Thanks for this post. :thumb: As we do not know for sure the outcome for our trades, how doe's one be sure that his risk reward will be around 1:5 and higher on the trade he takes? He only can find out this through past performance. So it would be interesting to see how a trader with such a high Risk Reward is taking trading decisions. Any links for this?
M6 - Man, Mind, Money, Markets, Method & Madness
- Thread starter DSM
- Start date
Hello,
yes, ur right....... there is no such thing from which we can know in Advance for achieving 1:5 R/R.........IMO targets never works in trading(they often confuse where to exit T1 orT2 or T3)...we need to take what market wants to give....and at the same time we must take care for not loosing more than 1R(R= one unit risk)...IMO 1:3 R/R for beginner is little tough to achieve...
IMO...if u have 45% win system and if u get 1:1.5 R/R on an Average u can make decent amount of money.
Regards,
yes, ur right....... there is no such thing from which we can know in Advance for achieving 1:5 R/R.........IMO targets never works in trading(they often confuse where to exit T1 orT2 or T3)...we need to take what market wants to give....and at the same time we must take care for not loosing more than 1R(R= one unit risk)...IMO 1:3 R/R for beginner is little tough to achieve...
IMO...if u have 45% win system and if u get 1:1.5 R/R on an Average u can make decent amount of money.
Regards,
You are absolutely spot on when you say that 'one cannot be sure of the RR' and it can be discovered only post facto - except in case of options which is your forte. To be honest, personally am spending time to focus on understanding market turns, and prefer being out of the market for most times, which has helped me understand the rhythm, and the pattern of the market.... and get better trades. Am sharing my thoughts - It is my understanding that learning to be patient and just watching the charts helps... just waiting long enough will get an opportunity with a handsome payoff... (why is this so? because as the trader has not traded, he does not have a long or a short bias, and more importantly it was not a trade he was stopped out, which psychologically helps to take an entry with a clear mind and without bias) And being out of the market for most times, is easier to trade, as one is not emotionally involved in the entry and have to wait for hours and be mentally drained in the process just to earn a few points.
It is my experience that when there is sideways action, which happens most days, or at times even on trending days, the major part of the move ,maybe 60-70% of it, will be done in about 10 minutes flat. Today for example. My personal focus is on identifying turning points in the market with good RR. Will post the same as I find anything insightful or relevant. One historical example of such trade is John Paulson's bet on sub prime crisis. If I recall right, for a risk or downside of about US$ 147 Mil. the payoff was US$ 15 Bil., which made it a 1:10 kind of trade. (Similar was the case of George Soro's bet against the pound) Have to state here that though Paulson encouraged creation of synthetic derivative structures (where he well knew the payoffs were) the greedy banks were oblivious focusing on the petty fees they could earn selling insurance (alike selling OTM options) without understanding the corresponding risk, because they had not checked their assumptions.
But of course opportunities such as these are rare, but no doubt exist in our markets, which we can identify if we are emotionally detached observers. We need to focus on find these such opportunities. Hopefully will have more on this subject.
It is my experience that when there is sideways action, which happens most days, or at times even on trending days, the major part of the move ,maybe 60-70% of it, will be done in about 10 minutes flat. Today for example. My personal focus is on identifying turning points in the market with good RR. Will post the same as I find anything insightful or relevant. One historical example of such trade is John Paulson's bet on sub prime crisis. If I recall right, for a risk or downside of about US$ 147 Mil. the payoff was US$ 15 Bil., which made it a 1:10 kind of trade. (Similar was the case of George Soro's bet against the pound) Have to state here that though Paulson encouraged creation of synthetic derivative structures (where he well knew the payoffs were) the greedy banks were oblivious focusing on the petty fees they could earn selling insurance (alike selling OTM options) without understanding the corresponding risk, because they had not checked their assumptions.
But of course opportunities such as these are rare, but no doubt exist in our markets, which we can identify if we are emotionally detached observers. We need to focus on find these such opportunities. Hopefully will have more on this subject.
The Greatest Trade Ever: How John Paulson Bet Against the Markets and Made $20 Billion by Gregory Zuckerman
http://www.theguardian.com/books/20...r-by-gregory-zuckerman-review-heather-stewart
Excerpt from review of the book - The greatest trade ever by Gregory Zuckerman : The story of one man's refusal to believe in the health of the housing boom....
The mania that gripped investors in the wild bubble years of the 00s is widely portrayed as a universal affliction, but in fact a few stubborn souls refused to succumb. This book tells the story of one such refusenik, hedge fund manager John Paulson, who was not only sceptical about the health of the over-inflated US housing market, but bet against it – and won.
The scale of Paulson's big bet, "the greatest trade ever", as Greg Zuckerman describes it, was extraordinary. By piling into complex "credit default swaps" against mortgages – in effect, insurance policies that would pay out if homeowners defaulted – his fund made an unthinkable $15bn (£9.8bn) in a year, $4bn of which he took home himself. On a single morning in 2007, when gung ho sub-prime lender New Century announced it was in trouble, Paulson's fund clocked up gains of $1.25bn – more than his idol George Soros made in his notorious gamble against sterling in 1992, when Britain was forced out of the European exchange rate mechanism.
Zuckerman, a writer for the Wall Street Journal, is excellent at explaining the financial engineering that left bank bosses with only the vaguest understanding of their own balance sheets, and the trail that leads from bafflingly complex securities such as "collateralised debt obligations" to cash-strapped homeowners across the US. (Am personally skeptical of analyst who analyze balance sheet, which these day are so complex and have facts and figures hidden is subtle nuances, misrepresentation and obfuscation of truth, that it in the end is like reading a fairy tale. And our own company reports hide as much as they reveal, and thus make a complete mockery of what financial reporting should be)
***
And to round up, the excerpts from the list of other 9 biggest trades :
http://www.ibtimes.com/top-10-greatest-trades-all-time-253039
2. Jesse Livermore's call on the Crash of 1929
Jesse Livermore is a legendary speculator from early in the 20th century, who famous for correctly predicting both the 1907 and 1929 stock market crashes. For his 1907 call, Livermore made $3 million, which is equivalent to almost $70million today. After his 1929 trade, he was worth $100 million, which is equivalent to over $1.2 billion today. Furthermore, he made his fortune without the benefit of having a hedge fund (i.e. massive amounts of money from investors) and using fancy derivative instruments. One last point in Livermore's favor is that he became successful with less educational resources and mentors than modern speculators. In fact, Livermore is considered a pioneer in the art of speculation and top traders still swear by the Reminiscences of a Stock Operator, a book based on his trading philosophy and career.
3. John Templeton's foray into Japan
Sir John Templeton, born in 1912, is a pioneer of the mutual fund industry and a legendary investor. In the 1960s, when Japan was beginning its three-decade long economic miracle, Templeton was one of the country's first outside investors. At one point, he boldly put more than 60 percent of his fund in Japanese assets. In 1939, he put $100 each in 104 U.S. stocks that were trading below $1. In just 4 years, this portfolio quadrupled.
Back in the 1960s, people weren't really familiar with the concept of investing in Asia and Japan's export-driven model wasn't yet proven. It took someone of Templeton's ingenuity, courage, and foresight to lead the way.
4. George Soros' breaking of BOE
George Soros put the hedge fund industry on the map in 1992 after he broke the Bank of England (BOE) by shorting 10 billion worth of pound sterling and forcing the U.K. to withdraw from the European Exchange Rate Mechanism (ERM).
Soros made $1 billion in the process, which was an unimaginable sum back then. Why isn't Soros, probably the most (in)famous trader in the world, and shorting the sterling pound, his most famous trade, ranked higher? Not to belittle Soros' accomplishments, but the analysis behind it wasn't as difficult as some of the other trades on this list. Indeed, there were copycats that made the same trade as Soros. Also, far more people recognized the unsustainability of the ERM than those that saw the dangers of the subprime mortgage market. Moreover, it was Soros' partner Stanley Druckenmiller who came up with the trade idea in the first place. Soros' contribution was agreeing with it and taking a large position.
5. Paul Tudor Jones' shorting of Black Monday
Paul Tudor Jones correctly predicted and profited handsomely from the Black Monday of 1987, the largest single-day U.S. stock market decline (by percentage) ever. Jones reportedly tripled his money, making as much as $100 million on that trade as the Dow Jones Industrial Average plunged 22 percent. In the weeks leading up to Black Monday, many traders were on edge about the market. Some also recognized the danger of portfolio insurance, which was partly responsible for the magnitude of the fall. Consequently, many had short positions going into Black Monday or advised their clients to get out of the stock market shortly before it happened, so Jones wasn't unique in predicting the crash.
6. Andrew Hall's $100 oil prediction
Back in 2003, when oil was trading at $30 barrel and the economy had just recovered from the dot-com crash, Andrew Hall wagered that prices would top $100 per barrel within five years. When oil prices blew past $100 five years later in 2008, Hall's employer Citigroup made a bundle and Hall took home $100 million as a part of his compensation for this and other successful trades.
According to Time Magazine, Hall structured the contracts so that if oil prices didn't hit $100 within 5 years, they would expire worthless. Therefore, it took a tremendous amount of conviction and probably some brilliant analysis on Hall's part to make that trade. Traders know it's hard enough to predict the direction of an asset and find a good entry point. What Hall did was actually pinpoint a timeframe and price level of the move.
7. David Tepper's 2009 bet on financialsIn early 2009, David Tepper bought severely depressed shares of big banks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C). By the end of 2009, Bank of America quadrupled in value and Citigroup tripled in value from their bottoms earlier in the year. That was good enough to earn Tepper's hedge fund $7 billion. His personal cut was $4 billion. Tepper's background is in investing in distressed assets and that's exactly what he did in his biggest score to date. In early 2009, everyone knew Bank of America and Citigroup shares were cheap, but they were too afraid to buy because, among other concerns, they were afraid that these banks would be nationalized. Tepper bet they wouldn't be. While this trade seems like a wild gamble, Tepper's excellent track record in distressed investing proves otherwise.
8. Jim Chanos' prescient shorts
Jim Chanos is the best short-seller in the world. He correctly predicted, and profited enormously, from the demise of Enron. Other examples of his successful shorts include Baldwin-United, Tyco International, Worldcom and recently homebuilders like KB Home. Chanos started to look into Enron as early as 2000. When he found red flags, he dug deeper, discovered more discrepancies, alerted the media, added to his short position, and eventually got rich when the Enron scandal was revealed in October 2001 and the company went bankrupt. The Enron scandal was highly impactful because it was the biggest bankruptcy to date, led to the dissolution of accounting firm Arthur Andersen, and brought about new regulations like the Sarbanes-Oxley Act.
In a way, Chanos' short of Enron is like a miniature version of Paulson's short of the subprime mortgage market; both reached strongly held convictions by painstaking and thorough research and very few people were aware of the landmines these traders discovered. Chanos is now setting his sights on China because he believes its economy is just a giant bubble. There are limited ways he can short the Chinese economy, so Chanos won't make as much money as Paulson if he turns out to be right. However, if he is indeed right, he would cement his status as one of the most brilliant analysts of all time (and this list would be revised to reflect that).
9. Jim Rogers' early call on commodities
Jim Rogers spotted the secular bull market for commodities way back in the 1990s. Since 1998, the index has returned 290 percent through the end of 2010. This compares to the 10 percent return of the S&P 500 Index during the same period.
Rogers expects commodities to continue to rally ferociously for the long term as paper assets become more worthless and demand (for certain commodities) picks up worldwide. If he is indeed correct, the importance of his call will be elevated and this list would be revised to place him higher. Back in the 1990s, on the heels of a long bear market for commodities, it was difficult to make a bullish case for them. In fact, few people did. It is therefore highly impressive that Rogers pretty much called the bottom of a market that went on to rally tremendously for the next decade and more.
10. Louis Bacon's geopolitical play
Louis Bacon made a killing in 1990 by anticipating that Saddam Hussein would invade Kuwait. Bacon went long on oil, short on stocks, and helped his new hedge fund return 86 percent that year. In the following year, he also correctly bet that the U.S. would quickly defeat Iraq and the oil market would recover. Aside from the eye-popping returns, this feat is included on the list because Bacon ventured outside the field of finance and correctly anticipated a geopolitical event.
Identifying strong trends : Al Brooks
There are many signs of strong trends. The most obvious ones are that run from one corner of the chart to diagonally opposite corner will only small pullbacks. However, in the earlier stages of a trend, there are signs that indicate that the move is strong and likely to last. The more of these signs are present, more focus should be placed on entering with the trend. You should look at counter trend setups to enter where those counter trend trader will be forced to exit with a loss. In the trend days the best reversal bars tend trap the countertrend traders into the wrong direction.
Characteristics commonly found in strong trends :
• Big gap open
• Trending high and lows (swings)
• No climaxes and not many large bars.
• No significant trend channel line overshoot.
• Few, if any profitable counter trend opportunities.
• Small pullbacks.
• Sideways correction after trendline break.
• No two trend bars close on the opposite side of EMA (5M, 20 EMA).
• Bars with no tails or small tails in either direction.
• Large gaps that don’t reverse early usually mark the start of a strong trend for the day, and the day often closes near the high or low.
• If the market does not test the 5M, 20 EMA for two hours, it is a sign of strength.
Summary :
With trend in a runaway mode, there will likely be no pullbacks for many bars, and the bars will be good sized trend bars with mostly small tails.
• If you find that you are missing with the trend entries, stop trading countertrend and focus on trading with trend setups.
• If you keep looking to trade counter trend, you are looking in the wrong direction and are likely to miss great trend setups.
• The stronger the trend, the more you need to be swinging with the trend and not scalping countertrend.
There are many signs of strong trends. The most obvious ones are that run from one corner of the chart to diagonally opposite corner will only small pullbacks. However, in the earlier stages of a trend, there are signs that indicate that the move is strong and likely to last. The more of these signs are present, more focus should be placed on entering with the trend. You should look at counter trend setups to enter where those counter trend trader will be forced to exit with a loss. In the trend days the best reversal bars tend trap the countertrend traders into the wrong direction.
Characteristics commonly found in strong trends :
• Big gap open
• Trending high and lows (swings)
• No climaxes and not many large bars.
• No significant trend channel line overshoot.
• Few, if any profitable counter trend opportunities.
• Small pullbacks.
• Sideways correction after trendline break.
• No two trend bars close on the opposite side of EMA (5M, 20 EMA).
• Bars with no tails or small tails in either direction.
• Large gaps that don’t reverse early usually mark the start of a strong trend for the day, and the day often closes near the high or low.
• If the market does not test the 5M, 20 EMA for two hours, it is a sign of strength.
Summary :
With trend in a runaway mode, there will likely be no pullbacks for many bars, and the bars will be good sized trend bars with mostly small tails.
• If you find that you are missing with the trend entries, stop trading countertrend and focus on trading with trend setups.
• If you keep looking to trade counter trend, you are looking in the wrong direction and are likely to miss great trend setups.
• The stronger the trend, the more you need to be swinging with the trend and not scalping countertrend.
It is easy to say things, but they do not always work out in practice. Read up any trading websites, and you will find a lot of things that are profound. But look closer... they may not really be practicable.
About this 1:5 RR, how many profitable traders really work on this ratio? Why do you think that a 1:1 RR will not work, if u have a high win rate (see the implicit nonsense assumption that the win rate will be low)? If u work on a 1:5 RR, what is ur win rate? (If u have a 1:5 RR and even a 30% win rate, then u will be seriously rich... and probably not writing a website article)... On TJ, as far as I know, ST has a low RR and high win rate.
The list of traders given above is heavily biased towards those who have used investor like strategies (Wonder why Buffet is not on the list?). If I already had my millions in my hand, may be I would try these strategies. But as a trader who needs to earn his daily bread, and without millions (and inside info) in hand, how do I limit myself to only trading rare opportunities.
I have ranted a lot, maybe a lot of it is not justified, but I am just hoping that there is a critical review of stuff that is posted out there on the net... It is so easy to be on a website and pretend to be an expert...
About this 1:5 RR, how many profitable traders really work on this ratio? Why do you think that a 1:1 RR will not work, if u have a high win rate (see the implicit nonsense assumption that the win rate will be low)? If u work on a 1:5 RR, what is ur win rate? (If u have a 1:5 RR and even a 30% win rate, then u will be seriously rich... and probably not writing a website article)... On TJ, as far as I know, ST has a low RR and high win rate.
The list of traders given above is heavily biased towards those who have used investor like strategies (Wonder why Buffet is not on the list?). If I already had my millions in my hand, may be I would try these strategies. But as a trader who needs to earn his daily bread, and without millions (and inside info) in hand, how do I limit myself to only trading rare opportunities.
I have ranted a lot, maybe a lot of it is not justified, but I am just hoping that there is a critical review of stuff that is posted out there on the net... It is so easy to be on a website and pretend to be an expert...
IMO there are we get many good R:R trades in all tf's ...if we found these patterns in live and not hesitating to entry its possible.....
Some of patterns which give good R:R trades...WW,Flags,Demand & Supply zones in sideways ,good reversels @ major pivot points ,TL bd/bo& PB trades etc....but for practical its tough to enter trades...IMO if we practice hard & hard we might start see these RR's
My views...am some how found in live some trades but unable to enter in it due to many emotional problems...so am not able to catch these trades ...may be if practice it someday will start to catch it
Some of patterns which give good R:R trades...WW,Flags,Demand & Supply zones in sideways ,good reversels @ major pivot points ,TL bd/bo& PB trades etc....but for practical its tough to enter trades...IMO if we practice hard & hard we might start see these RR's
My views...am some how found in live some trades but unable to enter in it due to many emotional problems
...so am not able to catch these trades ...may be if practice it someday will start to catch it Coincidentally, I was also trying to observe turning points today... http://www.traderji.com/trading-diary/90116-dasara-system-60.html#post949420
Similar threads
-
Dollar stabilizes&Safe-haven Demand Cools, Gold Retreats to $2320, Focus Shifts to US Jobs Data
- Started by Veteran123
- Replies: 0
-
-
How do you manage risk when trading forex, especially during volatile market conditions?
- Started by ReggieFx
- Replies: 2
-
How do you follow risk management strategy?
- Started by ReggieFx
- Replies: 4
-