Tag Archives: nifty

Twitter poll on expectancy

Trading Journal

I had put a poll on twitter yesterday with options to choose from various combinations of Winrate and Risk:Reward(RR)

Here is the twitter link:

44% of the voters chose Option 4, 32% of the voters chose Option1, followed by Option 2 and Option3 respectively.

Before getting into the groove of things, I would like to elucidate a bit about ‘Expectancy’ of a system. This term was coined by Van Tharp and here it is:

Expectancy = (Win rate x Average winner) – (Loss rate x Average loser)

If we insert this formula with the numbers given in the poll, We get the following –

Expectancy of System 1 = (0.5×2.2) – (0.5×1) = 1.1 – 0.5 = 0.6

Expectancy of System 2 = (0.7×1.2) – (0.3×1) = 0.84 – 0.3 = 0.54

Expectancy of System 3 (I meant to give the RR of system 3 as 1:0.8 but gave it as 0.8:1 – we will stick to what was given in the poll)
= (0.8×1) – (0.2×0.8) = 0.8 – 0.16 = 0.64

Expectancy of System 4 = (0.35×4) – (0.65×1) = 0.75

So, what is this expectancy? Expectancy is how much one can expect to make on the average over many trades. Expectancy is best stated in terms of how much you can make per rupee you risk. Tharp talks in terms of R-multiples but let us just focus on it in layman terms.

If someone risks 1% per trade and their system expectancy is 0.5, it just means that over a large sample of trades, he is expected to make 0.5% (1% x 0.5) per trade. So, if he has 100 trades in a year, he is expected to make (100×0.5%) 50% that year.

Surface level analysis of the poll results

1. It is quite obvious from the above calculation that higher the expectancy, greater is your chances of making money in the markets. So, as a new trader, it is pretty easy to select the option # 4 from the choices. No brainer there.

2. Few people pointed out that Option 1 is better as it is easy on psychology of the trader. It is true to an extent but if one is striving for better risk adjusted returns, option 4 is the obvious choice again (especially for a pure trend follower). Different people, different choices 😊

3. Some people take profits on the way and they would have naturally gravitate towards a better winrate system with lesser R:R. The traders who trail profits will almost always have a lower WR but better RR system in hand.

4. As I always advocate that there are various ways to skin the cat, nothing is right or wrong here. We just need to pick what is comfortable for us. But, if one has to analyse logically, it is option 4. On a side note, one comment mentioned that we need to find system that have a expectancy like the choices mentioned 😊. Fair enough !!

5. The traders who are new to the market gets enamored by the high winrate for a very simple reason – typically, they don’t want to take losses (Forget about newcomers – even the experienced lot do not like to take losses). Their mind can never get around in accepting the losses. So, they naturally gravitate towards high winrate as high WR typically means more number of winners than losers. But, what they forget is the other side of the coin – the Risk:Reward. They lose more when they lose and win less when they win. This has many statistical implications. We will see that in detail in the next section of this post.

6. Winrate and Risk:Reward should be seen together. They are like peas and carrots, day and night – always go together. This is why I like this expectancy as it nicely clubs both the parameters to give a logical view of the system in hand.

7. Few people have voted for option 3 as they feel high winrate can give them the psychological comfort – again, this is just another way of telling that ‘I don’t want to take losses’. As some great trader mentioned. ‘avoiding losses in trading is like you want to breathe in but don’t want to breathe out’. But if it works for you, great !!

In-depth analysis of the poll

1. Most of the stock market strategies employ trend following concept and the pure essence of trend following is to let the profits run. So, the detailed analysis is based on that assumption.

2. First let us dissect what High Winrate really means. Typically, a high WR system will have low Risk:Reward (compare to a low WR with same expectancy). This is a given. But, this also means that the average loser of a high WR system is usually larger than a low WR system(assuming the timeframe and expectancy are the same). In a trend following system, high WR is usually achieved by giving so much room for the market to catch the trend. Statistically, bigger SL will have a huge drawdown potential (am talking about maximum drawdown) and if the max DD is high, it is very difficult to proceed with the system for two important reasons –

a) The recovery factor will be high – meaning the number of trades it takes to get back to equity high(again) will be more and the problem exasperates if someone is trading higher timeframe. People grossly underestimate time drawdown – but it is a different topic altogether

b) Compounding can be a big problem for a system with larger max DD for obvious reasons

3. When a system has a bigger SL (again assumption is that we are talking about pure trend following systems with trailing stoplosses) like a moving average crossover system, the time the market spends between the entry point and stoploss is huge. This has so many psychological ramifications –

a) It can create havoc to our mind as it will feel that we are always in loss (even though it is not realized). One can draw analogy with an investor who enters a stock and the stock is underwater for 2-3 years. It is a very tough phase for that investor if he is still holding it.

b) It can force a trader to make mistakes (not following the plan) and just letting the emotions take the driver seat (how many of us have heard this ‘ I felt uncomfortable in the trade and got out but only to see the market moving in my favor again’). So, wider SL is a fertile ground for all these mishaps in the thought process.

On the other hand,if WR is less with smaller average losses, it will diminish the active trade time in grey area (between entry and SL) and give us a big advantage mentally.

4. Lesser WR and higher RR generally means smaller losses (compared to high WR and low RR/same expectancy system) and consequently, a trader can be well equipped for the proverbial series of losses in a row. One can place large number of bets or trades before we reach out max limit. So taking randomness into account, we give ourselves a fair chance to be in the game. Not to mention, these smaller SLs will also cap the maximum DD and will keep it nicely in control.

The below picture shows the 95% probability of losing streaks for various winrates. Even a 50% winrate system can have 16 losses in a row over 5000 trades. It is not a question of how but it is a question of when.

Workshop

5. On the flip side, Low WR and high RR will never have even distribution of profits as the system will turn positive only with large profits. If one misses those trades, then the performance would be pretty dismal.

6. The interesting thing is that most of us would feel better with a system that produces more winning trades than losers. The vast majority of people would have a lot of trouble with the 4th system (even though it has the best statistical advantage compared to other systems) because of our natural tendency to want to be right all of the time.

7. As I always say ‘there is nothing right or wrong’ in the markets. We just need to choose what is comfortable for us. The battlecry is ‘how to find the one that is comfortable for us?’. Very simple – try them all with minimum size. Your mind will naturally cling towards the one that is comfortable for you 😊

Happy trading !!

Intraday calls service – Performance report for 2018

Started Nifty intraday paid service on July 9th 2018

My belief lies in Price action based/mechanical trading and we risk around 2% per trade. All trades are intraday and we trade only Nifty futures. I always believed consistency is the key in making it in markets and being consistent in any activity (let alone trading) is not a one-day/week/month affair. It would serve us well if we view it as a continuous journey. We need to do structured set of things every day to bring that consistency in us.

For further details, please email marketswithmadan@gmail.com

July 9th 2018 to August 8th 2018 –-> Points made = 111 and percentage returns = 11.1%

Workshop

August 9th 2018 to August 31st 2018 –-> Points made = -54 and percentage returns = -5.4%

Workshop

September 01st 2018 to September 30th 2018 –-> Points made = 99 and percentage returns = 9.9%

** Highly volatile month and was standing in sidelines due to bigger stoploss (most of the days)**

Workshop

October 01st 2018 to October 31st 2018 –-> Points made = 200 and percentage returns = 20%

Workshop

Happy trading !!

Introduction – Growing small trading account into a bigger one

This is Madan and I have been trading for a living for the past 10 years. As I find myself doing nothing most of the time during market hours, I was wondering if I could help/facilitate few traders to take a small account to a big-sized one. I have done this growing ‘small’ account to a big sized one personally and have seen many traders struggle to move up in size for numerous years. I strongly believe that this little activity in twitter would give them a few ideas and the confidence to scaleup in the future.

Is there a way to grow a small account without taking unjustified risk, is the question I wish to address.

Most folks I know do not come into trading the stock market with more than 1 crore. So, it might always baffle a new or even an experienced trader on how to move up to the next level in trading account size. After all, we are not coming into the markets everyday (waiting countless hours tolerantly for our setup to show) to make just 50k per month. We did not come to this profession to keep trading single digit lots (if you trade futures), did we? If our account size does not grow steadily over a period of time, then there is something basically wrong with our trading approach and / or our discipline / psychology.

Having said that, when one starts trading a small account (say 2 lacs), the person has a fabulous advantage over others as he has all the time to make all the mistakes without wiping himself out financially. Many traders take imprudent levels of risk early in their trading career and never survive their learning curve. Trading small account has its own caveats too – one can get comfortable with the given trading size quickly and that might translate into a psychological road-block when we move up in size.

The best way to grow a small account is to ‘gradually’ increase the position size. If one has a positive edge in the markets, growing a small account gradually can be dealt effectively with proper money management.

I will be posting live Nifty intraday trades (as a disclaimer, am not asking anyone to follow my recommendations. This is just for demonstration purpose) So, here are the key points to ponder for this activity.

  1. The primary objective behind this activity is to demonstrate that someone with an edge can make trading a successful profession. It will also enable the trader to understand that discipline and patience with prudent money management can do miracles in the long run.
  2. Our objective is to earn 125-points profit per month on an average, by trading Nifty futures intraday. I can hear people mumbling to themselves ‘Is this guy for real? Just 125 points per month’. Yes – am for real and am very serious about it. We don’t need a spectacular system to build a big account, but we just need the grit to follow the system that has an edge (plus acceptable drawdown) and implement practical money management ideas. Some months we make more, some months we make less and some months can go negative as well. But, the keyword is ‘average’.
  3. As it is a Nifty intraday system, trades can happen anytime from 9:15 am to 2:45 pm. We will NOT initiate new trades after 2:45 PM and as we will be utilizing MIS margin (it is around 25k as of this writing), all trades will be exited around 3:20 PM (or as per the broker requirement) to avoid brokers compulsory closing of trade.
  4. The Stop-loss will be given when the trade-entry is posted, and target will always be open. If there is no tweet about the exit or if the SL is not hit until 3 PM, then we trail 5 minutes bar low for long trades to exit until 3:20 PM. We will exit the trade at 3:20 PM, if it is still open. A lot of our queries will be cleared once we go through a few trades.
  5. Average points per year = 1,500 Points (125-points per month x 12 months)
    Average number of trades per month = 20 (approx. 1 trade per trading day).
    Again, we are talking about the ‘average’ number of trades per month. So, it is possible that we might end up taking 2 or even 3 trades in a day and probably end up not taking any trades on a few other days.This system is not something that can catch every bottom and top. It is a simple/modest price action system that is based on both trending and breakout failures with simple rules. As other parameters are not vital for this activity, I would not get into further details of the system (and its parameters).
  6. If someone is trading in the markets for more than 10 years, he would have realized that making 1500 points per year consistently in Nifty (on an average) is no trifling task. Reasons are multifold but let us stick to the point that is more relevant here – the lack of consistency in executing the plan and ignoring/not managing ‘risk’ properly are primary reasons for this inability to make 1,500-points per year. As am a full-time trader for almost a decade now, I can safely say that we will strive to be consistent and be cognizant of all the risk we take.
  7. If we look at the Money Management plan that I posted, We have used 40K (including 200 points DD) for 1 lot but are using 50k per lot. We will keep 10k as a buffer amount incase of contingencies. We will invoke the buffer amount if we see unforeseen circumstances.


    I have mentioned that making 1,750 points can help us scale up from 4 lots to 25 lots in Nifty. Earning those 1,750 points can take us a year or two maybe. But, we are not bothered about how long it takes to reach 1,750 points but rather we will focus on how safely we reach there. We are not fixing any timeframe for our goals as we cannot have static targets in markets, which is dynamic in nature.

  8. If a trader can understand that Money and risk management are more essential than the system itself, he can extrapolate this belief into his own trading system and bring out the desired results as well. So, it is essential for us to understand that the crux of the activity is to reap long term benefits.
  9. By working on building a small account slowly and properly, we will be in a much better position than if we take wild/undue risks. Having a get rich quick belief in trading can decimate accounts more than anything else. Remember,  NO CAPITAL = NO TRADING
  10. As I always say, focus on the process in trading and end-result (money) will automatically follow.

I am looking forward to this activity as much as you do and would like to end this post with this departing thought – Being consistent in any activity (let alone trading) is not a one-day/week/month affair. It would serve us well if we view it as a continuous journey. We need to do structured set of things every day to bring that consistency in us. In small ways, every day, we must strive to be the person we want to become until, one day, it all comes naturally.

Happy trading !!