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 March 11, 2012 at 11:11pm: Hi Linechart- 3 years ago I would never look at stops under 10-12 pips - even on scalping. As I improved and spent another 2-4k hrs watching live tick charts - I discovered enough to be able to reduce stops down to as low a 3 pips and average 5-7pips on a 1-2 pip spread. I can therefore scalp on higher lot size- ( maximum nowadays £99 or 11/12 lots per pip) - which means i can still keep my exposure to less than 1% of my account capital.

However on a $1k account with high leverage and using say up to 30%+ of my capital and having stops at under 7 pips - I can easily trade say 2-4 full lots per pips - and end up like Piprus making 30-100% ROI in just one day on just 40 pips total and still with 2 bad trades allowed. With returns like that you could say withdraw your money once or twice a week and if you "blow you account" of $500 or 1K one day - so what - open another.

Slippage as not been too bad a problem - I even have positive slippage some days - because normally I am in 30 seconds to 5 minutes before others on some scalping methods. In then can be a case like you do Linechart and add multiple new entries at different prices if you catch a nice wave.

Remember every day in every currency pair there is always an high and a low - Theres 2 trades - and in between - you will have several other waves that allow you even more trades. I cannot scalp pairs with spreads of 4-8 pips so easily - they need 10-15 pip stops but if they move twice as fast like the G/Y - its then not so bad.

I try not to take scalp trades with targets under RR 's of 1 and good scalps have RR's of 3+ ie -15-25pips. I therefore am on an $100 trade risking 5 pips as a stop with $20 dollars a pip stake. I expect a return on my $100 risk - of minimum same average $200 and good over $300 per scalp. I dont take 50-100 trades a day ( I could but I am older and wiser) - but limit myself to a maximum of 20 trades - and some days just take 5 - if they have all been good.

Hope that answers your question Linechart - and no problem if you have any other queries on this topic - I will try and answer if i can

Lisa - I have been trading approximately 8 years - 5 years intraday short term - 1000's and 1000's of live trades - what cant you see? I am actually less of a risk taker than you on my main account - ie normally only half to 1% exposure per trade.- you trade 2% and when you have 3 trades on at the same time you are exposed to 6% on your account.

I trade time efficiency - I want to know if I am wrong in under 5 minutes and I ideally want a conclusion in less then 30 minutes - so I can take another trade. So say 5-15 trades a day on main account - never exposed more than 1% - even if i am in 2 trades at the same time.( one being a swing)

As i explained elsewhere I can easily have 3-10 bad trades a week - ie I lose money - but I can also have another 20- 50 trades that make good money. End result happiness - but still could do better :-)

Have a great week

Comment by LineChart on March 11, 2012 at 11:16pm: In your scenario let us assume that you all the trades you enter are manual and at the market, so in order to get a good price you need to monitor the market, so entering a 1k may not be big enough to justify babysitting the market for hours, and unless your broker has instant execution (one click trading), you will need to place a stop and a profit order, why not let your computer place 30 small entry tickets with one click stops and limits (90 orders) deep in the market?

Comment by Peter jcp on March 11, 2012 at 11:32pm: I will say its not a method I had looked at - and had not worked the maths out on etc - but in theory I am sure it can work well - just need to know how efficient it can be etc. I have been doing more wrapping as well lately either side - but not tried it yet with multi entries and small ticket size. Certainly one to look at and I appreciate it works for you.

I do take one click instant entries and exits ( that can take between 1- 10 seconds to work normally) and I dont use hard stops of 5 pips but instead you opposite pending orders as different sizes at certain key price areas.

I am lucky be able to take both the Europe open and main part of US in my normal 6-8 hr trading day and with the exception of weekly and monthly swing trades i do babysit every scalp - thats normally 3-30 mins maximum.

I am off now ready for European open - Have a good week Linechart and love to know more on your methods - regards Peter

Comment by FXWorx on March 12, 2012 at 5:54am: Hi Peter

Once again an excellent post? Always follow your informative postings. One question:

Could you please clarify the term "wrapping" please.

Good luck :)

Comment by Peter jcp on March 12, 2012 at 7:39am: Hi Dimitar and FXWorx - Firsty Dimitar - main stat - normally I will have at least one bad trade every 4th / 5th scalp. Three winning scalps in the row are the most common- and three losing scalps in a row- least common.The stats can be related to the days of the week also - ie Tuesday Wedneday and Thursday are normally more consistant and Mondays and Fridays - can inconsistent - normally my best or worst days - yet again depending on market movement. I try to stop having more then 3 bad losing trades in a row - by theoretically breaking the chain of more than 2 losing consecutive trades with any win - even if its just 2 pips - ( breaking a row of bad calls is a topic in itself) I will do an update on it in April after the end of the first quarter.

FXWorx - thanks for the comments - it was an old post revisted by 2 questions raised this weekend. "wrapping" is one of the names given to placing pending orders either side a price at a critical level . For example at say 1.3000 on the Euro - you might place a pending buy at 1.3012 if you a bull trader - or at 1.2988 if you were a bear and expecting it to fall. The pending prices can differ considerably depending how you trade, the next S & R levels and other factors you might want to bring in the equation.

Have a great week.

Comment by Suleman Ghazanfar on March 12, 2012 at 9:33am: Thanks for the in-dept response. made it much clear.

Comment by Peter jcp on March 12, 2012 at 7:42pm: Thanks Sir G - this post was written originally nearly 4 months ago - seems like years ago now - time goes so quickly - except on a Monday after daylight hr changes :-)

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