broke out above 1H extreme, closed, and then it DID NOT CLOSE a candle below that extreme (is it going to continually close higher? Will there be a massive up spike in momentum soon? Who knows, I'm IN!)
It wicked the ZL based on the time frame in question and it did not close below it (price will close above it? Is a bullish move in the making? Who knows, I am IN!).
Bold decisions based on fact (what did not happen) and that laugh in the face of the need for a security blanket in the form of confirmation.

It is all exploration into the unknown and eliminating risk as it presents its self.
Resist the temptation to be scientific and surrounding your self with rules.
Make general observations and then trade those observations boldly.

Only a fearful heart fails to be profitable.
Only a fool and his money are separated.

And you Razor are no fool :wink:

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TheRumpledOne
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Re: Buzzardish

Postby TheRumpledOne » Sun Dec 28, 2008 7:00 pm

MightyOne wrote:"TRO's THIRD EYE" indicator?

I am sure you can see this with your own eyes!



TRO ONETHIRD DOTS

Image

I was going over the thread and saw MightOne's post about 1/3.

I have written TRO_ONETHIRD_OC but that painted the bars.

TRO ONETHIRD DOTS places the dots at 1/3 the range from the top and bottom - dividing the candle into thirds. But the 1/3 is an input so you can place the dots at 10%, 20%, 25%, or whatever level you want.

MT4 VERSION of TRO ONETHIRD DOTS, along with source code, attached.
Attachments
tro_onethirddots.zip
(9.77 KiB) Downloaded 341 times
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