I would like this to be a continuation of Chan's Money Management thread with more focus around individual stats based on our trading strategies.
Risk Management, in my opinion, is the most important part of trading.
Psychology is right next to it.
Do you keep track of all of your stats to see where you need to improve with your strategy?
Or is your entire strategy based on a gut feeling? Do you throw darts at a wall?
Regardless, having a solid risk plan in place is one of the biggest keys to successful trading.
Here are some topics to be discussed in this thread.
I copy/pasted the following from BigMike.
- Risk of Ruin
- Position Sizing
- Scaling in/out vs AIAO
- Trading correlated/uncorrelated markets
- Defining stops based on risk/volatility/market structure
- Trailing stops based on profit/risk/volatility/market structure
The Maximum Adverse Excursion, commonly abbreviated MAE, is a term used to measure how much a trade moves against you from the entry point, usually expressed in ticks. For example, if your entry price on a long position trade in Crude Oil is 76.00, and while you were in this trade the market moved against you to a low price of 75.75, this represents a MAE of 25 ticks (76.00 - 75.75).
The Maximum Favorable Excursion, commonly abbreviated MFE, is a term used to measure how much a trade moves in your favor from the entry point, usually expressed in ticks. For example, if your entry price on a long position trade in Crude Oil is 76.00, and while you were in this trade the market moved in your favor to a price of 76.50, this represents a MAE of 50 ticks (76.50 - 76.00).
For instance, if over a 100 trade sample size you find that your MAE average is 20 ticks, then it could suggest your entry price could be improved.
As an example let’s say that a trader has a system that produces winning trades 30% of the time. That trader’s average winning trade nets 10% while losing trades lose 3%. So if he were trading$10,000 positions his expectancy would be: (0.3 * $1,000) – (0.7 * $300) = $90 So even though that system produces losing trades 70% of the time the expectancy is still positive and thus the trader can make money over time. You can also see how you could have a system that produces winning trades the majority of the time but would have a negative expectancy if the average loss was larger than the average win: (0.6 * $400) – (0.4 * $650) = -$20