Zeev's Turnips Patch-No Politics (ZEEV)

[Train Guy]

-- But, simply enough, never put enough into 1 trade, that it is able to ruin you. --

But how much is that? And what are the odds? If you're going to be a serious trader and take it to the next level, you need to know. Fortunately the math is easy enough, even if you have to do some research to come up with the numbers. Now if you've read this article, #msg-3635342 , then you realize you need probability tables. Where do you get probability tables from? I was pondering that when it occurred to me it is easy to make your own.

So let's look at a real world example. I scalp the YM. I've been going over my trades for the last few months to get my win rate. How many of you keep a trade book of every trade? I have on an off over the years, but as you'll see, it's a must. Otherwise how can you accurately predict your risk of ruin. And how can you be doing anything other than dabbling, just playing at the market. If you're going to be a serious trader, you need to know your numbers, the statistics. My win rate comes in right at about 75%. I've also calculated my average win and loss per trade, after factoring in commissions which run one point per round trip, we net 3 or lose 5 points. Average win per trade is 4 points with a 4 point stop loss minus the commissions.

So with a win rate of 75%, what's the chance the next trade is going to be a loss? 25%. So in 100 trades, the chance the next trade is going to be a loss is 25 in 100. You just had a loss, what's the chance the next trade will be a loss too? Again only 25%. So what's the chance of having 2 losses in a row, 25 X 25% or 6.25 in 100. What about three is a row? 6.25 X 25% or 1.5625 in 100. 4 in a row is .390625 in 100, and 5 in a row is an almost nonexistent .0976562 in 100. Here's the table.

75% win rate probabitlity table
chance in 100-- 1,000-- 10,000

1 - 25.00-- 250.00-- 2500
2 - 6.250-- 62.250-- 625
3 - 1.562-- 15.625-- 156.25
4 - .3906-- 3.9062-- 39.06
5 - .0976-- .97656-- 9.76
6 - .0244-- .24414-- 2.44
7 - .0061-- .06103-- .61
8 - .0015-- .01525-- .15
9 - .0003-- .00381-- .03
10 - .0000-- .00095-- .009

So how much can we expect to make a trade? Well 75% of the time we make 3 points, where 25% of the time we lose 5 points.

3 x .75 - 5 x .25 = 1 so on average we only net 1 point a trade. Doesn't sound like very much. Is it? Let's run some numbers and see. Don't you just love this math stuff!!

We'll say we are willing to take a $1000 hit before we decide that's enough of this. How many contracts should we trade? The chance of getting 5 losses in a row is 1 in 1000, so we could risk losing $200 on each trade. YM pays $5 a point, so for each losing trade we would lose $25. So we could play 8 contracts at a time. We immediately break out in a sweat at the thought. <g>

So what kind of money can we expect to make. Let's say we do 10 trades a day with 8 contracts at a time. We average 1 point a contract or 80 points for the day. So 80 points times $5 is $400. And that's after commissions. Hm, is that very much? What kind of return are we getting? The margin on the YM is $1250 a contract so 8 contracts would run us $10,000 with a return of $400 a day or 4% a day. Whoa, wait a minute, 4% a day????? Figuring 20 trading days a month, that would be like 80% a month. What kind of risk are we taking? 1 in 1000 that we'll ever lose $1000 in a stretch. But, but that's like 1000% a year. That's what the math says.

I stumbled on this on Sunday. I've been gathering my numbers and coming up with the statistics since. This morning is the first time I've seen the results of a real world example. They are so astounding I"ve been going over them again and again to see if I have a mistake in my math or something. Gives one a totally different perspective on how to trade. Takes the worry and fear out of it.

At 10 trades a day, it would be 100 days for 1000 trades, or about 5 months (20 trading days a month). So you are likely to once ever five months have 5 losses in a row. Four times in five months you'll get 4 clunkers in a row. Is that anything to worry about? Should you change what you're doing? Despite your losing streaks, you're still making 1000% a year. Worry?? Worry what to spend your profits on maybe. But worry about your next trade. Why bother.

This points up a need to constantly track your trades. To keep a trading log. Then as long as your win rate doesn't change or your profits/losses per trade don't, you can be confident in what the results are going to be. If your results start getting better, look for what you did to improve them. If they start going down, look for the problem. Other than that, sit back and put your feet up.