Risk management: how to factor deal frequency and duration?

[ScottAllenTVH]

I'm to the point that I'm consistently profitable, now trying to optimize strategies and allocate risk appropriately between different strategies. I'm familiar with basic risk reward ratios. What I'm trying to do is incorporate average deal frequency and duration into my risk management.

Let's say I do 180 day backtest on two strategies. Once fees are figured in, they both produce the exact same profit over the period. But one does it in two deals, the other does it in 20. It seems obvious to me that the one that did it in 20 is less risky, because it's more consistently predictable.

Similarly, let's say two strategies both have 20 deals, but one has average deal duration of 2 hours, the other 2 days. Again it seems obvious that the one with average deal time of 2 hours is better, all other things being equal. There less time for things to go wrong.

But the question is how much to factor that into expected value / risk-weighted return. How much higher return does the 2-deal strategy need to make to be "equal" to the 20-deal strategy?

Is there any standard way for incorporating these into risk assessment? I've looked but haven't found anything.

Or what ideas do you have about factoring these variables in your risk assessment?

[1714853493]

1714853493

[1714853493]

1714853493

[1714853493]

1714853493

[1714853493]

1714853493

[1714853493]

1714853493

[1714853493]

1714853493

[EarnOnVictor]

I'm glad to read that you are making consistent profits and it's very nice for trying to advance your trading for better results and safety. Yet, do not cause your winnings a setback by trying to get an assumed result through backtesting, they don't work. I've been in the trading environment for almost 2 decades, so I know what I am saying.

If you would ever help yourself in trading, forwardtest and do not mind the time it will take you to perfect whatever trading system you are building.

[joniboini]

I never found any calculation that answers your question. So I guess it depends on how comfortable you are. Longer trading duration means more factors to consider IMO, such as market sentiment, project updates etc. Short-term trading means price fluctuation is more predictable but your profit can get eaten by fees quickly if you're not trading on a good platform. I'd say if the market sentiment is generally predictable over the next few months or so, maybe the 2 days/2 deal strategy is better. But as always, don't put your egg in one basket. Maybe run both strategies with more allocation on the short-term period for consistent profit, while the long-term period for high risk and high return position (not assuming leverage).

[ScottAllenTVH]

Yet, do not cause your winnings a setback by trying to get an assumed result through backtesting, they don't work. If you would ever help yourself in trading, forwardtest and do not mind the time it will take you to perfect whatever trading system you are building.

Oh, I absolutely forward test too. But backtesting helps you figure out what to forward test, and what to run live in the meantime. You need both.

[ScottAllenTVH]

I never found any calculation that answers your question. So I guess it depends on how comfortable you are. Longer trading duration means more factors to consider IMO, such as market sentiment, project updates etc. Short-term trading means price fluctuation is more predictable but your profit can get eaten by fees quickly if you're not trading on a good platform. I'd say if the market sentiment is generally predictable over the next few months or so, maybe the 2 days/2 deal strategy is better. But as always, don't put your egg in one basket. Maybe run both strategies with more allocation on the short-term period for consistent profit, while the long-term period for high risk and high return position (not assuming leverage).

I like the idea of a weighted split test with live going forward. I always forward test the top few strategies from the backtesting, but yeah, a weighted split test live is a good idea for balancing risk.

And yes, I figured out quickly how essential it is to include fees in the backtesting calculations. Of course, that's another reason to favor the higher frequency strategy: it increases your monthly volume and may help you move to a lower fee tier. Currently my monthly trading volume is about 20x my average daily balance, which takes 0.06% off both maker and taker fees.

[crwth]

I suggest you look into statistical analysis with this. You are trying to incorporate an experiment, in this case, the backtesting strategy. After running a few tests, you have those parameters to factor in and change according to your needs and then look at a result or response. That way, you would know the best factor in all the elements you have tested that have the most impact on your experiment. That's a great way to check if it's effective or not.

[tranthidung]

Depends on your strategy, you will let your positions ooen for two hours or two days. Honestly, you discussed a right point that with each strategy, if you let your position opens longer than than it should be, you will face a bigger risk.

However, if you apply two strategies in bad times when market must be corrected or must change its direction from downwards to upwards, you will have bigger risk no matter how long your position opens. If you join, and the market crashes in next 10 minutes, I believe you won't have it in your plan.

But if is unpredictable and we must prepare for bad situation. In addition, it is important to add to your two strategies that you must identify when you should join the market when it does not move nearly ending of a price trend or price channel.

[ScottAllenTVH]

If you join, and the market crashes in next 10 minutes, I believe you won't have it in your plan. [...] But if is unpredictable and we must prepare for bad situation.

That's what stop loss is for.

In addition, it is important to add to your two strategies that you must identify when you should join the market when it does not move nearly ending of a price trend or price channel.

Actually, the swing trading strategy I'm using works pretty well in just about any market. I've tested it with out-of-sample data, e.g., the long bear run from Nov 21 to June 22, and it's still profitable. I do selectively turn bots on and off depending on long-term outlooks for the coin, but the goal is to pretty much let them run and trust the statistics.

[EarnOnVictor]

Yet, do not cause your winnings a setback by trying to get an assumed result through backtesting, they don't work. If you would ever help yourself in trading, forwardtest and do not mind the time it will take you to perfect whatever trading system you are building.

Oh, I absolutely forward test too. But backtesting helps you figure out what to forward test, and what to run live in the meantime. You need both.

I repeat, forwardtest instead of backtesting. You might still be new in the world of trading, backtesting is not working, it will only raise your hope and demoralise you later. This is especially if you are using indicators to trade, those indicators are often perfect in past views and patterns, but they are not so in live trading. You have to heed this advice to help yourself. Countless traders have argued before, and they all regretted backtesting later.

And if I may ask, how long have you been trading?

[savetheFORUM]

Depends on your strategy, you will let your positions ooen for two hours or two days. Honestly, you discussed a right point that with each strategy, if you let your position opens longer than than it should be, you will face a bigger risk.

However, if you apply two strategies in bad times when market must be corrected or must change its direction from downwards to upwards, you will have bigger risk no matter how long your position opens. If you join, and the market crashes in next 10 minutes, I believe you won't have it in your plan.

But if is unpredictable and we must prepare for bad situation. In addition, it is important to add to your two strategies that you must identify when you should join the market when it does not move nearly ending of a price trend or price channel.

If you keep on preparing for the bad situations, then you are not going to end up with something good neither in the long run because you will not be ready for it. People who are constantly getting ready for the bad situation could not hold too much investment, they would be scared to hold bitcoin or any other coin for that matter.

I personally do not feel like there will be a situation where people could make a distinct change into their feelings, that is why we should never trade emotionally. If you think everything will be bad, then you will always see the bad side of things, but if you aim for the good that will come, then you will do better.

[palle11]

Yet, do not cause your winnings a setback by trying to get an assumed result through backtesting, they don't work. If you would ever help yourself in trading, forwardtest and do not mind the time it will take you to perfect whatever trading system you are building.

Oh, I absolutely forward test too. But backtesting helps you figure out what to forward test, and what to run live in the meantime. You need both.

I repeat, forwardtest instead of backtesting, you might still be new in the world of trading, backtesting is not working, it will only raise your hope and demoralise you later. This is especially if you are using indicators to trade, those indicators are often perfect in past views and patterns, but they are not so in live trading. You have to heed this advice to help yourself. Countless traders have argued before, and they all regretted backtesting later.

And if I may ask, how long have you been trading?

To add to @ EarnOnVictor view. You don't really need backtesting that much, only you are sure with the times you have backtested then you move forward and concentrate on the forward rather than backwards. Are you saying that the past repeat itself all the time? The past only confirm to you your indicators efficiency on the way it moves with the market moving forward. Understand more with your indicators on how they are behaving in the forward market speculations.

[ScottAllenTVH]

I repeat, forwardtest instead of backtesting, you might still be new in the world of trading, backtesting is not working, it will only raise your hope and demoralise you later. This is especially if you are using indicators to trade, those indicators are often perfect in past views and patterns, but they are not so in live trading. You have to heed this advice to help yourself. Countless traders have argued before, and they all regretted backtesting later.

That hasn't been the case so far.

Forward testing is important. But how long do you run forward testing? And most importantly, what do you do in the meantime? Really, forward testing is just more out-of-sample data. At the end of your forward testing, it's just backtesting, and no better at actually predicting the future from there forward than the backtesting.

The two essential things I found in backtesting are:

1. Test the strategy against out-of-sample data, not just 30/90/180/365 back from today. How did the strategy do from November 2021 through June 2022? How did it do against the market (what's the alpha) from mid-June through mid-August? (BTW, my live strategy did over 60% during that 60-day window, vs. BTC, which went up 29% during that same time period).

2. Don't over-optimize. If you find, for example, that a 9% stop loss is your optimum profitability, but an 8% or 10% stop loss actually puts you at a loss, then that's a bad strategy. Instead, find a range of stop losses that still keep you in profit, and put it in the middle of that range. True example.

And if I may ask, how long have you been trading?

About a year, but I have a background in statistics, finance, and modeling. And I'm obsessive about both learning and experimenting. I've been consistently beating the market since the start (not counting a few failed experiments with live data, which I've also learned not to do).

I really do appreciate you sharing your experience, and maybe some day it will ring in my head, "You know, that guy was right." At this point, I'm certainly not ignoring it—just taking it with a grain of salt.

Let me ask you this: you say do forward testing. How long? And what do you trade live in the meantime?

[ScottAllenTVH]

If you keep on preparing for the bad situations, then you are not going to end up with something good neither in the long run because you will not be ready for it. People who are constantly getting ready for the bad situation could not hold too much investment, they would be scared to hold bitcoin or any other coin for that matter.

There's a difference between preparing for the bad situations and expecting them. Having smoke alarms and a fire extinguisher in your house is preparing for the bad situation.

Good risk management is a must. That's why most traders fail—going all in on something without good risk management, then being unwilling to cut their losses.

And good risk management doesn't mean you miss something good. I caught the DOGE run last week. About 30% on one bot, 40% on another, and one that hasn't exited yet. Now, that's not the 100% that someone could've made perfectly timing an entry and exit, and I only have about 4% of my portfolio in DOGE. But the point is, it all happened automatically. I wasn't watching the news closely and even then, I didn't make the connection that the finalization of the Twitter deal was going to make DOGE surge. I literally did nothing, other than decide to include DOGE in my portfolio a couple of months ago, when I decided it had finally moved out of the realm of $#!+coin.

Risk management isn't fear.

If you fail to plan, you plan to fail.

[EarnOnVictor]

I repeat, forwardtest instead of backtesting, you might still be new in the world of trading, backtesting is not working, it will only raise your hope and demoralise you later. This is especially if you are using indicators to trade, those indicators are often perfect in past views and patterns, but they are not so in live trading. You have to heed this advice to help yourself. Countless traders have argued before, and they all regretted backtesting later.

That hasn't been the case so far.

Forward testing is important. But how long do you run forward testing? And most importantly, what do you do in the meantime? Really, forward testing is just more out-of-sample data. At the end of your forward testing, it's just backtesting, and no better at actually predicting the future from there forward than the backtesting.

The two essential things I found in backtesting are:

1. Test the strategy against out-of-sample data, not just 30/90/180/365 back from today. How did the strategy do from November 2021 through June 2022? How did it do against the market (what's the alpha) from mid-June through mid-August? (BTW, my live strategy did over 60% during that 60-day window, vs. BTC, which went up 29% during that same time period).

2. Don't over-optimize. If you find, for example, that a 9% stop loss is your optimum profitability, but an 8% or 10% stop loss actually puts you at a loss, then that's a bad strategy. Instead, find a range of stop losses that still keep you in profit, and put it in the middle of that range. True example.

And if I may ask, how long have you been trading?

About a year, but I have a background in statistics, finance, and modeling. And I'm obsessive about both learning and experimenting. I've been consistently beating the market since the start (not counting a few failed experiments with live data, which I've also learned not to do).

I really do appreciate you sharing your experience, and maybe some day it will ring in my head, "You know, that guy was right." At this point, I'm certainly not ignoring it—just taking it with a grain of salt.

Let me ask you this: you say do forward testing. How long? And what do you trade live in the meantime?

With this elaborate explanation, I could see that you are doing advanced backtesting which is very good as you include your risks. But the setback still remains that the strategy you use will deceive you as you reference the past records of the market. These past records often fail, and as you are still making success with them now, I think you should continue so that you will realize what I warn you about later by yourself.

Also, from what I read from you, it seems you don't understand what forwardtesting is, it is merely trading through a demo or live account. It is just by trading an actual market reality. You might do this for 3-6 months to be fully sure of the capacity of your trading system.

And if you are using a live account, try it with very low risk.

[ScottAllenTVH]

Also, from what I read from you, it seems you don't understand what forwardtesting is, it is merely trading through a demo or live account. It is just by trading an actual market reality. You might do this for 3-6 months to be fully sure of the capacity of your trading system.

And if you are using a live account, try it with very low risk.

No, I understand exactly what it is, and have been doing it, the entire time I've been trading. I just didn't wait for that to start trading live accounts. But I started with just two strategies, with $500 each. Now I'm up to trading my entire crypto portfolio allocation live. 80% goes into strategies that have been proven out by forward testing, whether live or paper trading, and 20% goes into live testing new strategies from backtesting.

[justdimin]

Is there any standard way for incorporating these into risk assessment? I've looked but haven't found anything.

If you are doing with more than 50% for your rewards side then I guess you are good to go with all your strategies. Yeah, I mean you may or may not find a prescribed methodology for risk management for cryptocurency trading but until all your current strategies that are getting you consistent profits in both short and long run, you may not waste your time on adopting a new set of risk management principles.

do not cause your winnings a setback by trying to get an assumed result through backtesting

Yeah, I would never prefer to disturb my on-going profitable strategy but at the same time for back up purposes, I would find time to have other new strategies which might be the case of OP. I mean, OP is already profitable and may look for new things for ensuring being future-proof.

[EarnOnVictor]

Also, from what I read from you, it seems you don't understand what forwardtesting is, it is merely trading through a demo or live account. It is just by trading an actual market reality. You might do this for 3-6 months to be fully sure of the capacity of your trading system.

And if you are using a live account, try it with very low risk.

No, I understand exactly what it is, and have been doing it, the entire time I've been trading. I just didn't wait for that to start trading live accounts. But I started with just two strategies, with $500 each. Now I'm up to trading my entire crypto portfolio allocation live. 80% goes into strategies that have been proven out by forward testing, whether live or paper trading, and 20% goes into live testing new strategies from backtesting.

This is clearly explanatory enough and best of luck to you. You have done the better part by making your forwardtesting to be 80% and backtesting 20%. The two will definitely give you more experience in this subject matter, and 20% of the backtesting will not waste your time if you later discover it's not necessary. Also, the live or paper testing should be done until you developed a good trading system that has over 75% success to boost your confidence in it.