When Is A Profit, A Profit? 2 (Success Series)

BarroMetrics Views: When Is A Profit, A Profit? 2 (Success Series)

In the last issue, I considered the question: when do we add profits to capital? When do we deduct losses from capital? I introduced Ryan Jones’ approach.

(An aside.

Speaking of Ryan Jones, he has a sale on for his course starting Tuesday, April 19 and running for two days: see Fixed Ratio on Tuesday.

His course is normally USD 797.00; on the sale, his price will be, USD 197.00. And ‘no’ to those who will ask, “I am not receiving a fee for referring the course’. In fact, Ryan does not even know I have mentioned the saving).

Turning back to my subject……

Ryan’s approach does not suit me. I prefer to use another method – not better, just one with which I am more comfortable. My take requires we know:

  1. Number of historical consecutive losses
  2. Avg consecutive losses
  3. Loss Rate
  4. Population Size
  5. Avg pa return on capital (Avg ROI)

Let’s take my trading. Taking my trading results since 1990 (when I began the private limited partnership fund), we have the following results:

  • Historical consecutive losses: 16
  • Avg Consecutive losses: 4
  • Loss Rate: .485
  • Population size: 2210 (i.e. number of trades over the period, about 7 trades per month)
  • Avg pa return on capital:  27.63%

Firstly, the data allows me to calculate the theoretical consecutive loss: 10.64 (say 11). So, I would not consider the consecutive loss sequence of 16 as an outlier. (If I did, I would need to reassess the data. For example does the data show a period of extraordinary losses?) With a run of 16 losses, if I risk 2% per trade, I’d risk a loss of 32%. Since my average profit is only 27.63%, I am not prepared to run that risk.

What if I risked 1%? My possible loss would be 16%. Still a little high – I am aiming for a risk of around 50% of average ROI (14%). So, I’d bring down the risk per trade to around 0.90% which I find an acceptable risk; I treat the 0.9% as my ‘normal’ size.

Secondly, when to add to capital? I’d add on any increase above 50% of average ROI = 14%. And finally, when to subtract losses from capital? I’d subtract losses whenever I’d lose 50% of the increased value (i.e. 50% of 14 = 7%).

So far we have determined what I would consider ‘normal size.’ I have one more step to determine my position size for the current trade: I have to decide whether my trading is currently in Ebb, Flow or Normal State. 

More on this tomorrow.


10 thoughts on “When Is A Profit, A Profit? 2 (Success Series)”

  1. Apologies if you have posted comments.

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  2. re
    “5.Avg pa return on capital”

    I would like to confirm my understanding of your post.

    By capital you mean the $ amount that you are basing your return calculation on at any given time and the $amount used for position sizing calc as opposed to the actual account balance.

    For example, the actual account balance could be $107,115 but the “capital” figure being used for position sizing and return on capital calculation might be $102,150.

  3. Re

    “Firstly, the data allows me to calculate the theoretical consecutive loss: 10.64 (say 11)”.

    How was that calculated?

  4. Hi Chris

    Best explain by way of example.

    Let’s say I start with $100,000.00 – that’s my capital. I make $8,000.00. That’s less than 14% so, my capital is still $100,000.00.

    If I now lose 7% of $100,000.00, I reduce my capital
    to $93,000.00. The $8,000.00 is held in reserve as it were. I would now need to increase my $93,000.00 by 14% (including the $8,000.00) to add profits to the $93,000.00

    But, let’s then say instead of losing, I make another S7,000.00. I’d this profit to the $8,0000.00. I have now made 15%. So, I add the $15,000.00 to $100,000.00.

    I know have $115,000.00 as my capital base.

  5. chrij posted this comment. I approved it but the post has not published:

    ““chrisj said, in April 19th, 2016 at 7:33 am
    “Firstly, the data allows me to calculate the theoretical consecutive loss: 10.64 (say 11)”.
    How was that calculated?”

    Hi Chris

    The formula I use:

    (log of runs)/(-log(winRate)

  6. Hi Chris

    I’ll try – all I can do is give you some inputs, Excel does the rest for me.

    Let’s say my population is 2210 and my loss rate is .485. The formula I use is:

    (log of runs)/(-log(loss rate) = longest losing streak.

    The quotient gives an occurrence of 11.

    I have seen another formula: (log(1-DC)/log(1-PW)

    Where DC = Confidence Level (usually .99). The result gives an occurrence of 7 where the LossRate is .485.

    I prefer to use the first formula.

    A Google search will throw up probability calculators. I usually don’t use them unless they disclose the formula they are using.

  7. For any one else who may have gotten confused this may help.

    The earlier post had:

    (log of runs)/(-log(winRate)

    Later corrected to:

    (log of runs)/(-log(loss rate)

    i.e. loss rate.

    I did a little spreadsheet and with the revised formula I get the same result as in Ray’s original post.

    I will send my spreadsheet to Ray so he can upload it as an attachment if he is okay with doing so.


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