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How risk multiplier really affects monthly gains and drawdowns, help needed!

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  • How risk multiplier really affects monthly gains and drawdowns, help needed!

    I invented the following values just for the example. Imagine I have an strategy with this expected outcome:

    Strategy 1x:
    - Monthly gain: 4%
    - Expected drawdown: 12%

    My understanding is that if I copy-trade that strategy with a risk multiplier based on account equity of 4x, this will be the expected outcome:

    Strategy 4x:
    - Monthly gain: 16%
    - Expected drawdown: 48%

    Now suppose that at any given point both strategies have an equity of 10,000$. Then suddenly the max drawdown of both strategies is reached, so Strategy 1x reaches 8,800$ (12% drawdown) and Strategy 4x reaches 5,200$ (48% drawdown). After reaching this max drawdown, the strategies start performing well and reach their expected monthly gains exactly and consistently until they both reach 10,000$ again.

    Based on the previous statements I would expect something like seen in equity graph A below, where the green line is Strategy 1x and the red line is Strategy 4x:

    eq12.png

    However, actual calculations tell me that's not gonna happen. Actual calculations tell me that it will take more time to reach 10,000$ again to the Strategy 4x, that is the red line in graph B above.

    The way I calculated it is as follows:
    Strategy 1x: 8800 * 1.04^x = 10000, where x is the months until reaching 10,000$ -> x = 3,26 months
    Strategy 4x: 5200 * 1.16^x = 10000, where x is the months until reaching 10,000$ -> x = 4,41 months (more time!)

    At this point I'm totally confused about what would really happen, A or B, and I hope someone can put some light on the matter.
    Last edited by cprcrack; 05-03-2015, 11:14 PM.

  • #2
    Interesting read...but PLEASE remember that you spell lose just like that, lose. You can lose your money from being loose with your money. So many people get this wrong.

    Comment


    • #3
      Originally posted by cprcrack View Post
      I invented the following values just for the example. Imagine I have an strategy with this expected outcome:

      Strategy 1x:
      - Monthly gain: 4%
      - Expected drawdown: 12%

      My understanding is that if I copy-trade that strategy with a risk multiplier based on account equity of 4x, this will be the expected outcome:

      Strategy 4x:
      - Monthly gain: 16%
      - Expected drawdown: 48%

      Now suppose that at any given point both strategies have an equity of 10,000$. Then suddenly the max drawdown of both strategies is reached, so Strategy 1x reaches 8,800$ (12% drawdown) and Strategy 4x reaches 5,200$ (48% drawdown). After reaching this max drawdown, the strategies start performing well and reach their expected monthly gains exactly and consistently until they both reach 10,000$ again.

      Based on the previous statements I would expect something like seen in equity graph A below, where the green line is Strategy 1x and the red line is Strategy 4x:

      [ATTACH=CONFIG]1136[/ATTACH]

      However, actual calculations tell me that's not gonna happen. Actual calculations tell me that it will take more time to reach 10,000$ again to the Strategy 4x, that is the red line in graph B above.

      The way I calculated it is as follows:
      Strategy 1x: 8800 * 1.04^x = 10000, where x is the months until reaching 10,000$ -> x = 3,26 months
      Strategy 2x: 5200 * 1.16^x = 10000, where x is the months until reaching 10,000$ -> x = 4,41 months (more time!)

      At this point I'm totally confused about what would really happen, A or B, and I hope someone can put some light on the matter.
      Hi Cpcrack,

      It's pretty hard to understand your question since your explanation uses a combination of Strategy 1x, 2x, 4x and your graph uses A/B.

      It is my understanding that both strategies will recover in the same time frame provided your lot sizes are based on the account balance (not equity) and that no trades are closed while the account is in drawdown.

      If a trade is closed then your balance depletes, in which case it will take longer for your higher risk account to recover because you're now trading off a smaller base.

      If you lose 50% of your account, you then need to generate a 100% return just to get back to break even.
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      • #4
        Aggressive traders are the sufferer mainly, since they use higher trading lot size, so when they lose any single trade, then they lose huge! Even, Forex business is not gambling or any type money machine! So, stop searching quick success here! All successful Forex traders donít worry about risk management as they follow money management policies so strongly! 2% is a standard risk reward ratio in Forex (per trade).

        Comment


        • #5
          Originally posted by Mahbub Kafi View Post
          Aggressive traders are the sufferer mainly, since they use higher trading lot size, so when they lose any single trade, then they lose huge! Even, Forex business is not gambling or any type money machine! So, stop searching quick success here! All successful Forex traders dont worry about risk management as they follow money management policies so strongly! 2% is a standard risk reward ratio in Forex (per trade).
          2% is a standard risk reward ratio in Forex ---------- You said that, you are shooting from the lip

          or totally confused, I'm not sure which

          I would think 2% is purely RISK without any reward or ratio required

          for risk reward ratio, perhaps you better study some more on babypips school

          The eyes are useless if the mind is blind...

          Comment


          • #6
            is it work?...

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