Risk Management IV

BarroMetrics Views: Risk Management IV

In this blog, I want to consider the elements of a robust trading plan.

There is a correlation between the WinRate and timeframe a trader is trading and whether or not he is in a Flow Phase.

There is an inverse correlation between the timframe being traded and the Win Rate. The shorter the timeframe, the higher the win rate. On the other hand, there is a direct correlation between the timframe being traded and the Avg $Win. The shorter the timeframe, the lower the Avg$Win.

If you think about it, it makes perfect sense. If I buy the bid and sell the offer, there will be a high probability of my being able to do so; however my profit is limited to the spread.

The scalping that was previously the domain of the locals is now the domain of the algos or quants. If you believe the press reports algo’s are rapaciously grabbing profits from you and I. The fact is algo funds, taken as a whole, have lost money 2012 and 2013.

Why should this the case?

Because the AvG$Loss is now exceeding the AvG$Win to the extent that it overcomes the 90% and over win advantage. Paul’s comment that he only looks at the Expectancy Return when the AVG$W and Avg$L are constant would mean that he would probably never use the formula. The fact is like most things in life, the Avg$W and Avg$Loss demonstrate the 80-20 rule.

What is important about the Expectancy Return is the fact that it tells us the true state of our trading- you can’t B..lls..tt the numbers. And, with just a little effort, it tells us where we need to make the adjustments. …..

Sorry Baz et all have run out of time – will continue next week.

3 thoughts on “Risk Management IV”

  1. Thanks Ray, Thats what I am after, How you use the Expectancy Formula to make adjustments and get the most out of that data set. I then want make/get a program to display it and use as a management tool. I also believe that trading by the numbers helps overcome fear or indecisive action when trading. cheers baz

  2. Should we:
    1. Determine
    a.
    Average Profit/Loss per trade
    vs.
    Average Profit/Loss per standard contract/lot

    b. Also “normalized” the Expectancy by unit risk taken

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