Prediction Wizard

Traders  constantly try to improve their market participation  occasionally ask the question:

What is the appropriate time-frame for me  after taking into account  the present situation?

Of course this depends  on a lot of things like the following:

-         What is my objective  with my market participation?

-         How much time am I willing to allocate to  reach my objective?

-         How much capital do  I have?

-         What kind of market experience do I have?

-         What kind of edge do I have on the market?

-         How much stress level am I willing to endure during market participation?

Even after answering many questions some traders might conclude and select the wrong direction,  due to many seemingly unimportant  details.

One of that is the  brokerage commission, and the slippage, that is associated with  trades, executing market orders.

The more trades you  do on a yearly basis, the more stress you need to endure.

The following table shows a hypothetical example  for the brokerage  costs for a trader on different time-frame.

Assumption was in the calculation, that the trader pay 16 $ for a round trade.

The brokerage fee could accumulate to a horrendous level for a scalper or Day – trader.

The most important is not actually the brokerage fee, but the  Ratio of  the Yearly brokerage fee to your  trading Capital.

If you pay 50 000 $ a year for brokerage fee, and you are  playing the market on a 1 Min time – frame, having a 50 K account and playing all trades with a 100% allocation, than  basically  the yearly brokerage commission is equal to 100% of your Capital, and  the probability to stay consistently  on the winning camp  is very close to  zero.

A rule of thumb might be that yearly  brokerage fee should be less than  10 - 15 % of the  trading account, to have a fair chance to stay consistently  in the winning camp.

Depending on the trading style, trade execution, the total Yearly slippage can be as big or even bigger than the total yearly brokerage fee. For this reason try to  minimize the market orders  by putting in limit orders if  reasonable, exercising more control over the trade.

Time-frame  is only a construction, abstraction level, that helps to  visualize  the market  action through chart creation.

The actual  market behavior is a constant flow of  trades regardless of one specified time-frame, as  a construction of endless time-frames put together.

Opportunities  show up on different time-frames.  Some of the most successful traders  participate in the market  by taking the opportunities on different time-frames, even if they might have one selected time-frame which bring in  the  bulk of the yearly profit, other time-frame  plays might  add to the bottom line. 

Predictionwizard support  playing the market on multiple time-frames.

One example is  if the market trading in a tight range for a prolonged period of time, say many weeks or months, and  suddenly breaks out  and move decisively  on very high volume, compared to the average volume within the range.  In this  situation playing the 1,2,3,5 minute time-frames  could be successful, but we probably will  limit the potential  of the total yearly profit by restricting ourselves to trade only this very short-time-frame.

But  trading  opportunities on multiple time-frames usually not the way, newbie, novice traders can  successfully participate, as it requires much more trading  experience.

Few traders consider the energy level or  mental strength as  another extremely important component, in addition to our trading capital.  But that also should be in the picture, when we constantly evaluate our market participation.

One example:

A  Day-Trader  working 9 hours a day,  starting 1.5 hours before the market open,  trading during the daily market period (6.5 hours) and  still working 1 hour after the market closed.)

This intensive  market participation could be continued for  a weeks, months, or even for a few years but probably not for  many years without long interruptions.

By analyzing the  trading results  we see, that 90% of the yearly profit came  in during the first 60 minutes of the regular market session and the last 90 minutes of the regular market session.

So  this trader  gets 90% of the yearly profit  by watching the monitor(s)  150 minutes, and  get the remaining 10%  by sitting  and watching the market for another (240 – 360 minutes, depending on how much  we consider in the pre-market / after-market period)

Does it worth to  deplete / kill our mental energy level by  following the market all day, when we do not have the added benefit?  Probably not.  In this case spending 60 % of the time in front of the monitors for the 10%  added profit level.  Some of the biggest market players know this, and stay away from  the market when it is slow or does not  show good potential reward.

We can even define  market status, what we would consider low potential periods, when we  take a rest and  not following the markets.

After this introduction  we would like to highlight  two very important aspects of our market participation, that every trader try to constantly improve, with more  or less success.

These are:

1.      WIN PROBABILITY

2.      RISK / REWARD RATIO

These two are measures and considered the crucially important aspects of our market participation.

We can’t improve win Pct directly, but we can improve our market participation strategy, or mental fitness, our trade execution… to ultimately improve these two measures.

To demonstrate the  impact of these measures we created the  following table with 20 different strategies.

In the table presented below  we would like to see the impact of the win probability at 50%, 60%, 70% and 80%. Anything above 80% is  a gratis,  and might  not be possible to maintain for very long period of time. Also  we would like to see  the impact of the Risk / Reward  at different values, like   1/ 1.33   1 / 2,  1 / 2.5,   1 / 3,   1 / 4

Analyzing the table   the crucial importance of these numbers will become obvious:

A trader, with 50% Win rate and 1/2 Risk / Reward is a Good trader, but gets only 50  profit  units out of 100 Trades, BUT an excellent trader, who manage to get 80% Win rate and  1/3 Risk / Reward, gets 220  profit units  out of 100 trades -> The difference is a whopping 19.36 / 1  in only two years (220/50 exp 2  OR 4.4 exp 2) between these two traders. (Assuming they do 100 trades a year)

So if the first trader  get 1 Million, the other trader get almost 20 million during the traded two years using the same money available! The Risk / Reward ratio and the Win  Pct  is that  IMPORTANT, the CRUCIAL aspects of trading!