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     coyotte
Member
Username: coyotte
Post Number: 212
Registered: 12-2002
Rating: N/A
Votes: 0
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| | Monday, September 03, 2007 - 10:23 pm: |  
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Thought this book deserved a discussion thread of it's own.
The link below is to Ingot54's excellent original post.
http://www.incrediblecharts.com/userscripts/forums/show.plx?tpc=106&post=117990# POST117990
Although currently only midway through Chapter 3 of this Gem , there is one point (Chris Shea may go into to this later in the book ) that I find common amongst authors and that is they are consistently stating that picking a winning/losing stock is a 50/50 proposition or even money bet --- I'm probably wrong but I do not see it that way :
Take Chris Shea's example @ this stage in the book where he is saying the Max loss (stop) should be no more than 1% total bank.--- and the Win $$$ should be 2 x Loss $$$ --- no problem so far if you maintain a 50% Strike Rate -- Odds of 2/1 on a 1/1 probability -- Punters would understand the Overlay concept here .
BUT if I'm trading 20% of Bank per position , that would place the Entry Stop @ 5% max with a min Target of 10 % above the Entry .
What I am actually trying to attempt to do is to reach the 10% level BEFORE the 5% level is hit --- this to me is certainly not a 1/1 chance more like a 2/1 chance -- which the odds are implying .
Cheers
Coyotte
.
The "Sea of Uncertainty" is defeated by the nimble vessel "Probability", not the unwieldy vessel "Prediction".
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indos
Member
Username: indos
Post Number: 33
Registered: 01-2003Rating: N/A
Votes: 0
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| | Tuesday, September 04, 2007 - 03:37 pm: |
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Coyotte
I dont understand your second last paragraph.If he is suggesting a 1% stop the adjust your position size if need be or are you saying something else.
Cheers
Indo
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coyotte
Member
Username: coyotte
Post Number: 213
Registered: 12-2002
Rating: N/A
Votes: 0
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| | Tuesday, September 04, 2007 - 09:20 pm: |
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Indos
Just suggesting what the 1% of BANK and "2 x return to loss" rules would seem to be implying and how it would fit into one Money Management Plan.
If I understand basic money management correctly , then most authors state that max risk is 2% of the "Trading Bank" -- this falls in line with the old Money Management rules in Punting for a odds of 1/1 or the probability of success of a 50% selection method .
Chris Shea is suggesting 1% , which is in line with the same rules for odds of 2/1 or probability of success of 33% .
If for Example : Trading Bank = $100,000
and you use the whole T/B for one position only , then your Initial STOP level could be no further away than 1% from the Entry Level (max loss $1,000)-- with a min target of 2% from the Entry level (min profit $2000) -- odds 2/1 -- or suggesting a 33% strike rate.
BUT if you split the T/B into say 5 equal amounts of 20% ($20,000 ) each , then you can have upto 5 positions open at any one time along with a spread of risk.
Standard Position Size = 20% of T/B = $20,000 .
Max Loss . = 1% of T/B = $1,000 = 5% of $20,000.
Min Target = 2% of T/B = $2,000 = 10% of $20,000.
So you are able to maintain the 1% rule as it applies to the Total Trading Bank but each Position has higher percentages to move in -- each Position's percentages are determined by it's Percentage relative to the Trading Bank
Same principle with the 2% Rule by other authors .
If you wanted odds of 1/1, then the Trading Bank's percentages would simply be "2% Target vs 2% Stop" -- then adjusted for position size.
Think that's it !
cheers
.
The "Sea of Uncertainty" is defeated by the nimble vessel "Probability", not the unwieldy vessel "Prediction".
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easymoney
Member
Username: easymoney
Post Number: 55
Registered: 03-2005Rating: N/A
Votes: 0
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| | Wednesday, September 05, 2007 - 08:06 am: |
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If you seek twice the gain as you are prepared to lose on each play of the game then it seems reasonable that you would need to win 1/3 of the time to break even.
However, the game is more complex. If you are working on a particular timeframe then the possibilities are reaching the winning target, reaching the losing target, and being stuck somewhere in between.
That, combined with the cost of playing the game, means that if the markets are truly random then everybody must lose to the brokers.
The purpose of money management is to keep you in the game and prevent catastrophic losses. The 6% per month rule for example will result in a maximum annual drawdown of 50% (0.94^12 = 0.5). The 2% rule will assist position sizing and prevent over-trading.
The issue of profit expectancy on each trade is separate (almost) and this is what your calculations are addressing.
As an example, if you have a bank of $100 and you are going to win $2 or lose $1 each time and you are twice as likely to lose as win, then if you play long enough or often enough you will suffer a long enough string of losses to go broke. If you have a bank of $1 to start it will happen faster.
If you win $2 or lose $1 each time and are skilful enough to gain on average 50c each time you play, the starting bank of $100 will almost certainly guarantee that you will never go broke. Your skill will not, however, offer much protection if you start with a bank of $1.
In my experience the 2% upside that you mention is more to pose the question "if I'm prepared to lose $1, how likely is this bet going to win me $2?" If the odds are low, you don't bet.
Two of them say they're Jesus.
One of them must be wrong.
Industrial Disease
Dire Straits
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mum
Member
Username: mum
Post Number: 176
Registered: 08-2005
Rating: N/A
Votes: 0
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| | Thursday, September 06, 2007 - 12:17 pm: |
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Its an interesting book.
I'm not sure I understand the bottom of page 45 concerning the number of trades you need to take per year to make your specified profit. What would the number of trades be with a $50,000 kitty risking $250 per trade or $500 per trade. What would the target be ?
and a $25,000 kitty, same as above
I've never really thought about the number of trades you need to make annually to make a target
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coyotte
Member
Username: coyotte
Post Number: 214
Registered: 12-2002
Rating: N/A
Votes: 0
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| | Thursday, September 06, 2007 - 07:22 pm: |
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mum :
can only reply with the main way I trade -- Short Term Position Trading -- max holding time 1 month . (if the trade takes off it is entered in the ledger as a new position for that month)
the yearly target can be set against what ever benchmark you like . --- from a Bank Deposit through to a Aggressive Managed Fund --- like by year's end after COSTS and OVERHEADS would you have been better off putting the Trading Bank in the Bank or a Fund ???
I presume where Chris Shea is coming from is after setting a yearly target (as any business would do) you are then looking at " Profit on Turn Over " most retail 33% to 50% or in Punting it used to be 10% --- so you need TURN OVER --- the difference in Stock Trading though is the "turn over" is the the potential LOSS of each and every trade (win or lose)and not the "position size" -- this is one reason that the STOPs be accurate and acted on , otherwise Turn Over increases but Profit on Turn Over decreases -- a no no in any business.
Using the basic Management Plan I posted previously with my style of trading as outlined and your fiqure of $50,000 with Chris Shea's min "$2 win to $1 loss" at 50% Strike Rate
number of positions pa: 5 pos per mth x 12mths = 60 pa
Position Size : $10,000
Min Win : $1,000
Max Loss : $500
Turnover : $500 x 60 = $30,000.
Expected Wins = 30 x $1,000
Expected Lose = 30 x $500
Expected Profit = 30 x 500 = $15,000
Profit on Trading Bank = 30%
Profit on Turnover = 50%
so these would be the base expected targets as no outliers are involved .
from profit as in business you now deduct COSTS.
BUT as the first thread queried about the 50% strike rate coupled with odds of 2/1 --- this is overlay betting -- is it sustainable ?
Cheers
.
(Message edited by coyotte on September 06, 2007)
(Message edited by coyotte on September 06, 2007)
The "Sea of Uncertainty" is defeated by the nimble vessel "Probability", not the unwieldy vessel "Prediction".
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silvastar
Member
Username: silvastar
Post Number: 20
Registered: 08-2004Rating: 
Votes: 1
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| | Wednesday, July 16, 2008 - 09:23 am: |
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Hi Mum,
I recently read Chris Shea's book and think it is fantastic. I wanted to reply to your post by unfortunately I am at work and don't have the book in front of me to see what Page 45 is talking about.
In order to calculate your yearly profit you need 3 factors in the equation.
Risk per trade, Expectancy and Opportunity.
Therefore annual profit = Risk per trade * Expectancy * Opportunity
The element missing from your question is the expectancy so I am going to put a figure of 0.5 in there as your expectancy. Ie you expect to make 50 cents on average for every dollar that you risk. A worthy system in many regards.
I am also going to suggest 200 trades per year as your opportunity for this example.
$250 * 200 * 0.5 = $25,000 annual income from trading.
Your next example was risking $500...
$500 * 200 * 0.5 = $50,000.
The people I know that use and more importantly apply this formula to their trading are able to trade with absolute confidence by knowing so long as they have an edge (positive expectancy) they can profit year on year.
Of course people can still lose with a positive expectancy system so it is important to not risk more than 1-2% of your account on any one trade.
Good luck.
If you inspire others to dream more, learn more, do more and become more then your growth will be exponential.
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