I am new to forex trading and will be using systems/EA.
I am going to allocate a 'small' percentage of my total investment portfolio to forex (about €10000).
I am thinks of diversifying this money among several systems/traders with good, consistent records with low DD (I can take a 30%/40% DD on a stock if I believe in the fundamentals of the company and it is part of a diversified portfolio), but I am trying to avoid traders/systems with that much DD.
I also have SL in place of about 30% per EA.
1. In light of what I said, what would be a reasonable multiplier, if any? 2. Does my overall strategy seem sound? In other words capable of producing stable, long term (3 to 10 years) profit?
Thank you in advance for your time in answering my questions.
@TheSmokedAce , with all respect, but I strongly believe that you are wrong.
Sophisticated investors/speculators, use 'returns adjusted to risk' (simply put, ROR divided by account volatility), not 'pips'.
'pips' are so irelevant! one pip is different on eur.usd vs eur.sek. The spread on the first is around one pip, while on the second, it is around 30 pips. So... care to explain more?
@custodiof , there are so many things which needs to be explained. But for start, don't even consider to invest in 'systems' which have a DD more than 15, 20%. If a system reached that level of DD, then very likely the next DD will be bigger.
Regarding the EA's: I can say with a confidence of more than 99% (if I sound like a VaR confi level, you are right! just kiddin), that you are going to hit margin call. And this is not because automated trading is not a good idea (it is a very good idea, I'm using automated algorithms programmed by me in C++ in my own trading!) but there is no such thing as a 'start and forget EA'. They should be continously modified. You can throw inside an EA the most fancy regime shifting techniques (Hidden Markov Chain maybe?), it's not enough, it's not going to make a difference on the long term. Market is changing, period.
@Florian ... Everyone has a right to their own opinion and view. However here is more to my view. imagine two traders, A and B
Trader A has 10% returns per month, yet makes -200 pips a month, with an average expected return of 10 pips per trade Trader B has 3% returns per month , yet makes 10,000 pips per month. with an average expected return of 100 pips per trade
Who is the better trader long term?
Well from the above stats we can figure out the following
Trader A, is either a scalper or a grid/martingale trader, who used increasing lot size to recover from a move against him ( that's why they have negative pip results) This kind of trader has a limited capacity issue, and historically will blow up at some point
Trader B, is a trend trader, using probably higher time frames, smaller lot sizes and is correct on market moves, as he is capturing positive market movements without having to escalate to martingale matters to capture positive results.
That is the key, you cant be lucky and consistantly bank 1000 pips a week... but you can be lucky and bank 20% return on a 5 pip move in your direction...
@TheSmokedAce Yes, now you are clearer what you intended to say. But your examples show why using 'pip' as a metric is not a good idea. As you just pointed out, a pip is relative. Beside, the most obvious issue is that a pip is different on eur.usd vs eur.nok, as I pointed out earlier.
This is why earned percentages divided by standard deviation of daily P/L (for n periods) is better. It normalize itself and it's very easy to calculate. (on the other hand, if you want to go professionally, there are others much better metrics. For instance, ask for a version of VaR applied to the portfolio and see much more beyond the tip of the iceberg).
Looking at portfolio metrics is the starting point, but discussing and getting to know that trader, is the way to go.
It's not an easy task to quantify a trader skills. This is one of the reason why Fund of Funds found themselves a place in the industry.
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