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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?
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Comment by talisman on December 17, 2011 at 6:18pm
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very good article. the greater the number of opportunities the the greater the chance of gain or loss. i don t like lower timeframes as i believe they are mostly random. having said that i will be the last one to argue with success. it is more likely how my mind processes the information that holds me back. i believe trade management is the key, which you touched on in your article. i have read that 2 traders could take complete opposite views on an entry, and they could both make money in the long run. understanding that is probably the holy grail we seek. at any rate, excellent article.
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Comment by Peter jcp on December 17, 2011 at 8:00pm -
Thank you Talisman for your comments and interesting you mention that you believe the lower time frames are mostly random. I used to think exactly the same and during my first 2 years of trading would never look at a stop loss under 35 pips. In fact I kept reading and listening to all the longer term traders saying "anything under 50 pips is just noise" - "dont think you can even trade without your stops being at least over 25 pips"
Scalping was looked upon as scary and the quickest way to lose all your capital and 2 scalping couses I tried were not that good .In fact most of the scalping ideas I have read about and tried have probably given true probability rates of 60-75% but not very good RR with most trades struggling to achieve 1 to 1. However I persevered and did my many thousands of hours watching live small time frames and found slighty different ways of intraday trading to achieve over 70% success rates and higher R R's.
Result I can trade small time frames at certain times with 5 -10 pip stops and achieve 7-25+ pip average results all with a maximum of 30 mins - meaning you can take multiple trades every day.
You will always have random noise " generally 4-10 pips for me - and although I will be caught out most days on normally 1 or 2 trades- ( in the market "psycho times") i will either wait or re- enter. Remember markets dont spend a lot of time making big moves - the majority of the time they range and try to mislead - thats great for traders like me - but as with everything in life it takes dedication, perserverance, training, hard work etc etc to get there. Good Luck on your journey.
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Comment by Lisa on December 17, 2011 at 10:37pm -
Hey Peter,
okay … the opposing view ~ *hehe*(the yin to the yang)
Any methodology tends to have the *sweet spot* of STOPs and targets.
(not sure about that terminology, but can’t think of a better way to convey that thought ?)
“One of the cruelest ironies in trading ...
is that if we don’t risk the proper amount on each trade, ...
your losses will actually increase.”
"90% of trading is logic and theory and 10% emotion ...
until $1.00 of your capital is at risk ...
then it’s 90% emotion and 10% logic."
In my mind, all traders have 24 hours in each day ...
and have to choose how they’ll spend that time.
Trader A: could analyze a pair(s), find an opportunity, take a trade ...
let the market do the work and periodically monitor his trade.
Trader B: can take several short term scalp trades over the same period of time.
I tend to like to work smarter and not harder ...
pay less in commissions ...
and seeing how trading is a minus sum game ...
where winners make less than the losers lose and the brokers get the difference ...
I think a strategy that trades less with larger returns is the ticket for retail traders.
But ! no trading strategy will be effective unless the individual trading it believes in it.
So much in trading has more to do with personal perception & beliefs ...
and a-lot less with statistics and probabilities.
Remember; when we trade, we’re not working-out a math equation ...
we’re anticipating what other people / traders will do.
I happen to believe analyzing the higher timeframes ...
is monitoring what the big players are doing.
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Comment by Peter jcp on December 18, 2011 at 12:40am
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Hi Lisa Yin- its Peter Yang - love those sexy red lips - lol
Nobody had a go at the quiz yet (shame) - but your opposing view has many merits and I certainly agree with many of your comments.However - if I answer each one - you might then also look at it from another way . OK - let start -
First Myth again - Letting the trade breath - or giving it space so you have more wins and less losses? - Why not do the opposite again. Lets have more losses ( but very small ones) and yet make more money - How you say ?
If I tell you I am giving far too much away - and I already do that in the chat room . I dont mind genuine traders like yourself Lisa knowing many of my secrets - and even if another 100 traders all copied exactly what I do - it would not have any effect or even been seen in the place. In fact if another 1000 traders copied a totally successful method similar to mine - would it effect my results? - Retail traders are just nats or ants in the jungle and we only can have a very small effect - unless there hundreds of thousands of us all winning more - that might be different?
Clue -
So do you agree if a normal trader on say $5 has 1 loss of a say a normal 50 pips off a stop - Is he better off than me who takes 4 trades with 10 pip stop losses and extra 3 x2 pips spreads Results - normal trader only one loss - 50 pips - $ 250 - me ( silly trader - lol) 4 losses - total loss 40 + 6 pips extra spread- 46 pips - $230 -- those massive extra commissions have really affected me - I am still better of than the one trader- another myth lol
Big question now - would silly trader ( me) have 4 losses on the row ?? You might say yes - but I will tell you now - I have 3 extra reasons to be more than likely correct- otherwise i dont keep taking the trade. But you cannot do this if you a re just a part timer and spend only an hr a day at the charts - nothing wrong with it - but you must know you never going to make the earnings possible until you are fully skilled and then go full time.
Lifestyle - Now I am in my 50's and still very active - I am use to hard work and long hours. I have worked hard and played harder - enjoying all the nice things in life that require money - normally a lot of it. So 15 yrs ago I travelled the world spent time away from home and worked 50-80 hr weeks. I made a lot of money - and I spent a lot of money. I am semi retired and after seeing in the last 5 years my pension fund lose 50 % and my business investments dwindle I would like to earn a large amount of money during the next 3-5 yrs- and then I can just do 2 - 3 days a week part time and still possibly make equivalent to a few thousand dollars a day.
If I only work part time and do say just 2 days a week or say 2 hrs a week - how can the family have 4-6 holidays a year - eat out every week - enjoy expensive leisure activities etc . It takes money - but I dont want to work 70 hrs a week - but happy to do an easy 40 hrs - piece of cake (lol). I have more quality time then being stuck in a foreign country and working even on a Saturday ( without my family)- and I am totally flexible- I can have 1 hr off or even a day off when ever I want.
Next one - pressure - stress - which is the hardest to deal with a 10 full lot trade for say 15-30 minutes - or having no life - no future and 3 young kids to bring up?? We all have different stress levels and I am lucky and was always a bit of an "adrenalin junkie"- and can handle all type of pressure and stress - mentally and physically. Trading is psychologically damaging and very stressful - if you allow it to be . What do they say - "if you can't stand the heat in the kitchen - then leave " - Answer learn to overcome and control stress.
Next question - you can only believe fully in something when you have loads of prove and results over hundreds of trades to say this will work. Why do you think the warning are - past performance cannot
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Comment by Peter jcp on December 18, 2011 at 12:58am
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cont = guarantee future performance - you need to evolve you methods especially now - as markets are always changing and you need to know daily and weekly what might be happening - not like 3 or 6 month later-if you are only doing say 5 trades a month. Because I have made thousands of trades and have loads of statistics - I have faith - but still have not managed to take say 30 lot trades per pip on a daily basis ( one day )
Final myth - You trade off the higher time frames to see what the big players might be doing next - and to catch a direction - I do - but always find that my tick chart and one minute get me into a trade far quicker and with higher probablility - and end up getting my daily target - before a normal 4 hr trader entry point is even reached. Thats just a fact. ie RR trades of say 1 to 3+ in 15 mins before the 4 hourer even starts. Then I just join in with a "free ride" trade - fantastic lol
One more quick brandy and off to bed Nighty night - Peter x
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Comment by Lisa on December 18, 2011 at 1:13am
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The desire for constant action irrespective of underlying conditions is responsible for many
losses in Wall Street even among the professionals, who feel that they must take home
some money every day, as though they were working for regular wages. I was only a
kid, remember. I did not know then what I learned later, what made me fifteen years
later, wait two long weeks and see a stock on which I was very bullish go up thirty
points before I felt that it was safe to buy it.
... A stock operator has to fight a lot of expensive enemies within himself.
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Comment by Lisa on December 18, 2011 at 1:15am
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I still have an issue with tick chart trading and high probability being in the same sentence ~ lol
(sorry)
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Comment by Lisa on December 18, 2011 at 1:25am
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I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, "Well, you know this is a bull market!" he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.
And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.
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Comment by Peter jcp on December 18, 2011 at 10:06am
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Oh Mr Partridge - you would be so shocked if you were around today - to see what goes on in the World Wide Currency Markets now - Can you imagine his questions -
"What million of dollars being made in minutes - not months and years"
"Trading from off a boat in the middle of the sea on laptops? What are they?
"Banks completing trade transactions in milli- seconds - Cant be done"
"Algorithms and computers - dont talk silly they wont work"
"High Tech - what is that? - nothing wrong with a pencil and a ruler "
ie - Horse and cart / Bow and Arrows / Colt 45 - or nowadays 200mph cars / Ak47's and Drones fighting wars 1000's of mile away?
Lisa - do you follow my point ?
Please dont think I am making a mockery of history and the past - Its important- but the world moves on - "switch on for today" - and remember its history tomorrow.
I am sorry - I just cannot relate to many of the trading articles of the past. It was a totally different world - "chalk and cheese". The past will always have a bearing on our future - but the subject we are talking about - online retail currency trading- did not even exist 20 years ago
My kids say to me what kind of mobile phone / laptop did I have when i was a teenager? They laugh and I feel ancient when i say they were not invented when I was 14 yrs old (lol)
Back to your main points - Its so important traders "open their minds" and stretch the boundaries. I am sure some of the trading things i do nowadays - you would not have been able to even do 5 years ago. This industry is moving on so fast. I would guess that probably 90%+ of all retail traders just do not study what I do. No one so far seems to have written books or articles explaining how you can make trades from a tick chart with over 80% probabilities ( at certain market times) and end up with $5k dollars in your account in under 15 minutes?
I appreciate if there was one and even if it was written by a well respected author or professor - many trades would still not want to even try it. That's life
PS - Its not just wanting to take money home every day from trading Lisa - Its every hour!!!!!!
( sorry Mr Partridge would say it cant be done - lol)
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Comment by Peter jcp on December 18, 2011 at 11:00am
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Hi again Miss Yin - I am showing my age again this morning - I have had my breakfast - but did not fancy going "paintballing" with my son and instead would sooner relax and start thinking of all those turkey meals I will be consuming in the next fortnight (lol)
I know you love studying articles relating to forex and i meant to ask you - are you aware on anything on "short term multi wrapping"?
I am sure you know "wrapping" as been around in trading for ages and market forces have always been able to catch traders out one way or another. Nowadays HFT models are trying to make "wrapping" even harder - but what ever happens - the markets cannot stop a currency pair moving one way or the other and as long as that movement is over 15 pips - it offers great opportunities.
PS - Did Mr Partridge ever "wrap"?
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