BarroMetrics Views: Risk Management V
I was going to write a post on the elements of a robust trading plan. But given the questions from Baz and Paul, it;s clear that the questions have now coalesced around the Expectancy Return Formula.
As I see it, Baz is most keen to have some idea of how to identify an Ebb and Flow Phase.
The answer lies in our trading results. I calculate what, based on past trades, will be my losses within a 70% occurrence. I do this using Steidlmayer’s idea on how to calculate a Value Area (see attachment). The reason I use Pete’s approach is because the normal bell curve assumes a distribution where the mean and mode are roughly in line. This is not the case for trading results.
Once I have the data, (generally) if I find that I have three consecutive trades with losses outside my ‘normal’ range, I start to reduce my position size. In short, three losses moving into the beginning of the second standard deviation of greater than normal losses triggers a reduction in position size.
As for profits, I first calculate the numbers for profitable trades. With those in hand, for Flow stage. I prefer to see three consecutive trades where I have profits are in the upper region (or higher) of the second standard deviation.
I’ll deal with Paul and Manish’s questions on Tuesday.
Through the courtesy of www.marketdelta.com