anyone out there using the stop and reverse forex?how goes it?
I use it. It works great. LOL (couldn’t resist).
I want to know when somebody starts autotrading this system.
I’ve been autotrading the system for 2 weeks now and so far I’m ahead $450 considering each trade is only $50. But one word of caution is to invest 1% of your account if you can. The SAR system has more losing trades than winning trades but the winning trades more than make up for the losing trades so you better be ready to weather some small losses in order to make some big wins.
If the winning trades make up for the losing trades, why lower to 1% per trade? (I assumed you were saying to lower it.) Makes no sense. Trade it the same as you would any system. Regardless of win/loss ratio, it doesn’t drawback any more than any other system.
What percentage would you recommend to invest per trade?
Look at the table below. Notice how much your account has to recover from various sized Drawdowns in order to get back to even. For example, losses as large as 20% don’t require that much larger of a corresponding gain to get back to even. But a 40% drawdown requires a 66.7% gain to breakeven.
Drawdown Gain to Recover
5% 5.3% Gain
10% 11.1% Gain
15% 17.6% Gain
20% 25% Gain
25% 33% Gain
30% 42.9% Gain
40% 66.7% Gain
50% 100% Gain
60% 150% Gain
75% 300% Gain
90% 900% Gain
and a 50% drawdown requires a 100% gain. Losses beyond 50% require huge, improbable gains in order to get back to even. As a result, when you risk too much and lose, your chances of a full recovery are very slim.
Success in systems trading depends on having good trading systems and good money management practices. Optimal f can help you.
Once you have a good trading system, wouldn’t it be wonderful if you had an equation you could plug into a system to discover the perfect amount to risk on each trade? All you’d have to do would be to plug the results into a risk calculation and relax, knowing that the
chances of ever losing again were practically nil.
It’s a nice idea. But the fact of the matter? Such equations could easily lead you astray.
OPTIMAL F
When it comes to money management, one of the most popular topics is optimal f. Based on the historical results of a trading system, optimal f defines the optimal fixed fraction of total trading capital that should be allocated to any particular trade in order to maximize the geometric growth of the account. Dividing this by the largest
loss results in the number of contracts that should be traded.
According to this rationale, if you bet more you will go broke, and if you bet less, you will stay poor.
Arguments made for the optimal f sound so positive - maximum
geometric return! - you feel like a fool if you don’t use it. Who doesn’t want maximum account growth? Money management means devising a way to stay in the game. If there is a reasonable chance of going bust, then you need to adjust the amount of capital to trade lower.
There will always be a chance of losing the account if you trade, but you should work to make sure the chances are small.
win% loss% Optimal f %
51 49 2
52 48 4
53 47 6
54 46 8
55 45 10
56 44 12
57 43 14
58 42 16
59 41 18
60 40 20
61 39 22
62 38 24
63 37 26
64 36 28
65 35 30
66 34 32
67 33 34
68 32 36
69 31 38
70 30 40
71 29 42
72 28 44
73 27 46
74 26 48
75 25 50
76 24 52
77 23 54
78 22 56
79 21 58
80 20 60
81 19 62
82 18 64
83 17 66
84 16 68
85 15 70
86 14 72
87 13 74
88 12 76
89 11 78
90 10 80
91 9 82
92 8 84
93 7 86
94 6 88
95 5 90
96 4 92
97 3 94
98 2 96
99 1 98
100 0 100
Figure 1: True optimal f. A really good system could actually wipe
you out completely. - Gordon Gustafson
Hope this helps.
I don’t recommend any % per trade. For one thing with stops coming later on after trade is open, it is impossible to calculate risk. For another thing you won’t have the same results if you keep varying your trade sizes to keep EACH trade at 2% risk or 1% risk.
I recommend you determine how much you will risk on the SYSTEM, and divide that by how many pips drawback you will take before quitting or reassessing. If you are willing to risk 5000.00 on this system, and will quit if drawback hits 500 pips, then trade at 10.00 per pip. Simple as that.
Part of investing/trading is knowing what and when to trade. The other half is knowing what amount to risk per trade.
Part of exploiting and maximizing a trading systems potential is knowing how to risk our money. A well thought out system should have the entry and exit point fixed before the trade is entered. The difference is your risk. The Money Management (MM) discussion “how many” is then based on your total account size, %Risk/Trade, Entry, Exit points, current price, Exchange rate etc.,
MM has everything to do with Entries and Exits (Stops), because one needs to use these entry and exit stops your system and the market specifies in order to determine the “how many”. Entries and setups are not false control illusions.
It is true that while we are searching for a Holy grail system spending endless time there, position sizing might offer a much easier path because it optimizes expectancy while controls the risk of your choice, you know you can live long enough to earn your expectancy returns.
I agree with Edward O. Thorp who says: The central problem for gamblers is to find positive expectation bets. But the gambler also needs to know how to manage his money,i.e. how much to bet per trade. In the financial market (more inclusively, the securities markets) the problem is similar but more complex. The gambler, who is now an investor, looks for excess risk adjusted return. In both these settings, we explore the use of the Kelly criterion, which is to maximize the expected value of the logarithm of wealth (maximize expected logarithmic utility). The criterion is known to economists and financial theorists by names such as the geometric mean maximizing portfolio strategy, maximizing logarithmic utility, the growth-optimal strategy, the capital growth criterion, etc.
MM is an integral part of the basic system design and the goal of your system should be to bet the optimum amount, where the risk/reward ratio of your system is the best it can be, i.e., it maximizes expectancy within levels of risk that are acceptable. If you have an edge over this game, then you should take advantage of it, but do it with the track’s money by using a small initial bankroll, i.e, an Anti-Martingale system unless one is day-trading where the normal rules like “Cut your losses short and let your profits run” is completely reversed to "Cut your profits short lest it turns into a loss and let your losses run so that some time during the day or two days, it would turn into a profit"
But, in order to apply MM effectively, trader’s needs to have a defined system for entering and exiting the market with a historical and accurate profit and loss record. Having a well tested trading system helps insure that traders get consistent trading results from future trades, within normal statistical boundaries. It is understanding these statistical boundaries that represents a large aspect of managing an account both effectively and efficiently. The main way traders learn to understand these statistical boundaries is to have a sufficient sample of tested trades from which relevant statistics like %win, Profit Factor (W:L Ratio), drawdown etc., can be gleaned.
"A well thought out system should have the entry and exit point fixed before the trade is entered. "
Maybe that’s why I make money while most lose. You spend too much time thinking while I am doing. Do you actually trade Pal, or just type in forums? LOL. (that was retorical, no answer needed). Any system that tries to manage per trade is silly, unless every trade is from a different system.
Putting an entry and exit in before the trade is entered is PREDICITIVE. I’ve yet to see anyone replicate my success doing that. (including psychics). I’ll stick with watching the markets and putting in a stop or limit when the markets tell me to.
Ahhh…all the experts and their rules… If you tried to follow all the experts rules, you would do nothing but check rules. There would be no time for trading. Off to change my GBP entry now, as the market tells me I should. (I guess I should have predicted that entry change, but how would I know the market was going to drop 24 pips the last hour…hmmmm…)
To answer your specific question, I conducted an experiment with this systems values for %Win (41.1%) and W:L ratio (1.6) to come out with 4.2875% per trade.
I would use this as the maximum percentage (after averaging down etc.,) that would be prudent to invest, not the normal percentage. I personally try to use a maximum of 2% for 48 total positions, assuming a 96% realized DrawDown at a losing streak with 1 in 53334 odds of ever occurring will consist of 48 consequtive losses.
You may verify it by following this link:
http://www.hquotes.com/kelly.html
The original article can be found here: http://www.hquotes.com/tradehard/simulator.html
Thanks Hal and Pal (That rhymes nice, doensn’t it) for your recommendations. I’ll change my autotrader appropriately. The whole idea I had was to allow me to stay in the game even when there are losses. It would be crazy to bet everything on one trade because you never know if that’s going to be a losing trade or a winning trade.
Optimal f is a crummy way to trade - there are better money management methods. You can investigate Fixed Fractional and Fixed Ratio. Even a basic % of your acount is better.
Optimal f is a fast introduction to another concept “Risk of Ruin.”
I agree very much.
I pretty much illustrated with the above post about optimal f% and subsequent posts on the Kelly criterion, exactly what you said.
Glad you got my point.
Even if a very few traders (including me!) fully understand this concept, I would have done some good.
Joseph,
What autotrading system are you using? Tradebullet or Strategy Runner? And what broker are you with?
I heard IB won’t allow trading 24 hours a day. Please share your interesting experiences with the rest of us.
PS) I am setting up a failover computer system for running Tradebullet. This will have redundant Internet connections and failover ability for computer crashes. Anyone interested can message me. Thanks.
I created my own program that parses the Instant Trade Messenger window every 15 seconds and when it gets signals it automatically sends buy/sell commands to my FXCM account.
The only reason I’m doing this is that TradeBullet doesn’t support FXCM and InteractiveBrokers account requirements are too pricey for my taste. Ditto for Oanda (They charge $600 per month for using the programming interface)
If you really want an automated system email me at joeyfx@rossosoft.com and I can help you out.
In his book, “Trading for a living”, Dr Alexander Elder has the following to say concerning mechanical trading systems:
“Complex human activities do not lend themselves to automation. Computerized learning systems have not replaced teachers,
and programs for doing taxes have not created unemployment among accountants. Most human activities call for an exercise
of judgment; machines and systems can help but not replace humans.
If you could buy a successful trading system you could move to Tahiti and spend the rest of your life in leisure, supported by a stream of checks from your broker. So far, the only people who have made money from trading systems are the system sellers.
Markets always change and defeat automatic trading rules. Yesterday’s rigid rules work poorly today and will probably stop working tomorrow.
There are good trading systems out there, but they have to be monitored and adjusted using individual judgment.
You have to stay on the ball - you cannot abdicate your responsibility for your success to a trading system.
Traders who have the autopilot fantasy try to repeat what they felt as infants. Their mothers used to fulfill their needs for food, warmth, and comfort. Now they try to re-create the experience of passively lying on their backs and having profits flow to them like an endless stream of free, warm milk.”
