Numbers and a Trading Quiz?

Trading is a numbers game. Whether it’s the currencies price, win percentage ratio, risk to reward ratio, probability percentage or just the size of your win in money terms- you need to know the numbers.

I have always loved maths and playing with figures and statistics and I suppose it was also one of the reasons I was drawn to try currency trading. It’s the season of goodwill so I would like to share some of my findings and thoughts on numbers- and how they might help you to improve your own trading results.

Let’s start with the bigger picture. Ideally you trade to end up with positive results and to make a good return on both and your time and capital. I mention both because if you do plan to trade say full time and say over 30 hrs per week you are not going to be happy just making 20% return a year – unless you have a large multi figure capital account. Similar if you only spend say 5-8 hrs a work and treat as a hobby – you might be delighted with 20% per annum return on any capital account over $10k

Statistics will tell you that if you just trade say 30 times – you might not get a true reflection of how good your system is in a real live market. However if you have say 100 trades or even 500 trades – you will get a proper “mean” percentage result. For example if I use a coin for my decisions to buy and sell on just say 30 tosses – I could have a distorted result rather than a 50 /50 result. So I might end up with heads landing say 19 time and tails only 11 times. However if I tossed the coin 100 times or 500 times I would more likely end up with a 50/50 result or very close to it. Why I mention this is because many systems or methods used to trade are very marginal on big numbers – and only a very small amount can actually continually make 75% over 100’s of trades. You therefore ideally need a very high probability system- I think most of us would agree to that.

The key then must be on making sure you win results (pips and money) are a lot larger than your losses.

This risk to reward ratio must also be linked to the percentage of capital you use on your trade stake. If you were silly to use say 20% of your capital on a trade and your system was only 50/50 it would be quite easy to wipe your account out in just 5 bad trades- many new traders do not seem to realise this and unfortunately find out the hard way. Ideally you only place under 2% of your capital on a trade and then by the law of averages you should be able to make at least 100+ live trades without losing all your account.. In fact if you only have a success rate of 50% as long as your RR is over positive – say your win size is 2 or 3 times you loss size – then you can then go on to make profit.

Check this out – even with a 50/50 win ratio or 50% success probability with a RR of just 2 you should with a 1% stake size see a 50% increase over approximately 100 trades. Are you?? Not many traders will be and that’s because they are not getting a proper risk to return result.

If you have a fixed “static “system etched in stone ( don’t recommend) and you take just as an example trades with stops of say 24 pips and targets of 48 pips ( could have been 25 pip stop and 50 pip target) the RR is not bad (2)- it means you should walk away and you either get an exact loss or an exact profit based on either one of 2 results stopped out at 24 pips or hit target of 48 pips.

If you say yes it works and I have a 60% success rate and therefore I am happy – brilliant well done.

However if you study your losing trades that were stopped out – you would see that many in fact the majority might have gone into profit say 5-or 18 or even 44 pips – but did not make your target and got stopped out – What a waste and a shame - change it

Surely if you had managed it better you would not let a 44 pip profit become a 24 pip loss - or a 88 pip profit become say a 50 pip loss ?

There are so many ways to improve that method – I won’t go into them all but it can be done- you are in an ever changing quick moving “dynamic” market and still using old antiquated methods – that can work – but why trade with the dice loaded against you?

I have mentioned earlier if you have a pretty average method with good RR and MM ( risk to reward / money management) on a 1% stake of your capital you should be seeing 50% average returns after approximately 100 live traders – OK

So how long does it take you to do your 100 real live trades on say just 2 currency pairs with 1% stake and a R R of 2.

Longer term monthly charts – 2 a month say 25 a year – so what say 3 or 4 years to get 100 trades

Daily and weekly charts - Lets say 3 a week – so nearly a year to get to 100 trades

4 hr and daily charts - Lets say 1 a day average and so in 6 months easy 100 trades

1hr and 4 hr charts - I would say 2 trades every day and therefore within easy 3 months

30 min and 1hr charts – more trades now lets say only 3 per day – so within 2 months 100+ trades

5 min to 1 hr charts – even more trades per day – but lets not make it hard work say just 5 trades

So in a month to 6 weeks you have your 100+ trades

Scalping – Very difficult how are you going to get RR of 2 and also 50% win ratio on this dangerous

activity - OK – don’t wear yourself out – lets just do 10 trades – so every 2-3 weeks you

have your 100 trades.

Which category do you mostly fall into ?

Nowadays I actually fall into nearly all of the categories – but I do favour multi intraday trading because I am full time.

Do I therefore make 50% return off every 100 trades? Answer – NO – because I do not place 1% of my capital on every trade. (another complex reason because I multi trade I grade my trades differently)

Do I achieve over 50% win ratios on all my trading methods? Answer – 100% YES – with shorter term giving me a lot higher probability ratio.

Can you average trades over 1to 2 risk to reward ratios on short term trades? Answer – Yes – my best trade in the last 3 months on a trade was on a RR of 1 to 16 – ( 7 pip stop – 102 pip achievement) I can regularly achieve over 3 and 4 results based on stops between 5-10 pips stops. All under 30 minutes normally.

Trading Quiz ?

If you had 1% stake and a variety of trading methods – which is trade gives you the best financial result –

a) 36 pip target with a 7 pip stop?

b) 75 pip target with a 20 pip stop?

c) 120 pip target with a 35 pip stop?

d) 300 pip target with a 140 pip stop?

Also which trades takes the longest and gives you the least % gain ?

Looking forward to your answers?

9 members like this

Comment by Peter jcp on December 18, 2011 at 5:40pm: Yes Spiro - I like Don Miller and many of his methods. With regards to your Hedge fund friend - I think a high percentage of bank traders are brilliant on theory - can handle large money and big stakes - but are not always technically gifted enough to handle "noise" under 100 pips!!.

Also in the UK I can make a one full lot per pip trade (equivalent to$10 per pip) with just say £5000 account on short term intraday trades So with a £50 k account I can do 10 full lot trades on short term without over exposing my capital. Leverage is no problem at all when you know what you are doing - but if you dont - keep it very low.

Leverage - spikes - uncertainities are all designed to "out psycho" you - but after years of watching the shorter time frames - even the tick chart can look slow and boring at many times of the day

Comment by Suleman Ghazanfar on March 11, 2012 at 5:51am: Hi Peter

i found this article very insightful; especially, about the time efficiency.

P.S. can you explain what you mean by grading your trades ?

Comment by Peter jcp on March 11, 2012 at 12:58pm: Hi Suleman - Re Time efficiency and grading your trades - Ok I will try and explain how I look upon - and please remember this is only my own views and thoughts etc - not from any trading article or book I have read on Forex.

Firstly - efficiency. What ever we do in life we like to try and be efficient- not take twice as long to do a job or task - and not make a task super difficult when it can be handled and broken down into simple stops. So for me not going down to minutes - but there are 24 hrs in a trading day making 120 hrs approximately in a trading week. In a perfect situation it would be nice to be making money during the while 120 hrs - and many think they do by leaving one trade on all week and seeing it go up say 300 pips. That sound great - its not bad - you have made money etc - but is it truely efficient?

If we break this down and use a notional 2% of our capital in a stop for this weekly trade of say 300 pips - we would probably use a stop of between 70-150 pips. So at the end of the week the RR on the trade would be best of 4 to 1 - worse 2 to 1. Both ok - but they have taken 120 hrs and 5 days to achieve.

Is that efficient when I can do say a 10 pip stop and a 40 pip trade in under 1 hour??. ie RR of 4 and in an hr?. Now i am no way saying you can do another 119 of these in a week - but if you worked say 8 hrs a day and made just 2 a day in 5 days you would have 10 trades all with RR of 4 making total ROI increase of 4x10 = 40 against one trade of 300 pips with RR best of just 4.

Have a guess whivh makes you the most money ?

Ideally you want the weekly trades - but dont tie your 2% in and stop you using your 2% to make money every hr. Get a combination - and do both - and as long the the results give you the money to pay for your time - you are being efficient - depending on how much you value your time and your alternative opportunities etc.

With regards to grading trades. My AAA+++ trades are short term that might only happen twice a day on a pair - and they end up giving me a result within 30 minutes with an RR of 4.

After those trades I have other gradings wherby the probability is high ( like the AAA+ ones) - but they might take more than 30 minutes and they might only achieve RR of 2.

My so called "bread and butter" scalps happen at least once an hr - have a probability over 65% but the results that happen in say 5-15 mins might only give RR of 1 to 1.5. I still want them but they are hardly AAA+ trades.

The trade you did on the EU giving you your best results in terms of risk to reward you might grade as AAA+. It was a high probability in terms of meeting your criteria and you did made a great return. Do a few of those every day and you would be delighted.

Have a great week - regards Peter

Comment by genxtrader on March 11, 2012 at 4:37pm: pencil and ruler = 62% wl ratio,24% drawdown, 267% annual gain, june 2010 - jan 2011. the pen is still mightier than the sword,unless of course you are trying too swordfight with it.

Comment by James Rolain on March 11, 2012 at 4:43pm: a) 36 pip target with a 7 pip stop?

10,000 X .01 = 100, 100/7 = 143 Mini Lots x 36 =
$5148 Profit

b) 75 pip target with a 20 pip stop?

10,000 x .01 = 100, 100/20 = 50 mini lots x 75 =
$3750 Profit

c) 120 pip target with a 35 pip stop?

10,000 x .01 = 100, 100/35 = 28 mini lots, 28 x 120 =
$3,360 Profit

d) 300 pip target with a 140 pip stop?

10,000 x .01 = 100, 100/140 = 7 mini lots, .7 x 300 =
$210 Profit

As far as "which trades take the longest" I cant answer, that really all depends on luck and how heavily price reacts to your entry level; but if a person is consistently risking 1% of his account, the trades with the smaller stops will result in larger lot sizes.

Question A made the most Money: it had the smallest stop loss, and it also had the largest risk to reward ratio of all the other questions with 5:1 RR

Question D made the least money: it had the largest stop, and also the least favorable risk to reward ratio of all the other questions with 2:1 RR

Comment by Peter jcp on March 11, 2012 at 5:32pm: Excellent annual % ROI Gene. You must be pleased with that - but you know you can improve that - so all the very best for this 12 months.

Hi James - I forget all about this post until Suleman raised a question. Well done on the answer and A would normally at least twice before C and up to even 5 times before D. Were shall I send that Massive bottle of Champagne too? ( PS - the bottle is empty now though lol)

Have a great week - regards Peter

Comment by genxtrader on March 11, 2012 at 5:44pm: thanks pete,yes i was pleased, and i am diligently trying to improve,and even though i dont always respond i follw you closely because you bring a keen awareness,and even if scalping is not your cup of tea,there is alot to be learned from you.i hope people are paying attention

Comment by LineChart on March 11, 2012 at 9:03pm: The tighter the stop the more the spread and slippage becomes a factor. The number I am thinking about is profit, in terms of dollars. Can you risk 1 dollar to make 20 cents or 2 dollars? You can these days in forex with a 100 pip stop on a 100 dollar position using 30 cents of margin, but is it worth your time to place such small orders? What is your threshold?

Comment by Peter jcp on March 11, 2012 at 10:25pm: I think Linecharts and Lisa's comments are very valid - and therefore I will try and attempt to explain purely how I see it from my perspective.

Firstly - lets start at an obvious begiinning of what as been previuosly reckonised in the trading world as good rates of returns. I was always told that Banks and large Hedge Funds are doing well if they are making over 25% annual ROI. I would be happy with that on say 100 millions - making 25% per annum - seems better than 5-10% just sitting in an interest deposit account.

I then heard small retail traders can make higher returns due to several reasons which I won't go into - so good experienced retail traders can make 50-200% per annum- as they can operate differently to commercial institutions. That sounds better and live examples of these types of returns have been around for the last 5-7 years. The Forex brokers loved it - and the Banks loved it - but failed to explain that still 70-80% of traders would still lose over a year.

As the World as got smaller these last 5 years with the growth of the internet, google and you tube - all traders can now communicate so quickly. Suddenly new method are about. Forget the robots for a minute but suddenly traders are winning live forex trading contests with 200-500-1000+ returns in a month - and how do they do it. Simple - Great skill and massive risk.

However the risk you might take on a 500 dollar account or even a $1k - would only be attempted on a 100k or million account - by very very wealthy individual retail traders - ie probably less than a tiny percentage.

Now lets look at two options - which would you prefer - 100% a month ROI on a $500 dollar account - or just 50% per annum on a $1 million account ??

I won't answer that - i would like to see some others answer it.

However on various account I have traded - between $70 and $180K - there is no way I would do the tricks I would attempt on a $1k account. That why I am looking at running different strategies on different accounts - high leverage - higher risk on say $1-2k accounts and then safe less than 1% on per trade on accounts over $70k.

Now to answer Linechart and Lisa in more detail ( cont)

Comment by LineChart on March 11, 2012 at 10:48pm: If I had 100k I would deposit 10k in 10 brokers, some brokers have tight spreads on non major pairs

Numbers and a Trading Quiz?

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