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Risk Management

Why Do Traders Fail?Most of the novice traders believe that trading FOREX is a gamble! Why do traders fail? 1) They trade with the aim of getting luck to make money. 2) Their greed exceeds their need. 3) They think trading is a game of chance and luck and do not get the proper education to succeed. 4) They do not favor to invest enough time and amount for education and mentor-ship to get basic knowledge. 5) They have poor focus. 6) They are more emotional than intellectual. 7) After failing, they want to make up their loss; therefore they may further incur loss.
Education
by Anbat
2
The biggest “MYTH vs REALITY” in tradingDear traders, happy Friday and welcome on our Educational Post for this week. Today we will be talking about the most popular myths in the trading world and compare it to the reality. “99.99% win rate”, “50 trades winning streak”, “100% monthly return”. Do these phrases sound familiar? All of us have come across people and companies promising that they accomplish the above stated proclamations GUARANTEED. These individuals tend to deceive the beginners and sell them a fake dream. However, trading does not work like that. If we take a look at the chart, we can see the 4H timeframe graphic of GOLD. We decided to use this graph to illustrate the idea. On the left hand side of the chart, we can see an example of the strategy that the above stated type of individuals use to deceive a huge mass of people. Fake and unrealistic risk-to-reward ratios, impractical percentage returns and other tricks appeal the newcomers and lead them to the mousetrap set by the so-called “gurus”. On the other hand, on the right side of the screen, we can see the reality of trading. Not every trade will be a winning one. The most important thing is to follow the principles of risk management, have patience and discipline! We hope you enjoyed this educational post! If you have any proposals on what should our next educational post be about, please feel free to write down the topics of your interest in the comment section below. Investroy team is wishing you all a great upcoming weekend!
OANDA:XAUUSDEducation
by Investroy
6
What Is Capital Partitioning ? How will it help you as a trader?Hi everyone: Let's talk about capital partitioning, which is a risk management approach for consistent traders to utilize to allow them to leverage their capital. You may ask what exactly is capital partitioning ? well to simply put it in words, it is basically divide up your trading $ in the current trading account into 2 or more sub accounts. So what's the point of doing that you may ask ? Well, with leverage, a consistent trader does not require to have their entire money deposit into one trading account. They can allocate the asset into different trading accounts to reduce risk as well as trading different markets available Let's take a look here: Say I have a $100,000 trading capital. I understand risk management, trading psychology, and will not over trade, over risk and revenge trade. Hence, it's in my best interest to divide the $ in this account into a different accounts, or simply in a liquid-able account such as a savings account, stocks, bond..etc Here are a few scenarios that you can implement into your trading accounts. Understand that the % to allocate, what other trading accounts to deposit $ into, and how to move around the $ is totally up to you as a trader. The most important is to make sure you are a consistent trader before you approach this type of method. As more accounts you divide your capital into, the more % you will need to risk per account as you need to open bigger position sizes now. Any questions, comments, or feedback welcome to let me know. Thank you I will share other risk management educational videos that can be helpful for you. Risk Management: When/How to move SL to BE and to profit in a running trade ? Risk Management: How to filter trading opportunities if multiple setups are presenting entries: Risk Management: 3 different entries on how to enter the impulsive phrase of price action Risk Management 101 Risk Management: How to set a Take Profit (TP) for your trades Risk Management: How to Enter and set SL and TP for an impulse move in the market Risk Management: How to scale in the impulsive phrase of the market condition? Risk Management: Combine everything you learn to prevent blowing a trading account
BITSTAMP:BTCUSDEducation
by jojofang0901
27
The Importance Of Back-Testing Part 1When it comes to trading the financial markets (any market), back-testing your strategies is an absolute must. Although past performance does not guarantee future results, back-testing your strategy cannot be skipped or rushed if you wish to be a consistently profitable trader. Back-testing can be done many different ways today. There are many good software’s & trading platforms with available back-testing tools however, I personally prefer to use a spreadsheet as they are fully customizable & require you to fully understand the operation and function of the data you compile and your strategies performance. In my personal experience, I have found that traders who use software’s as opposed to manually back-testing each trade one by one, have a much more difficult time remaining consistently profitable. One of the effective benefits of manually back-testing your strategies is that you will be training your eyes to spot your specific Conditions & Criteria’s for entry along with getting a feel for the characteristics & movements of the market you are trading. You can manually back-test your strategies by going to your chart and scrolling as far to the left as you would like. Next you will slowly scroll one candle at a time to the right, until you see your setup. Once you see your setup, you should stop and enter the details of the trade into your back-testing tool. After you have entered the details of the trade into your spreadsheet, you should continue scrolling to see the results of the trade. Enter the results of the trade and continue scrolling right until you see your next setup. Your trading timeframe will determine how far back in time you can go for your back-testing. For example if you are using the 60 min chart as your trading timeframe, you should be able to test several years of trades whereas if you are using the 5 min chart as your trading timeframe, you may only be able to test several months of trades. I mainly trade using the 4hr and 60 min charts therefore I personally start my back-testing process by testing 1 years worth of trades. If I am happy with the results of the 1 years worth of tested trades, then I will typically restart the process of back-testing that strategy- going as far back In time as possible. I like to have 3+ years of back-tested trades before I will begin forward testing the strategy & then ultimately trading the strategy live. If you are unsure about the amount of time that you should back-test for your strategy, you can safely make this decision using the amount of trades instead- For example, I recommend back-testing AT LEAST 100 trades. I personally will not begin forward testing a strategy with any less. If the strategy proves profitable after 100 trades, I like to back-test as many as possible. There is no such thing as to much back-testing.  It is very important that we do not cheat during this process. Do your absolute best to scroll slowly as you proceed to avoid seeing the results of the trade before you have made the decision to enter. We must be honest in our approach to testing a strategy, in order to get the most accurate data & results possible. It is easy to see what happens next by accident & convince ourselves why we would or would not have taken that specific trade anyway. Be sure to follow your detailed conditions & criteria’s for entry as this will eliminate making discretional decisions. The purpose of pre-defined conditions and criteria’s for entry is to minimize the decision making process as much as possible. Please understand that cheating during this process is ultimately skewing the results of the strategy as well as cheating yourself! Back-testing serves many purposes to a professional trader & takes up a large portion of their work week as we are always looking for ways to improve our existing strategies and/or develop new, more efficient ones. This stage is also crucial to your confidence in your strategy which ultimately leads to being disciplined and following your set guidelines for the strategy you are using. Your confidence and discipline to your strategy will come into play during periods of “Drawdown" What Is Drawdown? Drawdown is an extended period of time that a traders account experiences loss or no increase in account balance. In other words, drawdown is a losing streak OR a period of time that the account makes no gain or loss. No matter how good a strategy is, it will eventually experience a losing streak. It is extremely important that we measure the severity of these drawdowns otherwise known as "Max Drawdown". Drawdowns can vary from strategy to strategy however as an example, my strategy typically experiences 1-2 drawdowns per year and the average length of these drawdowns are around 30-40 days long. Back-testing can really help maintain emotional stability & psychological logic during these prolonged periods of drawdown. If you begin to feel doubt while these periods of time are occurring, you may go back to your back-testing results to reassure yourself that it is normal for the strategy to not achieve a profit OR even lose a certain amount of money over the course of however long your results show on average. After we have completed 3 years worth of back-testing or at least 100 trades, you will be able to go back and see periods of time (typically 1-2 months) that the account made no money at all or even lost money. As an example- the strategy shown below carries an 11% Max Drawdown over the course of 3 years worth of trading, meaning that at some point during 3 years worth of trading, my account may experience a 11% loss from its current value at that time. This period of time is normal and as long as we do not exceed this Max Drawdown by more than 1 or 2%, we should continue trading our strategy without taking a further look to evaluate whether the strategy is outdated and needs adjusting or if we made trading related errors. looking at the date in the top left (10/4/2018) & Date at bottom right (11/5/2018), we can see that the strategy produced little to no gain over the course of this 32 days. When first starting out as a trader, this can be extremely difficult to deal with. 32 days can feel like a very long time while it is occurring but DO NOT give up on your strategy if it has shown to be profitable throughout your back and forward testing period!! This is where most inexperienced traders begin making mistakes, breaking their rules or change up strategies thinking the one they are using doesn’t work when in fact, this is 100% normal for EVERY strategy. This is where discipline comes into play. If you do not remain disciplined and stick to your strategy/rules during these periods of time, your lack of discipline will lead to inconsistent results & ultimately failure. Lets look at what happened right after this drawdown was finished had you stayed discipline. (See Image Below) In the following 47 days, the strategy managed to produce nearly a 90% gain! I am not saying these are the same results you will get, the point I am trying to make is to not jump from strategy to strategy or start making irrational decisions because of these periods of time. I have seen to many new traders destroy themselves because of drawdown or throw away an amazing strategy because they were unaware and uninformed about these periods of drawdown or because they chose not to back-test a strategy before using it to trade with live money. It is crucial that you extensively test anything you wish to use in the markets before using it. Take the time to feel those losses as if they were real and they were occurring in real time. Don't take anyone's word or back-testing results as your own, simply put the time in to this process yourself & you will find that your perspective of trading changes dramatically. You will start to treat this as a business and you will be one step closer to consistently profitable trading. Note: Back-testing a strategy must be done for each market you plan to trade. For example, your strategy may be profitable on EUR/USD however that does not mean it is profitable on any other currency pair or in any market in general. Be sure to back-test the strategy for each market you wish to trade as strategy results may vary widely from market to market. As a consistently profitable trader for the better half of a decade, the best advice I can give and the one thing I want you to take away from this post is- Always be sure to extensively back-test any trading strategy you plan to use in the markets. Without this step, you are essentially trading blind & will have an extremely hard time with your trading psychology & consistency. The software's out there today have a purpose when used correctly but I highly recommend using a more manual approach. It forces you to understand your strategy while training your eyes to spot your setups. Some Data Points You May Want To Gather For Strategy Optimization- I hope this was helpful for you, please leave a comment and let us know what your back-testing process looks like, and how you go about optimizing your trading strategies.
BITSTAMP:BTCUSDEducation
by Alec40
9
Bearish Evening Three Candle (Reversal Pattern)Evening Three Candle (pattern) How To Trade: Evening Star- is a three candle pattern with the highest middle candlestick, but also the smallest body and slight shadows/wicks. The third candle goes below the bottom half (1/2) of the body of the first candle and its opening FALLS below the opening price of the middle candle. The evening star is a reflection of the morning star formation. How To Trade: 1) On 4th candle open,use a sell market order to get into trade 2) Set stop loss higher then sell market order, give around top of 3rd candle (could be large, so adjust stop loss and risk management appropriately). You can find these bearish evening candles on lower time frames, but hourly, 4 hour and daily are better and more reliable, then lower time frames. 3) Set targets at least 1:1 to 1:3, stop loss and use ATR to get daily volatility range too.
Education
by Anbat
How Do You Build A Position With Pyramiding?As a trader, it’s a general rule of thumb that we should always be looking to maximise potential returns (per unit of risk) with each transaction. We should always be looking to squeeze as much out of the market as we can. There are times when this can occur by simply letting the trade run its course. However, sometimes market conditions align perfectly for savvy traders to “press the trade” or Pyramiding into the trade. Don’t press your luck; press the trade instead! Attempting multiple entries in the direction of a trend is one strategy savvy traders use in an attempt to maximise return (otherwise known as Pyramiding). The problem with this tactic is that while it may increase the potential reward, having a larger position in the market also opens you up to more risk. As a trader, you need to find the perfect balance of pressing the trade while not pressing your luck. There are a few ways to achieve this: If the market is moving at a snail’s pace, and not much movement has been made from the initial entry, any additional entry should be minor. If, however, a decent distance has been travelled, a trailing stop will secure more profit, and any additional entry can be larger. In essence, any additional position sizes are partly dependent on the distance between the initial entry position to stop loss. Ensure you have a strong driver that pushes prices along. Simply pressing trades at random is not good risk management. Reduce risk on entry by only adding additional positions when the stop loss on the first position can be trailed. Pick your battles carefully when Pyramiding You may find that as time wears on, you’re left with a large portion (>2% of total equity) in a single trade. The tactic of adding exposure will generally make for a “short” pyramid, which typically won’t grow over 2.5% of overall equity. This Pyramiding tactic ensures you’re exposed to additional upside while minimising downside to a level with which you’re comfortable. Here are a few things to be wary of: Keep an eye out for drivers that influence market psychology: This is when momentum and volatility will be high, allowing you to pyramid into a move more easily. For the technical traders, you may prefer to avoid day-to-day shifts by taking in a broader market view. Diversify: as with any investment, don’t place all your eggs in one basket. Diversification is key to keeping overall risk low. Have strict risk limits in place: With 2.5% in one pyramid, another 2.5% in another – next thing you know, your overall portfolio heat is close to 10%. That’s a high amount of risk to carry around with you. Consider minimising position sizes of certain trades to reduce overall risk. Consistency is key with position sizes: If your initial entry is $100k and your second is $300k, you’re off to a lousy start in building your pyramid. Final Thoughts on Pyramiding Remember always to start small and slowly. There’s no need to rush in. Experiment with pyramiding until you’re comfortable with your approach. Always remember the two key elements to consider: Resist the temptation to take profit early when the opportunity arises. Sometimes it’s best to sit on an existing trade. Be wary of adding to your trade at “worse” levels. Trends will always end at a certain point, so you don’t want to be pyramiding into an extended, ongoing trend. Look for new trends to pyramid in, which will reduce your overall risk.
TVC:GOLDEducation
by BlackBull_Markets
2
Education: Three Day Trailing Stop Rule (3DTSR)ICEUS:KC1! I learned a handy tool used to manage risk under certain circumstances - the Three Day Trailing Stop Rule (3DTSR) In this example, I actually fade the 3DTSR, but being able to execute different styles of trading strategies reflects an understanding of them, while acknowledging that no system or strategy used in markets will be perfect. Three Day Trailing Stop Rule: There is one initial criteria for the 3DTSR to become active - Either Upon Pattern Breakout - to limit initial risk/add to position at lower relative risk OR Upon Reaching 70% of Target from Breakout as a Trailing Stop In an Uptrend, to exit a position using the 3DTSR Day 1 is the High Day, defined by a new price high - at this point, we are not aware of the setup Day 2 is the Setup Day, defined by a closing price (end of day) that is below the low of Day 1 - at this point, the trigger is active Day 3 is the Trigger Day, as the stop is placed below the low of Day 2 The 3DTSR can also be used as an entry strategy, as shown in the chart here. Day 1 = High Day Day 2 = Setup Day, where price closed below the low of Day 1 Instead of placing a stop below the low of day 2, here I fade the 3DTSR by ADDING to a long coffee position, and jamming the stop to below the low of Day 2 Day 3 = The low of Day 2, or the trigger, is never penetrated, and price opens a cent higher If using the Trigger as a stop, or below the low of Day 2, and using the Triangle shown to imply a measured target, this is a whopping 20 to 1 trade setup. Do you have any profitable trading systems or strategies?
ICEUS:KC1!Education
by jBTCkingaling
3
BTC.D : A quick note on bitcoin dominance and altsCRYPTOCAP:BTC.D Hello everyone 😃 Before we start to discuss, I would be glad if your share your opinion on this post and hit the like button if you enjoyed it ! It is inevitable that at some points in the cycle, Bitcoin will outperform almost everything. With a few outliers of course. However, it's important that this doesn't change your game plan. Your game plan should already be set in motion. If you track your portfolio daily, both in USD and BTC, there are always fluctuations if you are holding a mixture of BTC, Alts and USD. It would be near impossible to maintain your portfolio's equivalent BTC value round the clock, unless of course you were all in BTC. I personally hold BTC as my base asset during bull runs (switching to USD at local tops or as near as I can) as well as moving to ETH as my base asset when ETHBTC looks set to out perform. However, it is inevitable that my alt coin holdings (spot) that I have accumulated will take a hit during a strong BTC run - so you may see your 'BTC worth' drop at times; However, I think of alt holdings like a coiled spring. When under pressure BTC, they bleed - and are suppressed. If you've accumulated at support, you need not to worry about the temporary drawdown in BTC, because in general alt coins out perform BTC in the right conditions, and so when bitcoin puts in a local top, altcoins regain their dominance and begin out performing. HOWEVER It is important not to be 'alt heavy' at times when the BTC dominance is at support. It is important to rotate the ratio of BTC:ALT:USD holdings to lessen the impact of alts bleeding at certain times in the market. For example, in January of this year, it was an amazing time to load up on altcoins given that BTC dominance was at resistance. We then saw astronomical gains in alts across Feb/March when BTC.D dropped like a rock. Then, in May when BTC.D hit support, the whole market tanked but alt coins got hit the hardest. Alts will lose value when BTC is volatile, in either direction. So it's important to balance the ratio of your holdings across BTC, alts and stables at certain times in the market. I pay attention to Bitcoin dominance more so for my spot holdings. For my trading account, every asset is simply a method of making a profit on percentage gains. So whether I'm trading BTC, ETH or alts - it doesn't matter as much. But for spot holdings, I generally want to cycle my ALT:BTC or ALT:USD holdings. When BTC.D is at support, I want to hold less alts. When BTC.D is at resistance, I want to load up on alts.
CRYPTOCAP:BTC.DEducation
by Helical_Trades
17
Box Breakouts On Daily, 4 hour & HourlyYes, you should try them yourself: Why? Makes Forex trading a lot simpler to do I add boxes on daily of: DAILY BOXES: 100 pip boxes - vertical lines every Monday and horizontal lines every price action number ending in .000 (psychological #) 4 HOUR BOXES: 50 pip boxes- vertical lines every day after session opens and horizontal lines every .000 & .500 critical price action numbers. 1 HOUR BOXES: 25 pip boxes- vertical lines every 4 hours after session opens and horizontal lines every .000, .250, .500 & .000 price action numbers. If you try this, you will like it. Why? because this will give entry price, stop loss price and 1st and 2nd targets. If your win rate can hit 70% or higher on these 1:1 or 1:2 risk reward setups- then you know exactly what and what you are doing when trading Forex. Risk management is always #1. You can have confluence with support and resistance, pivot points, RSI, BB, etc... before doing this box strategy. If you can use round numbers and quarter numbers in your trading you will be more profitable. Trading Forex is about PRICE and TIME of session going on now.
Education
by Anbat
Piercing Pattern (Blended Candlesticks)Can you blend or put together many candlesticks together in your head? If you can do this your profits and win rates will improve. Blended several four hour candlesticks together to make a Bullish piercing pattern: on AUDJPY 1) Look for a sharp down move (Bearish) - two /4 hour candlesticks 2) Look for a move up (Bullish)- three/4 hour candlesticks= with price action closing above 50% of previous RED or bearish move down. 3) Then do a buy order at that time with stop below lower bullish move and take profit or targets of 1:1 to 1:2, especially if day trading. ---Chart example if a great set up to trade: Look at highlighted boxes- what do you SEE? ---Yes, this blended candlestick idea can work on any time frames, but as usual higher time frames work better then lower time frames. IF, you can blend candlesticks together (some you tube videos on this idea too) you will be able to take an astronaut view on trades and not get tunnel vision but see the bigger picture or marco picture and see what price action on chart is telling you and direction or momentum is taking pair too. If you understand price action in the highlighted rectangle boxes on chart- then try to do this on other charts- find harami, engulfing, pin bar, etc... setups.
Education
by Anbat
Candlestick Patterns (Pin Bar) Part 3Pin Bars Are in Top 5 Reversal Candlestick Setups: Chart example Bearish Pin Bar 1) Price for Candlestick Push Up Higher, but Seller are stronger & end up pushing price action down to lower edge of candlestick 2) Wick/Shadow/Tail should be 2/3 or more of candlestick in length of real body 4) Real body should be 1/3 overall length of candlestick 5) A bearish trade of 1.26500 to 1.26300 to 1.26250 or 20 pips to 25 pips would have been easy to set up on chart example 6) Set entry at 1.26500, Set stop at 1.26700 and exit/profit at 1.26300. Yes, that is 1:1 Risk Reward- but with high win rate of 70% or more, it works Trading Forex is like playing baseball: sometimes you strike out, most of time you hit singles and sometimes doubles, triples & on occasionally you will hit a home run. If you scalp or day trade look for singles or doubles when trading, then you will trade for a lifetime. All about not being greedy and taking what a given pair, price, session and time will give you related to a single trade. Just take a piece of pip pie, you do not need the whole PIP PIE.
Education
by Anbat
Candlestick Patterns (Engulfing) Part 1Engulfing (Bullish or Bearish)- on any time frame, but like most things in Forex higher time frames works better and are more profitable too. Example chart is hourly of ChfCad, which moved great on Friday. Rules: Chart bullish engulfing ( can be used for bearish engulfing too) 1) Look for small bearish candlestick 2) Look for body of next bullish candlestick to engulf (yes, bottom of this candlestick can be same as close of 1st candle)- top closes above 1st candle. 3) Confirm time, which is New York session open (great) 4) Place buy market order on 3rd candle, after bullish engulfing 5) Place stop loss 20 to 25 pips away from entry related to using hourly time frame to do trade from 6) New 4 hour candle starts at 6 am to 10 am, PST/CA time- so I would let this trade run to at least 1:1.5 to 1:2.0 Risk Reward set up. seen on chart. 7) Always, risk management, remember: Pair, Price, Session and Time. I used only hourly, 4 hour and daily to trade from. Less noise & High profits.
Education
by Anbat
So You Wanna Trade Full Time... Is it Possible? A Good Idea?I walk you through my thoughts on the dream that most traders have: doing it full-time! I give you my personal experience and how I've tried things in the past. What I'm doing now and what works for me. Key takeaways: - The trifecta: access to capital, good strategy, cost-of-living. You have to solve for 2 / 3 of these! - You can't buy peace of mind. Have other income streams to mitigate the risk from your trading not going well for periods of time.
BITFINEX:XRPUSDEducation
by ImreSG
3
Time & Price Strategy (Box Breakouts)Time & Price Strategy (Box Breakouts) rules: 1) If scalping and/or day trading 2) Use Forex pairs with high ATRs or over 90, now GBP and EUR pairs 3) Use hourly charts 4) Use Naked charts (only price action on them) 5) Add vertical lines every 4 hours from session open . Chart is 2pm, 6pm, 10pm, 2am, 6am & 10am. (Every 4 hours- from beginning of new session) Chart look at smiley faces as times you should and should not trade r/t liquidity and volatility- red not trade, yellow maybe and green trade. 6) Add horizontal lines every 12.5 pips or as follows: 000, 125, 250, 375, 500, 625, 750, 875, so EIGHT lines. Example: 1.58125 as on chart. The above will give you boxes of both 4 hour times (vertically) and 12.5 pips (horizontal). Example hourly chart of EURAUD, on Friday gave you four possible trades to enter, place stops and exit with a profit. Three bullish and one bearish trade. 1) Trade with trend, momentum, support and resistance or breakout 2) Once price action hits or breakouts a box, then enter with stop at other end of box, three bullish trades use lower end of box for stop losses. 3) one bearish trade use upper end of box for stop loss. KEEP TRADING SIMPLE- you do not need to complicate Forex trading. Focus on price action, trends, momentum, support and resistance & risk management. Best times to trade everyday is in-between Tokyo end to London end related to high liquidity and high volatility.
Education
by Anbat
TRADING HIERARCHY | KNOW WHAT MATTERS THE MOST ⚠️❗ Hey traders, I vividly remember how I started to trade 8 years ago, how I was learning, and the things that I was doing. Contemplating my old self, I notice a dramatic shift in my mindset in regards to trading. Staring at the charts and desiring to make money on price action, I wanted to become a consistently profitable trader. Making the priorities, I decided to sacrifice my time on studying technical analysis totally neglecting trading psychology and risk management. Learning different trading strategies I always came to the same result: the account went blown and nothing seemed to work. Strategies of fancy traders on YouTube, strategies from best-selling books on Amazon, nothing could produce any penny. Not giving up and pursuing my ultimate goal I came to the conclusion that I set my priorities absolutely incorrectly. To be honest, I always thought that trading psychology (like psychology in general) is s*cks. Moreover, I considered risk management to be kind of obvious, banal topic not deserving much attention. Learning risk management techniques, applying them in day trading I finally saw a glimmer of hope. Reading dozen of books on trading psychology, contemplating my mistakes, and observing my behavior I noticed so many wrong, incorrect things that I did on a daily basis. With time and practice, my mindset shifted. I realized that most of the strategies that I applied and that seemed losing to me, in fact, were decent. It turned out that mastery of technical analysis is not enough for profitable trading. Instead, that is just a tiny part of what must be learned. Now, when my students ask me about the most important things to learn & study in trading, I always say: trading psychology and risk management go first, technical analysis is the secondary. ❗ Do not neglect these topics and give them due attention. They are an essential part of your success in trading. 🤔 Do you agree with the pyramid that I drew? ❤️Please, support this idea with like and comment!❤️
COINBASE:BTCUSDEducation
by VasilyTrader
44
Performance distribution of retail investors and hedge fundsMy thoughts about performance. This kind of info is not very available so I have to do some guesswork. We that spend all day in front of the computer expect to get better returns than 10% a year. But we have no idea what is possible and where we "rank" compared to others. All academics look at ever is day traders, yes 99% of day traders lose money and 1% earn peanuts while taking huge risk, we get it. And sometimes they look at passive investors. Cool. But no one ever says anything about active investors or Forex speculators, just that "on average active retail investors outperform", how wonderful, the average, yes I'd call myself the average normie definitely LOL! And regulators are even worse, all they care about is protecting dumb money and scaring people away from day trading. The french "market authority" on television was literally screaming "flee Forex it is dangerous, you should fleeeeeee!", I kid you not. First we look at retail investors. So the french "market authority" (AMF) looked at FX & CFD brokers representing about half of the individual FX & CFD investor population. 14799 persons in the 2009-2013 period. They found that over 4 years close to 90% of traders lost money. This is another of their deceptive tricks. It's just as with science these days, the data says something, the abstract says the opposite. So according to the extremely biased french AMF OWN DATA: - 30% of traders are in the "0" column, and according to their own data there aren't that many traders with tiny accounts, so ~30% breakeven. - They refuse to give any % result, some may be recalculated by overall we do not know, therefore I will assume it does not look as bad (or they'd show) - 5% of all investors make 2/3 of the losses, or at least half - 1% of all investors only are actually making significant returns (and 2/3 of the total) - As always day traders that destroy the stats are mixed with the rest - Most "winning" traders are barely above 0, making just a few hundreds to thousands a year www.amf-france.org From other sources and the AMF sort of confirms this, we know that: - Losers (especially big losers) that stick to investing, the ones that never give up never surrender in the face of adversity, the courageous ones with "heart", ye these guys, their losses get bigger and bigger actually. - Most winners continue to win and their profits get bigger. Here page 19, this is for stocks, we can see the net monthly market-adjusted returns of 62,439 households a large discount brokerage firm from January 1991 to December 1996: - On average, as they keep hammering us with, they underperform the market by 0.14% (each month!) - The average individual investor gross returns are slightly above the S&P 500 index returns (page 3) - The average individual investor net returns are slightly below the S&P index returns (about 91% of the S&P) - The S&P returns a bit less than 1.5% monthly - The worst of the worst managed to return -20.85% below index monthly, probably a permabear day trader or something - The 1st percentile is at -4.86% below market, 5th at -2.45%, and 25th -0.73% - The 99th percentile is at +4.44%, 95th +2.15%, 75th +0.50% - The best individual investor got 48.35% above market MONTHLY - The best individual investor difference between net and gross is minuscule, obviously it is not a day trader, probably some lucky investments - The gross median return is at -0.01%! faculty.haas.berkeley.edu So it seems this is how it goes, a normal distribution: We do not have that much info, and what little there is is rather hard to find, and hidden behind mountains of trashy scams "how much money can I make day trading join my course". I really only care about my own performance but it's always interesting to see how it's all distributed, what is possible, etc. For some reason I am interested in patterns and statistics. Funny. The info does not get shared a lot. Based on research and what gets exchange it seems most "traders" are VERY interested in money and "lambos" and very few are interested in stats, patterns, numbers. Ye I mean what do stats and figures have to do with investing right? It's not about some numbers it's about how much money you can make trading on a phone and what you will do with all of that money right? Honestly if we eliminate day traders that already make up at least 2/3 of FX investors, and all the lambo trolls that hate numbers but "it's ok I manage my emotions", it's not 10% making money but 30% at least I am sure, and 10% making decent money (enough to start a real career). Would be nice if they could just once separate day traders and look at FX investors with a time horizon greater than 1 day. All we can do is guess more or less, obviously more than 10% of these make money, but has to be less than 50% very probably. 10 to 50%, that's pretty wide. Probably in the 20-40 range, that's all I can say with high certainty. Hedge funds next. Hedge funds were doing great in the 90s and Morgan Stanley has a doc about them here: www.morganstanley.com Page 6 we can see discretionary funds making 18% a year with a max drawdown of only 5%. For all strategies except perma-bear the max drawdown is smaller than the annual returns. With all the regulations and harder market (and little fixed income) the results today are probably not as good but I do not think they are extremely different either. My guess on how hedge funds fulfill their max drawdown obligations is they place most the money somewhere safe (92% of the whole in case of an 8% drawdown) and then they risk the entire 8%, they might give a bit of it to each of their traders that go aggressive, and if they return 100% on the 8% that's an 8% return overall. I'm pretty sure that's the idea. But they might not freeze the entire capital and go 10X leverage, maybe they do something more complicated, with 50% in cash/bonds, 30% in "safe enough" investments, and 20% in high risk active trading with a max drawdown of 25% on these 20% (so 5% overall). The definitely do something like this, have to. The serious ones at least. The S&P returned 17.2% with a max drawdown of 15.4%, and page 4 we can see again a normal distribution: - The median directional return yearly was 16.3% (0.9% below market!) and median max drawdown 28.5% - The 75% percentile made 20.5% (3.3% above market), remember retail 75ers were 0.50% above mkt monthly - The 25% bottom only make 11.1% which is 6.1% below market for the year - Stock selection has similar drawdown and the returns of the 25, 50, 75 are 12, 17.2, 20.9 - There are no giant losers or giant winners but there aren't 66000 funds, and they have restrictions - In particular So actually pretty similar thing. The major difference is around 15% of the retail stock investors lost money in a raging bull market and no hedge funds did (except the few bears I guess). Otherwise, same normal distribution but with less extremes for hedge funds, they're more compact around the center (market).
Education
by MrRenev
1
[Advanced] How to aggressively grow a small (10k) account?Most of the time growing an account is a very slow grind. Make some, lose some, hope to make a little bit more than you lose. For example, with an average risk to reward of 1 to 5, and a win ratio of 21% (not counting once a year outliers), which is pretty good, breakeven being at 16.67%, after 100 trades the result will be - with a risk of 1% (flat) each time: - Profits = 21*5 = 105% - Loses = 78*1 = - 79% Net result = 26% Finding 100 good trades might take more than 1 year. With a theoritical compounding of 1% each trade the max profit would be: - Net = (1.05)^21 * (0.99)^79 = 25.94% Compounding is not always the magic trick. You might be looking at something like 20% a year. But once in a while, often in September-October, and sometimes at specific times such as March-April 2020, we get these monsters that go way further than usual. Often from a boring tight period, an explosion that grows exponentially, this pushes the reward dramatically. So we can end with a few winners at 10, 15R, rather than the usual ~5. So you can "easily" get the regular barely above breakeven 20% (for the example) with on top of that an occasional 10, 20, or even more, percent. On our small accounts these extras feel good, and they give a nice boost, but nothing dramatic. Growing a 10k account into 100k even with 50% a year will take 6 years. With 30% a year that would take 9 years. With 20% a year, 13 years. An experienced but poor investor, that spent years working on entries, exits, and so on, will need do something rather "dramatic" to grow his account. Doesn't have to be a complete gamble. An idea is after one of these "boost" periods, the investor could put all of that profit at risk. Say he made 32%, losing it all would be a major drawdown of 25%, but if the investor sees it as extra it is not the same as a crippling drawdown. Having a great period is nice (within years of moderate consistency), but it is not life changing. It might be a good idea to use that as some sort of springboard (or launchpad): - Losing that profit is a return to last step it is disapointing and the grind continues but even with an extra 30% the grind would still continue it wasn't going to be life changing. Maybe 6 months - 1 year worth of profit lost (but it was "extra" anyway). - Not losing it all (winning or even a period of breakeven) is great because it will allow the account to leap up suddenly, you quickly end up years ahead. So how does this work? Going to use an example. The investor gets 100 trades a year because why not (that's 2 a week or a little over 8 a month), has a reward 5 times the risk and a winrate of 21% (PF = 1.33). Account size = $10,000. Risk per trade = $100. The investor was able to grow 4000 into 10,000 over 4 years "slowly" (not that slow) but surely. The biggest drawdown ever was 20%. The yearly return is 26%. Over September to November he made $4000. He would "normally" make $1000 over 3 active months like this, but as is often the case, that period was violent with fear moves, winners just kept going and our investor that was able to add early ended up with 2 winners at 9+7 R each. So 32R. It can go very fast. 32%, on top of 8% on other grindy trades (over 3 months). Trying to catch whole trends and hold forever in my opinion is not realistic, but adding once or twice to winners is (talking about FX here), and winners (especially in March 2020 or September-October) going vertical does happen. So now how does the 10K investor scale up? Well $100 was 1%. 1% of 14,000 would be $140. but how about he more than doubles the risk?! So investor's profit in Sept-Nov was $4000 ("regular" $800 + "extra" $3200) and he/she decides to put it all at risk. He pushes the risk up to $280 which is now 2% of the new account size. After 12 loss in a row (down 3360) all the "extra" will be gone with only $640 profit left, the risk will then be reduced progressively, first down to 200 and if losses continue, 150 and finally back to 100. To attempt this our investor must have several years of results. From these years, taking out the handful of outliers, we know average RR & WR. The important question is what are the odds of 12 losses in a row? (With 21% WR) ==> First the probability of 12 losses in a row (if it was a random coinflip) are 6%. The odds are rather low. ==> Second the odds of exactly 11 losses out of 12 are 19%. In that case investor lost 1680/3360 -> Half. Still 6 lives left. ==> Once investor has 6 lives left the odds of losing all 6 times are 24%. Risking 280 rather than 140 means in 1 year rather than grow by 3640 (26%) the account will grow by 7280 (52%). Basically fast forward 1 year. In a way this is risking 1 year of profits to make 2. With something like 80% odds of making it. Aiming for much less than 12 lives is really gambling. An investor could also go for 20 or more lives but the higher the number the slower the grind. With 6 lives there is 1 chance in 4 to lose it all. But it would be a $560 risk, a huge increase from $100. Is there really a need to increase size by that much at once? It would not even accelerate growth that much. Our little investor can always make another jump after that first one. Because yes, that snowball can keep getting bigger. It is a terrible idea to keep going double or nothing, eventually it will be nothing, but we could find a compromise between being very careful and careless. We might not accept a 30% drawdown, or losing 3 years of very difficult very slow profit but if we can separate that say slow grindy 15% a year and go "I won't risk this" but the once a year or two monsters that provide 20%-40% at once (arbitrary numbers) we can see it as "extra", we got our account with 10k in in and the 4000 we just made well losing the 4000 technically would be a 30% drawdown on 14k but we can perhaps separate this, it was unexpected, and we put all of this capital at risk, without hurting our "main" capital. Might be a great way to boost growth without risking to blow up or being set back years. And if it works out. As I said the example investor (which is already at least in the top 5% by the way) made 7280 rather than 3640. An extra $3640. Actually since his account was $10,000 and he was supposed to make about 3600 in 1.25 year, but instead made 7280 + 4000 = 11,280, well that's an extra of about $7500. Last time investor risked 3400/4000 in 12 trades (6% odds of losing all 12 and perhaps ~15% odds of losing all that money over a longer time), maybe this time investor wants to risk 6000/7500 in 12 trades ($500 each!). 26R = $13,000. If it works out in 2 years investor's account went from $10,000 to $34,000 rather than $16,000. $24,000 profit rather than $6000 (or $10000 with the big winners). With what? 1 in 4 odds of only making 6000? It is still going to take years anyway, but it is possible to take ponctual big risks to try and jump up a few steps, without playing russian roulette either. Another quick example... I think this example is within the good compromise area. It would be possible to go "I will risk $1200 over the next 3 ($400 each)" but just 3 trades that gets rather random so it becomes gambling. Over several years risking "1200" (12% base account) over the next 3, well the randomness would even out but seems bad, better to have some sort of certainty. 4% and 6% odds to immediately fail means 94/96% odds of success, unless really bad luck that should rarely happen, this should work. Just not with rent money. And even if it fails the "base account" is still here, simply some unexpected profit evaporated. If it fails, can always re-try next time, after another while of grinding, making sure we are still actually profitable and it was just bad luck. On top of this whole concept of putting profit at risk for a boost, there are the very rare "generational" trades (George Soros versus BoE 1992), where risk is known to be limited (so no swiss tsunami), the odds are really high (way more than 21%), and the reward will be even better than 5R. Also more generally when having a great winning period, great conditions, but I would not trust anyone to be objective about that. Our eager investor that made 4000 could out 3000 at risk over 12 trades with $250 each, and leave the remaining 1000 for the "great ones" where maybe $300 can be risked at once (and if it works out a one time 1500-3000 boost), 300 being "only" 2% of 14000 so it's still fine, not completely crazy (we are talking about a serious investor that has been doing well for a few years not a retail day trader with a gambling addiction). Just like with trade selection strategies, there is no secret magic trick. This scaling strategy is honestly the best I can do. Maybe 1 last example... And finally, this can be tweaked. Rather than rambo the risk from $100 to $280 in the example I choose, still putting all or most of the 4000 at risk, an investor could first increase the risk to $190 (takes 20 losses to lose most of the 4000 rather than 12), and if that goes well, which if it's a profitable investor is more likely than not, then once at +5R (+$950) or so investor could then increase it $280 which overall is safer, and much more likely to work out. With $280 from the start 5R would be 1400 so investor left 450 on the table, not that big of a deal. From that point the next 12 will have a 280 risk, if unlucky then there is still profits left and we can drop to 190 before returning to only 100 which hopefully won't be the case, at least most of the time. Then stay at 280 a while (if it works out) and next time big profits appear, risk that + a part of the 4000, without touching the rest of the profit made in the meantime. Risking profits is really not the same as risking the "bulk" or "base" capital, that's a slippery slope... Rule number 1 = protect your capital Rule number 2 = do not lose money
Education
by MrRenev
99
Forex Trading System (Three Basics)Forex Trading System- All great systems have these basics in them: Entry rules, Exit rules & Money Management rules Anyone who is serious about trading needs to have a Forex Trading System that is tailored to them, but there is no reason to start constructing Forex trading system from scratch.There are some good Forex trading systems out there for you to work with. Some of them are free and some are very expensive, but the price tags don't always reflect the actual value of the Forex trading systems. Many of these systems won't work for you, and I am not talking about out-right dishonesty here, which can be a big problem when trading. Your ability to effectively trade with system you may be considering using or buying. You need to use a system that matches your life style and personality. Once you know what sort of Forex Trading System will work best for you, look at the components that make it work. Face it; if you are a new, or even a fairly serious, trader how likely are you to come up with a totally new concept? There are some very smart and wealthy traders out there. Why not use their ideas. All great Forex trading systems have these three basics: 1) Entry Rules- Based on choosing levels/level picking. Confirmation signals. Momentum entries. More mechanical the less emotions when trading. 2) Exit Rules- Based on risk to reward ratio. Can vary if you scalp, day trade, position or swing trade. take trades where risk-to-reward ratio is at least 2:1. 3) Money Management Rules- Proper position size for your account, most time 1% to 2% maximum risk. The idea of risk tolerance. This is how much a trader is ready to put to risk with one trade or during some period of time. It is often unrelated to a particular trading set-up, but can depend on trader's perception of probability for the current trade. Examples: 1% of account balance per trade; $100 per trade; 10% per week, etc.
Education
by Anbat
How to Backtest a Trading StrategyBacktesting is a manual or systematic method of determining whether a trading strategy or trading setup has been profitable in the past. A trader should backtest a strategy to help determine if a trading strategy is likely a waste of time and money, or if it shows promise and profitability in a variety of markets. While you can get software that does systematic backtesting… we prefer manual backtesting as it can be carried out by any type of trader, It is a key component in developing an effective trading strategy. There are infinite possibilities for strategies, and any slight alteration will change the results. This is why backtesting is important, as it shows whether certain parameters will work better than others. What Do I Backtest?
The first thing to note is that you don’t need a full trading strategy in order to start backtesting. 

For example I personally am always looking at new trading setups and candlestick formation and then backtesting them to see how effective they are. 

You can test small parts of a trading strategy before putting them all together. 

And of course you can and SHOULD backtest your whole trading strategy in a number of different trading situations. 

How to Backtest

 1) You need data to use in testing… if you are testing short term strategies on small timeframes then use at least a few weeks of trading data.

If you are using higher timeframes then you should be using years of trading data.

 2. Define the strategy parameters. Entry conditions, exit conditions etc. Include as many “If X happens then I will do Y” scenarios as possible so that your strategy is repeatable. 

Its essential to include risk management in these parameters too. So decide on if you are risking a percentage of your account equally on each trade, what is that percentage. If you are managing your risk in another method, clearly define it as something you are able to measure. 

ALL OF THESE PARAMETERS ARE WHAT YOU ARE MEASURING AND TESTING. THESE ARE THE ELEMENTS THAT YOU CAN CHANGE TO SEE WHICH ARE MORE OR LESS PROFITABLE. 3. Use the TradingView rewind tool to go back in time and remove the predictive nature of knowing where the chart will be headed. 

You could go back in time and look for trades from a year, a month or a week in the past, depending on how far back you wish to look. 4. Analyse price charts for entry and exit signals. This can be done until all trades on the chart up to the current time have been located and marked or written down

(be aware that it can take some time and be prepared that you are unlikely to be able to do all of this backtesting in one session… it could take you a few sessions of backtesting and recording the trade outcomes to fully test a strategy.) 5. Once you have competed this process, then you can start to total all of the trade results up to see how profitable or unprofitable your trading strategy / setup has been over time. What Goes Wrong in Backtesting

Typically the pitfalls and the ways that people fail at backtesting are based around not being through enough. 

That could mean that people haven’t included enough data in the backtest. 

It could mean that they left too many unknowns in the strategy so when using it in a live trading situation the strategy isn’t usable or realistic.

Also it could be that people don’t back test for long enough to see if the strategy is profitable or not. If you only have a small sample size of trade then even a short losing or winning streak of trades would dramatically affect the results. You need enough trades to show winning streaks, losing streaks and all between so that you can be confident that your strategy will be able to withstand those situations in live trading. 

Imagine for example in your backtesting your strategy didn’t lose more than 2 trades in a row but when you start using it in live trading you get 5 losses in a row. This is a situation that hasn’t been tested so could show a different result. 

The goal is to backtest for long enough and through enough so that nothing in live trading hasn’t been tested previously. While it may not be possible to fully achieve this… it should be the goal and you should feel confident enough that you have done everything possible to ensure this is the case.
Education
by JoelWarby
56
Insanity... the thing most traders do (intro)This is a short intro to a major problem traders face... in a longer video, coming out tomorrow most likely, I will explain more on how to stop being an "insane" trader and take control of your trading results by working on the most important person in (your) "room", which is YOU! Just how important are YOU to yourself? take any picture where you are with the people you love the most and look at it, the person you will first search in the picture is you... so I rest my case. Anyway, this video might wake you up a little, if it doesn't the full version will!
OANDA:US30USDEducation
by PrimedGroup