Dan,
Talk about timing. I did a second edit on the win/loss thing for the book today. It stems from those materials posted way back, which in turn come out of the site course.
Its still a little rough. Believe me, posting this is for therapy, not self-promotion <g>
from The Master Swing Trader
copyright 2000 Brooke Publishers and McGraw-Hill. All Rights Reserved. Please do not repost without express permission.
Winning and Losing
Swing trading success depends on the chosen path to profit. Some push hard for the big gain but risk big losses when the action suddenly turns against them. Others slowly build each profit and watch defensively for a quick exit when wrong. Choose the focus that matches the trading personality but prepare to deal with the consequences of the decision. You have to be very, very good before you allow yourself to be bad.
Measure ongoing performance using Win-Loss calculations. The simple %WIN ratio compares winners to losers and tracks the success of new strategies. Average winners (AvgWIN) and losers (AvgLOSS) measure results against risk tolerance. These calculations look at trades in the following manner:
%WIN = Winners/Total Trades
AvgWIN = Total Profits/Winning Trades
AvgLOSS = Total Losses/Losing Trades
Example: The trader books profits of $300, $350 and $400 and one loss of $175 is recorded. Profits come from 3 out of 4 trades:
%WIN = 3 winners/4 trades
%WIN = 75%
AvgWIN = $300+$350+$400/3 winners
AvgWIN = $350
AvgLOSS = $175/1 loser
AvgLOSS = $175
Different strategies emit different risk profiles. Scalpers tend to display high %WIN and low AvgWIN while position traders reflect low %WIN and high AvgWIN. Strong momentum markets incur high AvgLOSS. Momentum players must compensate for this increased risk through higher %WIN if possible but that often fails. Swing markets increase %WIN but limit both AvgWIN and AvgLOSS. Swing traders can impact results through time frame and strategy choices more than any other market player. They may wind up at either extreme depending on their risk approach.
TABLE 4-2
Effect of Loss Management on Profitability
% WIN....TRADES....AvgWIN....AvgLOSS....PROFIT
75%...........100.........$800.........$2000.........$10,000
50%...........100.........$800.........$600..........$10,000
25%...........100.........$800.........$133..........$10,000
Trade risk shifts dramatically through small changes in %WIN, AvgWIN and AvgLOSS. High %WIN traders can absorb much higher dollar losses than low %WIN traders and still profit. Many markets limit AvgWIN by the nature of their inefficiencies. But swing traders can often narrow AvgLOSS through careful risk management practices. Consider how loss impacts performance from the 25% to 75% levels. And here's the kicker: most professional traders have a %WIN under 50%. Guess how they got to be professionals?
The markets offer only three ways to improve profitability, regardless of trading style: raise the %WIN, raise the AvgWIN or lower the AvgLOSS. Intraday traders have fewer profitability options than position traders. Price tends to move away from entry as a function of time. So individual intraday profits (AvgWIN) tend to be smaller than longer-term gains. Very short-term time frames also frustrate attempts to raise %WIN since short-term traders must demonstrate perfect timing while position traders can wade through many whipsaws to get to their profit.
Intraday traders can control losses more efficiently than position traders. Price-time tendency now works to their advantage. In other words, incurred losses will be smaller on average because positions are held for a shorter time period. This allows loss distribution closer to zero than position traders. But frequent intraday executions often wash out this advantage through higher transaction costs.
Loss side management will increase profits more quickly than chasing gains. Take what the market gives and move on to the next trade. Successful participants know when they're wrong and execute a well-rehearsed exit plan. Learn this skill quickly since traders lose more often than they win during a typical career. Enter every position with an exit door close to the entry to cut losses when wrong. Keep another just behind advancing price to protect gains when right. Expect some frustration along the way. Many stocks will whipsaw through S/R and shake out good positions just before taking off sharply in the right direction. Experience will reduce these unpleasant events but never eliminate them completely.
TABLE 4-3
Market Liquidity in the Year 2000
Volume....Nasdaq....NYSE/ASE....All
Top 10%....417.......361..........778
Top 20%....895.......663.........1558
Top 30%....1400.......1159.........2559
Seek liquidity at all times. Swing traders need fast executions with low slippage and that won't happen unless there's an active crowd flipping the stock. Less liquid issues also carry higher transaction costs and erratic movement that will undermine sound risk management. Avoid stocks that average less than 500K to 1M shares/day for 1-3 day positions. Intraday traders should focus on issues that trade 2M or more shares each session. Special conditions will change these guidelines. High-level shock events turn thin stocks into excellent swing trading vehicles for short periods of time. Shocked stocks that trade 3-5M shares or more with high volatility produce excellent profits with low transaction costs.
Alan |
