Thoughts on Day/Swing Trading

[Satyen]

The entire trading is based on two very important concepts.....1) Reward/Risk ratio or R/R and 2) Money Management ( MM )or Position sizing. Both these concepts are more important than which of our trade is successful and which is not.

I read a book called " Mathematics of Money Management " by Ralph Vince. This is one of the three finest books on MM by the author and some of the concepts in that book opened my eyes to what trading really is... I am giving below a small excercise from this book to stress a point that in final results, which of your trade made money and which lost money makes NO difference at all.....

THE POSITION SIZING AND MM GAME

Make 40 small pieces of paper,on 20 write SUCCESS and on 20 write "FAIL" and fold them and put them in a glass bowl. Then ask a small child in the family to pick up each slip from the bowl and you read whether success or fail.

The sttarting capital is Rs 1,00,000/- and At each trade you will risk 25 % of the capital. If the trade is success,you make double the amount of money risked on a trade and if it is failure,you loose the amount risked on that trade. So for first trade your cum equity balance is Rs 1,00,000/- and the amount risked is 25000/- so if the slip says success,you make 25000*2 =50,000/- and your cum equity is 1,50,000/- now and on next trade you bet 25 % of 1,50,000/-. so go on like this till 40 trades are over.

The final amount you will have is not dependent on the sequence of your winning/loosing trades,consecutuve looses,wins etc and final amount is over Rs 10,50,000/- Dont believe me ? Try it out. I have spent 3 hrs on this game early in my career and tried coin toss,various sequence of alternate win/loss,10 losses and 10 wins in sequence etcBut the final wealth is same not even a rupee more or rupee less.

What does this prove ? Have a competent system,backtest,have a good mm and trade with confidence. Your sequence of losses and gains make no difference in ultimate results of building your wealth as long as your method has a positive expectancy and edge. Hope you enjoyed the game and learnt something from it..About expectancy, we will discuss later...

I am no way advocating risking 25% on every trade. This is just illustration because optimal f for this system is 25 %. But 25 % is way tooo high. Start with 1-2 % and put your profits to work for you.


Smart_trade

Hi Dada Thanks for this Idea .....


On the Above post Summery is

Initial Capital = 1lac

R:R = 1 : 2

Risk on Capital = 25%

Wining Rate = 50 %

So after 40 trades initial Capital Turns into Over 10 lac


Suppose I have different parameters of above then how can i calculate the return

Want to Do some Experiment Is there any common Calculation where if i change parameters and see what will be the return

Say I have Following parameter


Initial Capital = 1lac

R:R = 1 : 3.5

Risk on Capital = 2%

Wining Rate = 35 %

Then After 15 trade waht will be my returns ??


One more thing how to Calculate R:R , I Suppose ratio of total avg risk and total avg return after some no. of trade ?


Bit Weak in maths etc , Waiting your reply

 

[adityasaraf007]

@Satyen:

This should be helpful.

 

[jallanankit]

Smart_trade.. The above post will help a lot of people who understand it.. i will love to give it a try.. first on paper and then on money.. Hope this lesson comes good..

Thnx a lot..!!

 

[Satyen]

@Satyen:

This should be helpful.

Hi
when i gave Dada's Parameters Outcome is 6 lack not 10 lac said by dada

Is the formula is ok ??

Regards

 

[Smart_trade]

Hi
when i gave Dada's Parameters Outcome is 6 lack not 10 lac said by dada

Is the formula is ok ??

Regards

Check that again , Satyen.....with my parameters....the final balance comes to 10.54 Lacs......I have done it myself spending 3 hrs on it manually.......

The formula of calculating the final balance ( also called TWR or Terminal Wealth Relative in Ralph Vince's book ) is not that simple....it involves some mathematical calculation ....I did not understand those when I read them.....and now I know that those are not important for creating good returns on your capital .Understanding the concept is important.

Smart_trade

 

[adityasaraf007]

Please download the file again. I have updated it.... Earlier I didn't notice that we are compounding the money after every trade.... Now its okay.... Link to download the file is same as before...

Regards.

 

[adityasaraf007]

ST Sir, I can't believe you spent almost 3 hours to do the calculation. You are an engineer by profession, so, you must be good with mathematics..... We just need to play with the powers after making the factors, nothing else......

For the parameters given by you:

Final Balance = 100000 * (1+2*0.25)^20 * (1-0.25)^20 = 10,54,509

Regards.

 

[Satyen]

Check that again , Satyen.....with my parameters....the final balance comes to 10.54 Lacs......I have done it myself spending 3 hrs on it manually.......

The formula of calculating the final balance ( also called TWR or Terminal Wealth Relative in Ralph Vince's book ) is not that simple....it involves some mathematical calculation ....I did not understand those when I read them.....and now I know that those are not important for creating good returns on your capital .Understanding the concept is important.

Smart_trade

Yes Da...... Concept is most important learned ,

instead of thinking of profit if we can managed to get low RISK (Low Stop Loss) Entries to Big trends...... then it will be amazing

Managing Risk is more important than any other things








Thanks Da ......

 

[EagleOne]

Hi ST
It is good to see you posting. I hope your back is much much better now.
While reading your posts on R:R, monthly targets with respect to one's trading capital etc., I suddenly remembered a post by a relatively new member that I read on some thread last night.
He wrote essentially something like: Day trading doesn't mean one has to trade everyday.
And I was like, man how right this guy is! Because I think the compulsion to trade everyday is one invisible killer of ledgers. As we all know that there are some objective things about market which are applicable to all traders, but also there are subjective things peculiar to a given trader. That is, sometimes the market doesn't 'behave' to one's style of trading. Pushing oneself to trade just because one is sitting before the terminal, is a mistake. IMO, one can never trade properly if one is not feeling in sync with market. No matter how good is the methodology, the MM, or the system. A mistake by a dejected mind may wipe out days', sometimes whole week's, profits! (happened to me many times!

When I acutely observed myself trading, I found myself making stupid mistakes when market was playing in a very narrow range. A little headfake off the channel, and I would think it's gonna be breakout/breakdown...and plomp! It'd fall/pull back, hitting my SL.
But now, the moment I catch myself getting pushy, I just switch off the terminal, listen to some music sitting in the rocking chair, or make some coffee and sit outside in the the fresh air for an hour or so.

I hope this will help some of my fellow traders.

Good night all

PS. Just found the post I mentioned above, it was by Abir. Here is the link:http://www.traderji.com/day-trading/59141-please-help-newbie-day-trading.html#post585028

 

[mdrafi67]

thanks for the enlightenment.............wat u said is absolutely correct.......hope many of them will follow this as some guiding steps............cheersssssssss