This trader has continued to win regularly. He is very calm and confident in their trade. Probably most of us would have been quite confident of their trade, if we did 11% of the total trading capital each month and at the same time with very low maximum losses.
He stated that his last month, was losing more than a year ago, and he has never suffered losses of more than 10% of the share capital since the deal began to use their current system. And it is not own trumpet, because he preferred that his name was not announced.
He also said that just carried out a modification of its system, which he researched and tested over the past 7 months, using data for 22 years with more than 6 markets. This will give additional 0.3% of average income per month, but the more important aspect of the system is to reduce potential losses. For this approach to regulate the size of the positions. Last modification does not affect the basic system concepts, and only optimizes the ratio of return and risk, tailor the relative size of positions for different circumstances.
In this interview will be discussed is on the use of positions to improve the profitability and risk.
Reporter: What does a regulation of the size of the position?
Trader: A trader does so. Some do not realize that they do. Even fewer use the full potential for profit. Regulating the size of the position can be defined as a change in the size of the transaction, based on the perception of the likely success of the trader trade.
Reporter: And every trader do this?
Trader: Yes. With every opportunity to enter the market, unless you choose to include or not? Of course, you do so. This is a solution based on your perception of success, to enter into the market, say the standard size of a position or stand aside. The decision to regulate the size of the positions associated with the use of your normal amount of shares or of lots or the use of zero-size positions based on your perception of success.
Reporter: So that every trader uses, in varying degrees, regulate the size of the position. But perhaps your approach is used to a greater extent?
Trader: Yes. I use the regulation size of positions to maximize profits while reducing risk.
Reporter: Could you tell about its development?
Trader: First it is necessary to understand two key ideas. Everything else can take their application.
Two basic concepts:
- Overlapping series of losses,
- Definition of the expected results.
Let's start with the losses. Like all simple ideas, it is best explained by a good example:
Assume that you sell, relying on the results of tossing a coin. And this is just a coin. In 50% of cases, it turns right, while 50% do not. I say, I will pay you double your bet (the size of the position), if you win and pick up your bet (the size of the position) when you are not lucky.
It would seem that even in this case, you can still lose. Imagine that your total capital was $ 100. And you put all of this when you first rolled coins. And you are not lucky.
Reporter: But no one will be foolish enough to risk all their capital in one transaction.
Trader: Correct. As you know, the correct size of the position is to the optimal level of contracts or lots to trade every time? I will name you is not the optimal amount, but will show a way to determine the basis for the maximum amount to trade every time.
Let's assume that you risk only 1 $ for each transaction. You can withstand 99 consecutive losses and still keep $ 1 of its capital. Although this is unlikely but theoretically possible.
Let's see what are the real chances of successive failures, for example, for a series of 3 or 7 consecutive failures. Agree that the sequence of 3 or 7 consecutive failures - it is a reasonable possibility?
Look at the probability of ten consecutive failures. It is equal to 1 in 1000.Reporter: So, in other words, using an acceptable level of risk, I can decide what the maximum number of lots or stocks, I can safely trade, based on the size of my account?
Trader: Absolutely. Now, with regard to the expected results. It is also easy - a simple multiplication and subtraction.
Remember, what chance we have suggested to our fair coin? I paid double your bet (the size of the position), if you win, and I have taken your bet (the size of the position) if you are not lucky.
Reporter: Yes, all true.
Trader: Well, the expected result of a separate deal with the size of the position of 1 is likely to benefit (50%) and the number of wins (2) when the probability of a loss (50%) and the number of losses (1).
This will be +0.5 x 2 - 0.5 x 1 = +1.0 - 0.5 = + 0.5.
In other words, for every $ 1 bet, the expected result is a profit of 50 cents.
Reporter: So, how this affects the size of the position?
Trader: What kind of trading system do you prefer?
- (A) 50% chance of winning with the second expected result of 50 cents or
- (B) 30% chance of winning with the second expected result of $ 1.10?
Reporter: In this case I'm not ready to make a choice, because I do not possess enough information to choose.
Trader: Good answer. Let's look at the table of probabilities, similar to what has been seen before. At this time, the chances of a successful throw a coin would be 30%, and the chances of failure will throw a coin 70%.
If you would like to take the risk of ruin 1 of 1,000, it could take a maximum position with $ 5, based on 20 consecutive losing.Now let's look at the expected profit from the transaction with the same risk of ruin.
For (a) you would have $ 10, $ 5 to get the expected profit from the transaction.
For (b) you would have $ 5 to get the $ 5.50 expected profit from the transaction.
Correspondent: I, like probably many who would prefer option (b).
Trader: Maybe. Now let's see what we would get with my perception of acceptable risk of ruin.
For (a) I would place the maximum bet $ 7 to get the expected profit from the transaction in the amount of $ 3.50.
For (b) I would place the maximum bet $ 3 to get the expected profit from the transaction in the amount of $ 3.30.
Reporter: So it may depend on the perception of risk of ruin?
Trader: Absolutely. However, it is worth remembering that people do not iron machine without emotions. He may have different perceptions of risk, not only a real risk of ruin. How would you deal with a series of 10 consecutive losses?
Reporter: Probably not too well.
Trader: For option (b) you have only 30%-s chances of winning for each transaction. So the probability of 10 consecutive losses for the (b) significantly greater than for (a). In fact, you are approximately 29 times more likely to have 10 consecutive losses to trade on the system (b), than to trade on the system (a). Because fear distorts your perception of risk, it brings harm, and this must be taken into account.
Therefore, taking into account human emotions, the expected profits may be substantially higher than in the example above, to compensate for "the emotional perception of the risk trader" with a large number of consecutive losses.
Also the option of tossing the coin was very simplified. In real trade commodity contracts, stocks, indices and currencies do not have two results - win a fixed sum or fixed-loss amount. There is a sequence of wins and losses and the distribution of probabilities for different outcomes.
So, to calculate the expected outcome requires a little more work.
In any case, this approach should be used with some caution. Think about the ideas and what they could mean for you. Move slowly - without any haste. Usvoyte basis before further movement. Build your house on a good foundation.
Reporter: OK. You said that did not change its trading system, and adjust the size of their positions, and this will give you significant benefits.
Trader: Yes. To understand this, remember the two transactions, which are offered as alternatives: options (a) and (b). You wisely did not become a choice between them, not knowing better.
But what if this was not an alternative for all of your capital. You should not have to risk their maximum transaction, based on the acceptable risk of ruin. Therefore, you should not have to choose only one of the systems of trade. You can place, say, 50% of the capital, provided the requirements of the risk of option (a) and 50% of the capital in case (b).
Now, what happens to your expected results, if you do this? You should try it on real-life examples for the two systems until you understand how it works.
And what happens to a joint series of losses, if the trading system (b) will usually win, while the trading system (s) will be inclined to lose? That is, would yield a negative correlation between these two systems.
I say so - selling the two systems together, when they are negatively correlated, your risk of ruin could be reduced and sometimes very much - and you could increase your maximum amount of the transaction at the same level of risk of ruin.
In other words the ratio of your return and risk will be higher. Doubling this ratio is not something incredible. You will make more profit on each unit of risk. You will become more peaceful. This sounds like music to your ears. I have several times increased the ratio of my return and risk over the past few years. I can not now imagine, as I have traded with the ratio, which was my first.
It is this focused on my recent research - finding the best set of negative correlation between the systems. Then, evaluating the combination of items, you can then make a new set of series of losses and find a new level of risk of ruin. Then I performed a study to build the same level of confidence, which I like. My success in trade is partly based on confidence, which in turn is based on research. But I attribute much of my success to my principle of continuous improvement.
Reporter: Yes, sure - it is an integral part of the peace. And I feel that your method gives you an emotional balance for sustainable improvements. This, indeed, regulate the size of the position has this effect?
Trader: Wise use of controlled items, for each system and between systems, may actually reduce risk or increase the yield to the same level of risk. I also use the concept of regulating the size of the position to increase the size of positions with increasing my trading capital and to reduce them, if he declines.
And this, of course, also be beneficial to my emotional state. I have successfully used some of the concepts to regulate the size of the position for many years. But remember that this is just my ideas - they may be wrong and they can be improved.
I am also very well know, my perception of risk. I spent a large study of how the success rate varies in different circumstances, for my markets and market instruments and trading strategies. I have enough experience evaluating various alternatives based on different probabilities. But the trade, I still presents surprises. Surprises happen if I missed anything, underestimated or incorrectly calculated.
I try not to take anything as a given, and re-reviewing it. More recently, a market situation, which I thought was fairly obvious, now I do not think so. I am constantly studying the data and studying what other changes should I make in their trading systems to improve them.
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