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Gary & others,
I don't pretend to be expert with this ratio, but I've been giving the
question of risk management (with futures) a lot of thought lately, and
I'd like to encourage further input.
It seems to me that percent of winning trades must be part of the equation.
If you're taking high probability trades and have a track record of 65%
accuracy, you are far less likely to have 10 consecutive losers than
another trader who shoots for a few big wins and has only 30% accuracy.
Both traders may be profitable, with different styles.
If you are highly accurate, the chance of long losing strings rapidly
approaches zero. But in addition to consecutive losers, another figure
to look at is the probability of being profitable after the next 20, 50,
or 100 trades. The more you apply your edge, the less likely that you
will be a net loser.
The account may therefore become safer the more you trade it, as long
as you don't raise the ante (the more you get ahead, the harder it is
to lose it all back).
The chances of being profitable after 6 months would also depend on the
dollar amounts of losses and gains. Trader A has 65% wins, takes a $500
profit or a $500 loss each time. Trader B is the same except he's able
to take $1000 profits each time. They have equal risk of consecutive
losing trades, but trader B is much more likely to be ahead in dollars
after any period of time. This is interesting because we all have some
control of these figures; they are decisions on when to exit.
If all goes well, the next decision would be when to trade more capital,
and how much more, without lowering the odds of long-term success.
The one thorn in all this is the nature of the markets. We can decide
to limit our loss to 2% or $500, but what if we can't? How do you deal
with it when nobody wants the other side? It only takes one disaster
to ruin the best plan.
Wayne Moody
wlm95@xxxxxxxxxx
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