Left Brain Thinking III

BarroMetrics Views: Left Brain Thinking III

Yesterday I said that Trader B had to exit immediately. Why?

Figure 1 shows that, given his win rate, his required reward:risk return (2:1) is secured at 0.8103; in our example this was where the AUDUSD was trading. So, he had no safety moat; and with the AUDUSD now trading at long-term support, a bounce has to be included in the possible scenarios – especially with the view I have taken on the FOMC (see blog later tonight around 8:00 PM HK time).

For risk management reasons, then, Trader B needs to exit now.

Trader A on the other hand, given his win rate, can afford  a bounce of 520 pips. That being the case, Trader A can review his technicals to see where he can place his trailing stop in an attempt to maximise his core profit exit. As long as the trailing stop is below .8555, he will secure his targeted outcome, even if a bounce occurs.

So there you have it. Feel to comment.

expratio.png

FIGURE 1

10 thoughts on “Left Brain Thinking III”

  1. Hi Ray,

    How is 2:1 reward level 0.8103 calculated?

    Given his entry=0.8617 and sl=0.8827 isn’t the 2:1 reward level 0.8197? Twice the size of the SL.

    Thanks!

  2. hi Ray,
    As said before, we agree to disagree! lol …

    The following are my thoughts:

    A. Assumptions
    1. History will repeat itself
    The consistent trading behaviour and execution of the traders with the same trading system, will reproduce the same trading statistics/ratios over a large numbers of trades.

    2. Traders A and B are system traders
    – not discretionary traders for ease of discussion

    B. Nothing is sure for the outcome of the trade
    If a man tosses a coin a large numbers of times in a consistent manner, the probabilities of head and tail are both 50%.

    But, it does not guarantee that the next toss is a head nor a tail.

    C. What should Traders A and B do to maintain the same statistics/ratios?
    They should trade strictly according to the entry and exit rules of their systems!
    – not exiting the trade based on their winning probabilities because nothing is sure for the outcome of the (next) trade;
    – but if they trade consistently according to the entry and exit rules over a large numbers of trades, they would maintain the same trading statistics/ratios.

  3. Hi Paul

    Sorry, unfortunately this time, it’s not an issue that can be resolved by ‘agreeing to disagree’.

    If you are applying the ‘Rule of Three’, there is a fundamental flaw in your logic that MUST result in a less than optimal result – if not a outright loss over a large sample size.

    In other words:

    a) If you adopt the trading rule that your system will either get to target or be stopped out for the core profit third –
    b) even if prices get to within the Expectancy Ratio zone for taking profits,
    c) I’d be happy to put up hard cash on any system with an edge against yours. My system rules would allow for a trailing stop exit once prices reach the Expectancy Ratio zone.

    Part of the reason for our difference is probably because I posted a less than cogent piece on Thursday.

    Since I did post a rather hurried piece on Thursday, I’ll be posting, on Monday, an answer to Sorin’s question. I shall also add a reply to your observations.

    Perhaps then my logic will be clearer.

  4. hi Ray,
    “They should trade strictly according to the entry and exit rules of their systems!”

    The rules could be:
    1. get to target or be stopped out for the core profit third, or

    2. exit if prices get to within the Expectancy Ratio zone for taking profits,or

    3. time exit,
    {4-time World Cup Trading Champion Andrea Unger used that)

    4. …

    That will mean different trading systems.

    But if they all have very good Expectancy,Expectancy Ratio, I will say again:

    “They should trade strictly according to the entry and exit rules of their systems!”

    on the assumption that
    “History will repeat itself.”

    Note-
    I ever asked Andrea Unger face-to-face about trailing stops.

    He told me he didn’t use or believe in trailing stops.

  5. “if not a outright loss over a large sample size”
    – haha, how could it be when

    “You have exited 1/3 of your positions so that the remaining 2/3s, if stopped out, would be a ‘no-’loss’.”???

  6. hi Ray,
    What are the statistics of profits for the 3 different trading rules:
    a) the system will either get to target or be stopped out for the core profit third

    b) exit if prices get to within the Expectancy Ratio zone for taking profits with trailing stops

    c) time exit at EST 2 or 5 pm (for Forex)

    If b) has the best result, I would agree not to disagree! 🙂

  7. Hi Paul

    I am not sure about the point you are making, especially since we were speaking about the second third. In this post, you have brought in the last third where different considerations apply.

    Continuing on the second third discussion….

    I don’t disagree that system traders need to stick to their rules. Where we disagree is the all or nothing approach of ‘target or stop out’ in respect of the second third.

    So far a Andrea’s trading is concerned, I can make little comment since I am not familiar with his systems.

    I could say that Paul Tudor Jones believes in price trailing stops in some of his methods – but that does not progress our discussion one iota.

  8. Hi Paul

    There is a confusion here – the second third is the core profit contract.

    Why don’t we postpone discussion till after Monday’s blog?

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