"Any trade that causes my system equity to go from 50 to 100 then back to 50 is extremely risky.
Any trade that causes my system equity to go from 50 to 1 then back to 50 is extremely risky."
If a protective stop was placed tight at say 45 and then moved to breakeven there was little risk in the first example. However in the second almost completely wiping out with one trade was an extreme and foolish high risk trade and in no way can the two be compared and to do so is to deny reality.
In other words in one you were never down and with the other you almost lost everything. Completely different risk tolorences for anyone I would think. Seeing profits slip away is by no means fun but wiping out your equity with one trade would be insane.
"Risk warning labels clearly not having any effect."
Experience is the best teacher. Warn em and let em learn.
That is life!
"If a protective stop was placed tight at say 45 and then moved to breakeven there was little risk in the first example."
Even risking 10% of your account on a single trade is very risky. A few losers and you’ve busted the account. There’s no free lunch. When you backtest systems, you find you almost always get stopped out if the stop is too tight compared to the current volatility. The notion that you can successfully trade huge volatility with tiny stops is a fantasy.
That is correct Dennis, I have backtested hundreds of trading systems over the years and found out that tiny stops never work. The idea of taking very small risk (using very small stops) seems very logical and conservative at first glance, but in reality very small stops will transform any perfectly good trading system into a losing system.
The best stops are are the so-called dynamic stops. An even better stop is the price action stop, using real-time support and resistance levels. These are the kind of stops used by the pros, while the amateurs simply choose a fixed stop they are comfortable with (“I only want to lose that much money on this trade”) and never realize that the market could not care less about the amount of dollars or euros they can “afford” to lose on each trade.
Now let’s get busy and study those charts again, since the weekend is the best time to find the next potential winning trade. Of course every chart seems so clear now, after the fact 
So you are saying trading in general can be very risky. Yes, it is! My point was some ways are riskier than others.
Here is an idea, place stops based on volitility.
Getting stopped out depends on the the timing.
Yes trading can be hard but nothing is impossible until you have proclaimed it to be. The most difficult part of trading occurs in our minds.
" I have backtested hundreds of trading systems over the years and found out that tiny stops never work."
What you have found out is your entries are not precise enough, nothing else.
If you declare tiny stops will never work then that will be your experience. Why limit yourself like that. All things are here and possible, it’s up to us to find them, and that is the fun of life.
“What you have found out is your entries are not precise enough, nothing else.”
Timea, how many trading systems have you backtested in your life?
Take any winning trading system (a simple moving average cross over will do) and backtest it with a tiny 3 pip stop (Forex market) or a very small 10 cent stop (stock market) and your equity curve will plummet like an Enron stock.
Don’t take any trading idea for granted, especially when it sounds brilliant and logical, always do a backtest. In fact, at the beginning of my trading career, my most “brilliant” trading ideas failed miserably, until I found it that my best trading systems were ALWAYS counter-intuitive.
"What you have found out is your entries are not precise enough, nothing else."
BS, Timea. I look forward to seeing you publish a system here with the “precise” entries you describe. We’ll all be tripping over each other to subscribe.
What I said is the truth, your entries were not precise enough for the desired result. Your conclusion was, this is something that can not be done when your conclusion could have been, this could only be done with more precise entries.
I speak of possibilities and never said this is how I will trade. My methodology is what it is.
Based on end of day trading what would you consider a tight stop on the mini-S&P 500? How many points?
Most winning systems do not have presise enough entries to use a tight stop. The only systems that can use a tight stop must have very precise entries and this is perceived as an impossibility by most. When we open our minds things can dramaticaly change. That is my point.
By the way, my methodology is counter- intuitive and I only do a walk forward and then papertrade, after that a modest system is born as I am a modest person.
-Peace-
What’s that, Jack? (Since no one else has asked, I will!) You can’t increase model size, can you?
Christina
Just rescale your system. Preferably down something big, like 1/2 size.
There’s a defect in the trade risk equations. I’m not sure exactly what they are doing after a rescale, but it appears they may be comparing the new, smaller, rescaled trade size to the original equity. So, all the original risks get cut in half.
It’s a neat trick.
But, it is something that should be fixed.
Thanks.
It is indeed now fixed going forward, and all the older trade drawdown data has been adjusted and cleaned for rescales. In other words, the rescale-system-equity loophole is gone and the trade-drawdown data is now clean.
I do appreciate your bringing this to my attention.
Matthew
I’m guessing it will take a while for all the systems to get their trade risks adjusted?
I looked at a few systems, which had gone through rescales and they still showed the erroneously low risks on the trades.
Hmm. They should be fixed already. We do some caching of secondary data to speed up the web site, so you may be looking at old (cached) data that will get refreshed shortly. But do me a favor: email me a couple specific cases that you think are incorrect and I will double-check. Please be as specific as possible so I can locate and see the data you think is incorrect.
Thanks, Jack.
Matthew
"Most winning systems do not have precise enough entries to use a tight stop"
There is no such thing as a “precise” entry point, there are only buy zone areas and sell zone areas. If you are a day-trader for example, the “precise” buy point is the exact low of the day and the “precise” sell point is the exact high of the day, period. Of course no trader can find these precise entries unless he can travel back and forth in time.
Trading consists of finding high probability zones (areas) where you can buy/sell a financial instrument with as little risk as possible and as much reward as possible, nothing more. It’s all about probabilities, not certainty, that’s why a “precise” buy/sell entry is a pure fantasy, regardless of the trading system, strategy or methodology you are using.
<<It’s all about probabilities, not certainty, that’s why a “precise” buy/sell entry is a pure fantasy, regardless of the trading system, strategy or methodology you are using.>>
Beautifully written in a single sentence.
Hugo, I agree with you that the risk category of a single trade can be misleading in certain specific instances, but for a different reason.
Many people who trade options (either alone or as a complement to stock trades) will create multi-leg positions on the same underlying instrument, myself included. In that case each trade is not independent, and so should not be analysed for risk on its own - the risk of the combined trades is what really matters.
This distinction does not affect the majority of stock, futures or FX traders but it does matter to many options traders.
I have written about this before several times, see the following forum post links:
http://www.collective2.com/cgi-perl/board.mpl?want=listmsgs&threadhilite=8046&boardid=20960084&msghilite=49608173#msgid49608173
http://www.collective2.com/cgi-perl/board.mpl?want=listmsgs&threadhilite=7867&boardid=9323885&msghilite=47604026#msgid47604026
The first link gives an illustrative example.
Dean.
Hugo
You say "Why penalize to someone who is holding a very profitable position but with a lot of volatility?"
Isn’t volatility one important component of risk? In my opinion, C2 is not penalizing anyone when they look at the volatility of a security, only telling it like it is.
Dean,
I agree with you on your statements. Another example might be someone pairs trading TNA/TZA. The individual securities would probably carry a high risk label where the strategy itself is considered market neutral or low risk.
