Quantified Risk in Forex

There’s a “little factor” that for me shows whether an automated trading system (expert advisor) is “a joke” or not.

I’ve been investigating dozens of ea’s this year and they’ve all been jokes imho. For example there is a managed program that has been doing 50-100% per month for the last 6 months. I’ve been following it with interest. Last week they had a 50% drawdown. (That means that they lost 1/2 the account).  Of course they justify it by saying that it’s doubled a few times already, everyone is still up. Nonsense!!

Just like when you’re a kid and someone twists your arm – we all have a point where we yell Uncle!  Is that when you’ve lost 50% of your account?!  I think that is ridiculous.

Here’s another system that’s listed on MyFxBook which I’ve been watching, its’ an automated system which has done over 200% the last 2 months: Spytrader – Yesterday I was watching it and at one point he had 5 trades open on his 750$ live account and I saw it down 150$ (600$ equity), luckily the euro turned back up and he got out with a small loss but what if the euro would have gone another 30 pips south, would he have let his live 750$ account go to 500$,  400$ ?  Where’s the Uncle point?

AND – what’s up with MyFxBook’s drawdown statistics, it still shows the DD as 3.43%, I witnessed the account go down 20%.  Maybe that’s because the account is already so far in positive it’s not affected. This statistic is not good for me anymore. I don’t know about you but if I saw my live 10,000$ account which has been gaining nicely is all of a sudden down to 7000$ equity in one day’s trading session I would flip.

Introducing: Quantified Risk.   “You know exactly where your Uncle point is for each trade”.

Think about it, who cares if you win 98% of your trades if the 2% losers blow up your account?

In betting language there’s a concept called Flat Betting and an old saying that “no system which doesn’t work in flat betting is worth its salt”. I really like this and if you can get back to simplicity you’ll see that you just need to have an edge. I’m confident after my research years ago on gambling that there is no edge to be found at the casino except for maybe card counting which is not my thing. With Forex you lose some edge everytime you get in a trade by paying the spread to the broker. However, it’s so open-ended that you CAN find a system which has a 60 or 70% win rate. Once you’ve found this and a way to execute consistently you are set.

I’m also testing a 3 step martingale at the moment but here’s the difference: I know that on step#1 I’m risking 1% of my account and then step#2 I’,m risking 2% of my account and step#3 I’m risking 3% of my account. So if I lose the 3 step series I’m down 6%.  Then I can look at how often statistically will I lose the series. Let say for every 30 wins I get 1 series loss, I still have a profit of 24% for that round.  This is Quantified Risk.

It’s possible also that -25% of your account is your Quantified Risk level, but in this case you will have probabilities and statistics in your favor.

Another factor is Risk of Ruin – at 6% loss each time for the mini martingale series, I would have to lose a dozen or so times to ruin my account. Important to factor this in also, It might end up not being worth the risk of ruin and I will stay with flat betting.

I”m so shocked at how many joke systems are out there, is it because the internet is full of scammers who just want to sell broken shovels to unsuspecting gold diggers? Or, is it because few of us take the time and energy to really understand the game.