Suri's Trading Diary

[suri112000]

There must be a better way of trading rather than this way. In all likelyhood this month too, the method is about to close in losses. That is 3 months in a row. For an intraday trader with 5 and 1/2 hours intruguing screen watching a negative result consecutively for 3 months is definetely disappointing. I will not trade this method from next month series. Switching to better price action method. Clubbing 5 minutes breakout with that of Price Action (breakouts and breakout failures) should provide me a platform to profit. I thank heartfeltly all those members who have been with me all these days.

 

[suri112000]

Concluding the April series, with a loss of 9.78%.

 

[suri112000]

Risk/Reward, Profit Factor and Profitability of Trading Strategies

It is amazing how many traders, specially newbie traders, emphasize how this or that system wins 80% or 90% of the time, as if that is the only thing that matters. When in fact, only the combination of the success rate plus the risk/reward ratio of the trades should be analyzed as a whole.

Let's say for example you are a trader who has a mechanical system that wins 90% of the trades in back test. That's 9 winners out of 10 trades. Now, if that one loser is big enough, it can wipe out all the profits of the previous 9 winners, resulting in a flat account balance. That's the typical behavior found in scalpers. If the risk reward in your system is 9:1, that is your risk is typically 9 times bigger than your target profit, then winning 90% of your trades means you don't make any money after all. Thus, it is really important to talk about risk/reward when you mention winners percentage, otherwise talking about success rate is meaningless.

Other traders will favor the favorable risk rewards, where your risk is smaller than your potential reward. Usually 1:2 or 1:3 is desired. Then they become so obsessed about this, that they will look at your system and will invariably say, well your typical risk/reward is only 1:0.8 (That is your winners are on average 80% the size of your losers, so losing trades are bigger), so that's not a good system, immediately jumping to conclusions. However, your 1:0.8 risk reward system might win 75% of the time, which would make it a very valid and profitable system regardless of the criticized non-favorable risk/reward.

Now a little exercise to compare systems.

How can I determine if a system of a 9:1 risk reward ratio that wins 92% of the time is more profitable than a system with a 1:2 risk reward ratio that wins 50% of the time?

This calculation is what is known as "Profit Factor", which tries to determine how many rupees you make per every rupee you lose. How to calculate the Profit Factor? Simple:

System number 1:

Wins 92% of the time. That is 92 trades out of 100.
Risk Reward ratio is 9:1 meaning if the typical winners is Rs.1 the typical loser will be Rs.9.
Now, you do the math, 92 winning trades of Rs.1, that's Rs.92 in positive territory.
Versus 8 losing trades of Rs.9 dollars, that's Rs.72 lost.
Finally you divide 92/72 and that's a Profit factor of 1.28. Meaning, you make Rs.1.28 for every Rs.1 you lose.

System number 2:

Wins 50% of the time. That is 50 trades out of 100.
Risk Reward ratio is 1:2 meaning if the typical winners is Rs.2 the typical loser will be Rs.1.
Now, you do the math, 50 winning trades of Rs.2, that's Rs.100 in positive territory.
Versus 50 losing trades of Rs.1 , that's Rs. 50 lost.
Finally you divide 100/50 and that's a Profit factor of 2.00. Your strategy makes Rs.2 for every Rs.1 it loses.

A profit factor lower than 1 means the system is not good, a.k.a it loses money. A profit factor of 1 means your system has no particular edge: it loses the same amount of money it wins.

A profit factor of 1.25 or above is probably a good number that implies (over long periods of time, and statistically enough data) a possible real edge.

System number two has a higher profit factor. It makes more money for every rupee it loses. Now, this by itself doesn't mean that system number 2 is better. We haven't considered the opportunities factor. How frequently does system number 2 trade? So, although the profit factor of this system is much higher than that of the first one, maybe it only trades once every month, while the first one trades 15 times every month. In that case you might want to consider System number one, because although it has a smaller profit factor, the opportunities are much more frequent and it can give you more money in absolute numbers in the end.

At the same time, there is the Draw-down to consider. What is the worst period of losses of your system? How much money in percentage terms did it lose over any period of time? How long was the system involved in a draw-down during its worst period? All those factors need to be considered when choosing your system, as your psychological profile will determine which one makes you feel more comfortable.

In the end, it is important to know that the percentage of winners alone is not what determines a system's profitability. Only the combination of percentage of winners plus typical risk/reward ratio of the trades can give you a real picture on how profitable a system is. Also, always be aware that in order to choose your system there's much more to evaluate than just the risk reward ratio or the success rate.

I can arrange the factors to be considered before considering a trading system.

Drawdown.
Percentage of drawdown.
(comfortable percentage of drawdown is less than 20% for futures segment, 5% for equity segment)
Period of drawdown.
(comfortable drawdown period is less than 3 months. that is to say the system should be back on track on making profits latest by 3 months)

Profit Factor

Above 1.25 is good. (This should be arrived after deducting expenses like brokerage, slippage, taxes etc)

Percentage of Wins

40% is recommended as a minimum. Anything less is psychologically draining.

Frequency of trades

10 or above per month.

 

[suri112000]

Backtest report quarterly wise

Instrument traded : Banknifty
No of lots traded : 6
Initial Capital : 10,00,000
No of points deducted for a round trade : 8 points.(Both buy and sell)

Period : 01/4/14 to 30/6/14

Amount at the end of period : 12,67,090
Number of trades : 64
Winners : 24
Win Percentage : 37.50%
Profit Factor : 1.48
Risk Reward Ratio : 27.60
Monthly average return : 8.67%




Period : 01/7/14 to 30/9/14

Amount at the end of period : 9.93,960
Number of trades : 72
Winners : 28
Win Percentage : 38.89%
Profit Factor : 0.99
Risk Reward Ratio : -9.71
Monthly average return : -0.21%


Period : 01/10/14 to 31/12/14

Amount at the end of period : 13,21,652
Number of trades : 57
Winners : 25
Win Percentage : 43.86%
Profit Factor : 1.70
Risk Reward Ratio : 32.67
Monthly average return : 10.72%


Period : 01/1/15 to 31/3/15

Amount at the end of period : 15,81,145
Number of trades : 60
Winners : 32
Win Percentage : 53.33%
Profit Factor : 1.83
Risk Reward Ratio : 25.48
Monthly average return : 19.37%

============================================

Underwater equity experienced during entire test period : 7,17,000
We must be ready to experience an erosion of capital to the tune of Rs.3,00,000 to profit from this system.
Inspite of this, we can trade 6 lots without much pressure on Margins.

 

[suri112000]

The system I am going to trade is simple. Its simply trend following MA crossover based on 15 min TF. The intial Stop and entry price acts as SAR until the predetermined target is hit. No trailing stop. Only target hit exits.

08/5/2015

Long BNF @ 17686

 

[suri112000]

I have tried with moving averages, Elliot waves, Pivots, Price action. We are aware that no single analysis is perfect to break off the randomness of price movement. Its simply random!!!! 60 - 70% of the times the price is directionless. This fact in itself is an edge. The price moves in directionless phase is notorious and more random than trend moves. The boundaries of the price move keep changing. The established support/resistances keep breaking and form a new base of S/Rs. Finding support and resistances of price in itself is mostly discretionary than mechanical. As a trader, I hate to be discretionary in my trades. The single most reason for this is 'we cannot backtest discretionary trading rules on past data without prejudice'. So, I felt the need of a system with much simple rules which can be backtested on past data as well as tradable without much intervention of discretionary ideas. For those who can guage trendless phases intelligently, it offers a tremendous scope of building highly successful trading systems. 60-70 winning percentage is not a problem with this phase. Its not for me. So, seeking the edge in directionless phase is of no use for me.

Then comes Trending phase of markets. Only 30% of the times, the markets trend. Its an established edge. The systems built around this edge experiences low percentage of wins as low as 20% and a bigger drawdowns.

My system is built on trend. No matter....numerous small losses in a row can be wiped out by a single trend move. The million dollar question..........how to establish a trend. I have used a common set of moving average cross over for establishing trend. The trade at first to be initiated in the direction of trend. Once in the trade, determine a well calculated Stoploss point which acts as SAR. Now, comes the price action. As most of the times, the price hits stop loss. Reverse the trade, and make the entry price as SAR. Now, the price is locked between these two points. Exit the trade at a profit target usually 5 to 6 times bigger than the gap between entry and SL points. What if the price keeps rotating between entry price and SL without much directional move. This is the drawback of this system..........and I am aware of this. Nothing much can be done except wait for a breakout to directional move to hit profit target. My backtest report experienced as many as 13 rotations in a trade which finally hit profit target in its 14th attempt. However the trade was a loss due of poor risk reward of high rotations. The system is seemingly robust with quick recovery factor. Most importantly, it suits my tempo and psyche.

 

[suri112000]

 

[suri112000]

 

[suri112000]

SAR is saved by a whisker of 0.3 points. The action which I am going to take tomorrow will depend on first 15 min candle closure.

(a) Gap Down and the first 15 min bar close below SAR. I will exit longs and reverse the trade to shorts keeping new SL as SAR.

(b) Gap Down opening but closes above SAR. No further action except waiting for SAR to be taken out.

(c) Opening at previous close. Wait for first 15 min bar to close. If the close is above present SAR, no action. If the close is below present SAR, reverse the trade.

(d) Remaining scenarios. Adhere to the present SAR.

Today's Psychological Challenges

1. Gave up 500 profits. A lot of psychological pain. I consoled myself by saying that "You are doing great as per system". The real edge of the system lies in those extra 200 points and booking of profits at 500 points will through the system out of gear.

2. When the price was moving towards entry and SAR points, I was reluctant to change my bullish bias which helped me to commit myself to the rules.

3. I kept saying myself "Give me my target or else take my SAR". Today both did not happen. Patience will pay.

 

[suri112000]

Here is the PM from Jagankris.

Dear Suri,

How psychologically it could be draining to watch the profits vanishing.

When profit of 500 points made why the profits were not considered as profit ?

Making profits is easy but very difficult to protect the profits.

When the markets falling one Need not go for short but at least why not long exit/trailing stop was not considered ?

(Off course these were words/views of my Mentor long ago for profit protection - just thought of sharing that with you).

Hope I am not meddling with your discipline and trade plan.

Wish you success and all the very best for your trading.

================================================

My replies :-


The question is of exits. Right? What is the deciding factor for your exit. If it is amount of profit......how much profit? 100...200...300.....400........700......1000 points. This figure is to be arrived by the system based on the edge. If the edge of the system says the trade should exited at profit not less than 700 points, but if you exit at 500 points...you are dangerously modifying/deluting the system's edge. No matter if you loose 500 points of probable profit. But you are not diluting your edge. When the edge is protected, the system ultimately delivers profits at the end and in the long run. In the process....you will miss many opportunities like yesterday's. The system is not intended to grab this type of profits........but targeting higher profits with an edge.

When the system is of 1:7 Risk to reward ratio....... taking profits at 1:5 is nothing but tinkering the RR. When you are supposed to exit at 1:7.........if you exit at 1:5....we may feel comfortable and emotionally high because we have made a profit on the trade at the hind sight.

But what happens to the overall system? It becomes a loosing system.