Originally Posted by Xela22
Thanks for your explanation and concern, TheShortLife.
It's a challenge, I did not say that I'm going to turn 3K into 1M. I'm going to try my best to do so. I want to see how far I can go and whether or not I even have the skills to do so.
I do not know why you assumed that I am flipping a coin when I trade, I actually throw darts instead In seriousness, I know how to read charts, I trade using a daily chart setup that has been taught to me by a professional trader.
I actually discussed how to minimize losses, I have a 6% stop loss. I also can exit the stock if I feel that the chart is indicating further losses.
Here is the main point of this challenge: I want to see whether or not I can become methodical with my trading. I want to take all emotion out of trading, something that is very difficult for most individuals to do. If I bank a 3% gain or more, I get out of the stock without waiting for it to go to the moon. If I have a loss of 6% or if I see that the chart soured, I would get out and move on to something else. I would not wait or pray for a bounce and become a bag holder as most individuals tend to do.
I've learned my lessons from being emotional in trading. 95% of all traders lose money in the long run and the two big reasons is greed and inability to control a loss. I want to see if I can be in the other 5%.
I paper traded beyond 10K and made systematic real money off trading as well but that is not the point here. I think a 3% compound idea is not impossible to achieve through the use of discipline and charting.
I may have come off a bit to abrasive since the way I understood, you were actually serious about going to 100,000 then to 1 M. The coin thing was just assuming you flip a coin when deciding to go long or short and your chances of getting a row of random trades going in your favour. About the 200 trades to compound to a million, I assume you don't actually take it seriously and it was just a demonstration of how fast one could get there.
However, with your stop of 6% and cut off at 3% profit you're making it really hard to win in the long run because your putting restrictions that have no significant value. If you have back tested your system and found the optimal outcome was a stop loss at 6% (or sooner) and a close of the trade at 3% profit then maybe it could work. But as it stands, you will need 2 winning trades just to make up one bad trade. Get a streak of 3 losing trades in a row and now you need a streak of 6 but probably 7 to make up the percentage loss just to break even.
Assuming again 200 trades, 50/50 win or lose after entry based on a coin flip, you have a 54% chance of seeing a 7 streak win (or loss) at least once but a 99.99% chance of seeing a 3 streak win (or loss) at least once as well. Meaning, you already have chances of seeing more streaks of 3 losses in a row than you will of 7 wins. I know you're using technical analysis and I believe that you know how to use it to put the odds in your favour, but even so, you are fighting an unnecessary uphill battle. Whatever improvement in odds technical analysis gives you is eliminated by the fact that you have to win 2 for every 1 you lose.
Why not let a profitable position run its course and scale out instead. Do it in increments - 50% of the initial position, then 50% again so you'll be left with 25% of the original. The first exit covers the costs of entry and adds a little profit even if price reverses back to your entry and the rest can go until the movement is done. Is the 6% stop loss to allow the position the chance to reverse in case it goes badly? If so, then let's say one third of the time your 6% stop loss allows a trade to reverse and become a 3% win instead. In the previous paragraph I used 3 losses and 6 or 7 wins to break even as an example. This time around, you get 2 losses in a row (lose 12%) followed by 4 wins (win 12%) to break even, and you get another win that used to be a loss but isn't 1/3rd of the time and gain a total of 3%. If that 6% allows 1 out of 3 losing trades to turn into a winner, than it might be justifiable. But I'm assuming 1/3... what if the 6% stop loss only allows a losing trade to turn into a winning trade 1/4, or 1/5th of the time? Is the 6% stop loss still worth it? I don't know, I'm going to say probably not.
Have you tried seeing how the outcome will change if you based your stop loss on volatility of the stock your trading instead? What about pyramiding the position instead? Buy 3 to start, if it goes in your favour add 2 more on the move up, then again once more effectively pyramiding your position upwards. Otherwise, if your initial 3 buying didn't work out, you dump it long before 6% stop loss is reached and you only lose on half of your entire capital at once. Personally I don't use that, but it's just an idea that might be better than a rigid 6% stop loss.
I'm not trying to be antagonistic, just trying to understand how your strategy works and bounce some ideas off to you. I've put together a little experiment in Excel pictured below. You randomly pick a stock from a list with certain criteria and decide to enter long or short (doesn't matter which) and you sell or cover whenever the stop loss is hit or the profit target is reached depending on which occurs first.
- It generates the number 0 or 1 randomly with 50/50 odds of either showing up
- 0 is a loss of 6% and 1 is a win of 3%.
- 50 trades are done per simulation
Scenario 1 - Pure 50/50 Coin Flip
All 5 trials resulted in losses. On trial 1 you started with a streak of 5 wins resulting in an account size of $3,477. It still didn't help after 50 trades as the account still lost 35.74%.
Scenario 2 - Assume We Use Technical Analysis
In the previous scenario, you had to play hundreds of games before you had a game with positive net percentage change. In scenario 2, you are using technical analysis which increases your odds by 16% so that you win 66% of the time and lose 40% of the time as opposed to winning or losing 50% of the time as in scenario one. To accomplish this, I changed it to generate a random number between 1 and 6 so that we have six numbers: 1 2 3 4 5 6 where the numbers 3,4,5,6 are considered wins and 1,2 are losses. This means that you should expect to win 4/6ths or 66% of the time. I ran 20 games and below are the net percentage change results. The average return of 20 games was 1.515%.
This means that with a 66% chance of a winning trade that nets 3%, you have an average portfolio gain of 1.515% for 20 accounts of $3000 with 50 trades per account. So technical analysis gets you just above break even with the current system. Now, I realize that you said you might even bail out your positions ahead of the 6% loss if you see the technicals going bad. To account for that, we'd have to create another random generator that says you exit a proportion of your bad trades at 2% loss, another proportion at 3% loss, and so on until 6%. But that's too complex for what's required here.
Conclusion - Reduce your stop loss level to 3% so that a technical analysis that creates a 66% win rate can have a positive effect on your account. Alternatively, increase your target profit rate so that it absorbs the draw downs. However, this will increase the variance of your gains making them more spread out. If you don't, you have a huge statistical disadvantage with your current system and will most likely lose.
Here are the excel files if you want to play around with them. Change the percentage gain or losses varialbes in the "Name Manager" and play around with them to see. Press delete on an empty cell to generate a new game.
50 / 50 Model - http://minus.com/lBBd9O0MT9GF1
Technical Analysis 66% Model - http://minus.com/lPqESvwNCB52J
Edited by TheShortLife - 5/20/12 at 4:37am