The results shown immediately below are not mine. They are from someone I respect highly and even more so that Chris has the courage to put these out.
Pip Mavens is the trading name of Chris Lee. I read Chris’ book a few years back and have been interested in his blog since then. What went wrong for Chris?
For an experienced trader like Chris, it is usually not his methodology. More often than not, it is the trade structure that is at fault. I concentrate on my trading and don’t know Chris’ trading method in detail but can tell from the severity of his results the one thing that is probably amiss.
Are these times of great opportunity?
I think it was in March that Chris published that the current market conditions provided great opportunities. I felt at the time that this was wrong thinking.
Great opportunities balance with great losses. That is how it works.
As with most diligent traders, Chris uses a percentage of the account for each trade—but only works if adjusted to market size.
It is possible that in Chris’ case, it didn’t. As the market price movement stayed large throughout much of April to a market (or risk-adjusted) trader, it provides no better or worse opportunity than it does at most other times.
The trade entry opportunities of value, setup and price action don’t come around anymore frequently than usual. Although the market is significantly bigger, our amount traded per pip (or per lot) is correspondingly considerably smaller.
A natural law
Trading mathematics is a natural law, and we cannot alter it. Three criteria matter: Win rate as a percentage, profit/loss ratio and percentage of account traded.
Each is intrinsic to a profitable account. A win rate of 50% and a profit/loss ratio of one would provide, more often than not, a breakeven account.
Adjust one of these statistics the wrong way while the other remains static, and it’s the slippery losing slope. However, decrease one while increasing the other can lead to increased profit. For example, a win rate of 47% and a profit/loss ratio of four would result in extraordinarily happy days.
The percentage of account adjusted for market size plays a significant part in the probability of account blow out.
Trading at one per cent of account adjusted for market size might be a reasonable percentage to take and not blow up the trading account anytime soon. However, reducing to 0.5% of account risked per trade is not halve as likely to take us out, but in percentage terms, it is many, many times less likely. Conversely, increasing to say 2% risk takes the likelihood of an account to blow out to a stratospheric level.
Now, if we trade at 1% of account and do not adjust for market size then most likely we are (unknowingly) trading at a significantly higher account percentage and are putting the fund at an unjustifiable probability of ‘blow out’.
To those that are not familiar with leveraged trades then 1% is going to sound tame. They are very wrong. I trade at 1% of account when I’m focused and current. Anything else then it is good management to drop the percentage risk, even down to the level of paper trade.
Firstly, at 1% of account risk, I can place concurrently four trades (either independent or as a scale-in), and my margin used as a percentage is in the region of 60%. It might be higher as not all currency pairings are margined equally. All traders know you do not want a margin call.
Secondly, the pitiful 1% of account risk-adjusted for market size gave me a gross market exposure for April of nearly £24 million—eye-watering stuff.
That is not a figure to dwell on. If divided by the number of trades I’ve taken this month, we reach an average per trade exposure of a mere £216,000.
Also, each currency pairing I’ve traded this month would have to drop to zero—or climb to infinity if I were long—in every trade and slip passed my protective stop. So, investors relax. I mention it only to emphasize my point about the importance of the percentage of account adjusted for market size.
Slow Trader’s profit/loss, April 2020
Below is my cumulative profit/loss over April 2020. James, my technical/chart analyst, took time off a third of the way through for the delivery of his firstborn. (Mum and baby doing very well).
You can see the effect it had on me from the chart until I got to grips with it again and continued the positive profit/loss trend.