In this Webinar, Alistair takes a look at the importance of money management in trading and techniques to help traders with theirs.
Welcome to an ACY securities webinar. My name is Alistair Schultz, and I am the chief market analyst for ACY securities. And my history has been pretty diverse over the years. I've worked in both brokers and investment funds, including on the floor of New York and different trading environments, as well as the flaws of wall street in the pit. So I do have a little bit behind me, about 15 years in total these days. And tonight's webinar is really going over some basic money management principles to start off with, as the webinar progresses, I will be moving into some strategies behind money management and they will get a little bit more sophisticated quite quickly. But if you do have any questions along the way, you are able to email me.
So, if you don't get to get your question answered tonight, then feel free to shoot me an email. I'll quite happily answer them as best as I can. And these strategies that I'm covering tonight and the way that we control money management, sort of in the professional world does vary. And there are plenty of other options that are available to you, but I like to show some of these to not, to give you an idea of just a few of the different ways that you can control your trades and more importantly, what you can do about losses. So to get started with, obviously the first thing I have to cover is a risk warning and a bit of a disclosure about foreign exchange and derivatives, and about them being high risk. I'm sure many of you have already read this sort of stuff before. So make sure that you understand the risks behind trading and that your risk tolerance and training experience quantifies for your ability to trade and that the objectives matched to what your financial situation or needs might be.
So moving on from the risk disclosure, if you want to read this, there is one available in your PDF statements for any of the products that we service, uh, and we can sort of get onto way now money management is perhaps one of the most important aspects of trading, even more important than your entry and exit points. Understandably money management involves subjects that sort of need to be understood in their own metrics or in isolation and how they sort of work together to form a cohesive money management system. So some of the things that I usually try and cover, or I know we'll try and cover today, sort of basic performance statistics included the mathematics behind them trade sizing and how you can actually apply it with calculations, stop losses and a variety of different ways that you can take some of the thinking process out of way, you might get in or out, get out of a trade.
And when you might use different types of strategy methods that might involve different strategies or, or entries completely on their own. So the first thing we're sort of going to consider is the idea that performance comes as, as statistic and all of those performances. We have to consider the idea of the math that's behind it. Now in involved in trading, there is always a lot of math and there's no exception to that. So the first thing I'm actually going to cover with you a bit is about win rates. I've just gone to the wrong one. There, there we go. Um, so when describing trade performance, the win rate is commonly a quoted statistic. You'll usually see it with investment funds or perhaps in reporting where they print out certain different details about their trade history. It's an important figure and it compares the number of winning trades to the number of losing trades expressed as a percentage price point. So in this instance here, we have the number of winning trades over the total number of trades. And then you times it by a hundred percent, and this will give you your percentage for it.
So for example, a win rate of 60% tells us that old trades that taken 60% were winners. It's really simple statistic, but it does have limitations. So on its own, it doesn't really reveal whether trade performance is successful. For example, if it is possible to have a win rate of 90%, but only break even, or even lose money. And this would only occur if the actual size of the wind was small, but the size of the losses were large for a win rate to really have any value. It needs to be coupled with a risk reward ratio, sorry, one moment. I'm just about to cough.
That's a bit better. So in order to have it to be of value, it needs to be coupled with his risk reward ratio. And this sort of helps you to predict whether the trade performance can lead to a profit. Now, you might use these in conjunction when you're doing your own system or testing, but if you are planning on you giving your money for someone to invest for you, then you need to be able to understand what the metrics are behind them. Now, there are a number of other ratios that are used such as acid ratios, everything like that. I'm not going to cover them today because their stuff that you would usually use in stocks. But the idea between the risk reward trade ratio is that the size of the average loss to the size of the average win of the trading system.
So you can see that as a calculation that I've got there on the screen for you now. But as an example, if a trading system has a profit take profit of say 20 pips and a stop loss of 10 pips, then you risk reward ratio is to be 10 to 20 or one to two, which would make it a 0.5%. If a trading system has to take profit of 10 pips, but a stop-loss of a hundred pips, then your risk award is going to be a hundred to one or 10%. If the trading system has a profit of 20 pips and a stop-loss of 20 pips, then you've got a one as the number. So it's going to be just literally one because 20 to 20 equals one in, in ratios and, and your fractions, if you remember from school. So this, the test statistic tells us whether the trades except larger losses over smaller wins or vice versa, but it does not let us sort of form an opinion about whether the trade's approach is going to be profitable when we sort of combined the two together.
And this is something that by using both the wind weight at win rate and the risk reward, it's possible to start forming an opinion about whether trading system is likely to be profitable. So if you're new to trading or you're starting to build your own trading strategies, this will be important for you in the idea behind it. If you have a win rate that is say, I'm just going to move it to a table so you can see what I'm talking about. So if you have a, uh, a win rate and a risk reward as one that's desirable, then you're going to sort of try and have an idea about where those percentages might be. So for the following table I've got here, it shows several different win rates along with the risk reward that is required for the system to have a break even outcome.
The third column extends this a little bit and shows the risk reward values. The system needs to be profitable. So by, by looking at the chart, you'll be able to see that if the win rate is 33%, the break even point is going to be a one to two ratio and that your system is going to be profitable if you have it less than 0.5. And if you obviously have it above that, then you're going to see other things as well. Now, in these examples, you know, I should make it clear enough that knowing only the win rate or only the risk reward ratio is really not enough to be projecting the outcome of the system. If both are paired together, the information becomes a little bit more useful. And naturally, if we have a few other series of calculations and or percentages and ratios that we use and ones that we get given, or we're able to assess with, and we can get more information out of it.
And the more information, the more data we have, the better it's going to bait. So when it then comes down to comparing it with the idea of consecutive losses, the number of losses that we record shows how many losing trades obviously occur in a row. So small numbers tend to be better, especially if you're looking at it from an investor's perspective. And it provides a measure of likely size of account drawdowns as well. So by that state, if we have a number of losses in a row, then we would likely going to be able to see how far this person or this strategy will run us into the red before turning a profit around. So the win rate can give us the impression that that is a nice even distribution of wins and losses, but it's not always the case and winning and losing streaks can occur.
And they do tend to have a significant impact on trading outcomes or the curve that you're looking at. So during a losing streak, the account will go backwards and knowing a maximum amount of recorded consecutive losses allows us as the traders to make predictions about how big that drawdown might get. If it's a strategy web developed, or if we're looking at a system or someone else's to trade for us, then we'd be looking at it from a very different perspective as the investor. So if you're using a strategy with trade size increases, following losses, it's crucial to know the maximum number of losses you might experience. If you don't know this assist or you don't take account of it, the chance that your account will be destroyed by losing streak gets much, much higher. Now, the next one is the largest loss. And this is one that when you think about it, it provides additional information about the Jordan potential of a single trade.
So the previous examples, we talked about the idea of a fixed take profit and a stop loss. However, a lot of traders tend to vary that stop-loss and the take profit to account for different market conditions. And I'm guilty of doing this myself, because if I don't see the market conditions fitting, then I will modify what I'm doing on a given day. And if you've been on my webinars before or watched some of my videos, I tend not actually to even use a given strategy or paid, which by trading plan as I just sort of wing it a lot of the time, but I did in the past. And that has sort of developed into part of how I trade now. And I have a lot of things that I just do automatically, and don't need the sort of piece of paper to remind me, but it's always good if you're new to trading to keep that piece of paper by your side as a trading plan, but it measures to sort of provide insight into how it can happen and what the impact on our trading account might be.
It also adds to the idea of what the average loss value might be in reports. So if you get out a printing report and you want it to go to investor to get funds, then usually they will ask you what your consecutive losses, what your largest loss is, what your largest win is. And then that will sort of work out from there, what the average loss might be. And it's possible to average out a loss to be lower than the regular, because you get a one large one or, and then you have a consecutive series of number ones. Now, from there, we sort of talk about the idea of sort of the largest wind, which I just mentioned before having the largest winds helps you to identify how typical, just like the opposite of your largest loss, what the typical average win is going to be.
So if the largest wind is a lot larger than at the average, the largest wind is a lot larger than the average loss. It may have contributed more to the overall result than the average suggests. And this may not always be a negative result, but some traders rely on outlier trades to boost the results a bit, especially if they're a little bit vulnerable too, with their trading system. So if a trade method relies on outliers to make profits and it's missing even just one of the trade opportunities can make a big difference to the overall profits on trades. Then it is likely a strategy you would not want to employ. Now we move on to that. We then go into a little bit more statistical. I promise you all the mathematical statistics software, it lasts too long. I'm going to try and get through it as quick as possible.
And then we'll move into the stuff that actually will be something you can put in a practical sense of ideas. Now, when it comes to sample size, it's not often discussed, but without it, you can't make an assessment about whether the other statistics are valid. If the sample size is small, then the other statistics have doubtful values. So for example, if you have a small sample size of five trades and all five trades were winners, you can't declare that the win rate of your system is a hundred percent because as the sample size increases perhaps to a hundred trades, you might find out that that win rate was really only 40%. And you're in a point in time in price where the system just worked well. And this tends to happen because trades don't always occur in neatly organized packages. There are winning and losing streaks.
And in this, the example of just given the initial five trades may have been a part of the winning streak side of dates. So the question to how big of a sample size should I be doing is really a hard question to answer because the market's behaviour itself is never uniform. And with all the volatility we've had now, and specifically pre 2008, we've seen the market behave differently after almost every single recession and a new normal is sort of identified. If it moves into a different pattern, depending on the various situations, driving prices around, and as a generalization, you should have a minimum of 200 pieces of data roughly, and preferably a lot more. If you can, just, before you start beginning to form opinions about your trading processes. So if I was going to be running a new trading strategy that may be automated, or even if it was doing it manually, and it was pattern recognition, and this applies more to the technical side of things, then I'd be looking at doing well over a thousand tests to see how many trades really worked these days.
I tend not to trade that way. I do have automated stuff that I use, but it's not always the same. So, but either way that frequency of training can impact it. So a trader who trades and say a five minute chart might place 10 trades a day, and it will take them less than maybe a month to have two trades, to be able to develop that data, to start working with. Whereas someone like myself, who's a trader who uses four hour and daily charts. I might only take two trades a week at maximum. You can't make an assessment about whether other statistics are valid. So if you had a sample size of five trades and all five trades were winners, you can't declare that to be the win rate of your system as being a hundred percent because the very next string could end up being a sample of losses.
So we really need to have between 200 and a thousand, if not more than a thousand before we can start declaring what has gone on during our trading. So the next bit to sort of think about is our actual trade size management and trade size management can be done in two different ways with calculations. The potential profit of the trade is the function of the size of the trade. And the number of pips to trade moves before being closed. The potential of loss of the trade is a function of the size of the trade and the number of pips the trade moves before you actually close it. So these both, both of these sort of statements are expressed in the following equations that you're seeing on screen. Your max risk equals the max distance to stop loss in pips times, the value of one pit per contract times the number of contracts and vice versa, the potential profit equals distance to take profit in pips times of value of one PIP to the value of number of contracts.
So to put this in a bit of context for you, I do have a chart to bring up with you, but I am just sort of gonna go through it a bit simply before we move on to the other stuff. So for example, what should you consider the idea of a trade on the Euro Dollar, where one PIP of movement is worth $10 per people contract, or one standard lot. You have a stop loss of 20 pips and a take profit of 50 pips. Now, if you were to sort of think of that, then the contract sizes will end. The risk that you have variance will be incorporated is this table that I've made up for you. So in one contract or one point a you're risking $200 and the potential profit is 500. Now, if you were to then do the same thing again, you're for two contracts and incrementally increases, and eventually at five contracts, we're seeing a risk of a thousand dollars for that same 10 PIP stop loss, but the potential profit of 2,500 for the 20:00 PM take profit.
So then I want you to sort of take into consideration that you have a $10,000 trading account now by rule of thumb, the maximum size trade, you can really take for a standard one lot for a $10,000 standard account would be about one contract. And so when we sort of start going up in numbers, I see you've got a hundred thousand dollars in your trading account or more you're talking about having an account risk of one contract is no, you wouldn't trade any larger than that, the way you go up and you can see why in this table, if you had a $10,000 account with five contracts for it to move one PIP, you're risking sort of 10% of your account. So this means that the trade plan needs to consider what level of risk is appropriate for the account and the plan for the trade sizes. Based off that, not only that you also need to take into consideration your own risk tolerances and how much you're willing to sort of consider.
So when we then move into the idea of stop-loss sizes, we need to sort of consider the stop-loss size itself versus the minimum allowable size of a trait. So the value of loss equals your stop-loss size in pips times of value of one PIP times the size of your trade in the number of contracts. If we then rearrange those variables, we get the size of the trade that we're really allowed to actually use for that account type. So that's the second equation that I've got there below. So because of that, the stop loss size will vary. According to the style of trading that you're using, your short-term trading will use smaller stop sources while your longer-term trading ends up using largest stop-losses. So, by example, if we're considering that you're a dollar chart before, if I was on a daily chart, I would use a stop loss of 200 pips or more.
And in fact, today I've actually placed one with 600 pips on the Euro Pound, and I am have reduced my trade size dramatically. So as opposed to the normal size, it's about 10 times less than what it usually would be. So in that figure, you know, if you were then to put it on 25 minutes, you might only be using a stop of 10 to 20 pips, but it would often be much more appropriate at that size. So no matter how big your stop-loss is in terms of pips or distance or the dollar value of the loss, it will be proportional to the size of the trade.
Now, by example, I want you to consider trading a trader using a $10,000 account and, you know, wanting to limit the risk by 1% or a hundred dollars. So if you were trading your, a dollar on daily charts is likely that stop loss will be in the order of 200 pips or more. So your position sizing would have to be for the hundred dollars to be $10 per contract times 200 pips, which then equals 0.05 contracts for, to actually fit into that parameter. Now, if you were trading the Euro dollar on a five minute shot, it's likely the stop loss will obviously be smaller. So I'm using say 10 pips as an example. And at that point, then for the a hundred dollars per turn, and a temp contract, you now are able to take a full-size standard lot. And this sort of gives you an idea that position size and the distance, the stop loss actually worked together.
There is a relationship between the two and different trading strategies require you to do this calculation to work out, which was between them. The next issue you sort of need to consider is what the minimum size trade might be for the account and what you're actually trading different brokers do tend to have minimum trade ciders. So for example, futures brokers often have a minimum trade size of one full sized contract or one standard lot. Whilst most Forex brokers will have their standard minimum to be 0.01. So you can also then find micro contracts at some brokers, which are, you know, a thousand times smaller. So your minimum contract size whilst it's 0.01 it's 0.01 of 1000, as opposed to 100 and makes your actual contracts 0.00001 of a full-sized contract. So therefore this is sort of is something you need to be aware of. You need to find out from your broker, what you're using in our instance at ACY, if you are trading with us, then it's 0.01 for you to be using.
Now summarizing it a little bit. It's, it's not enough to just have a trading strategy for trading. It's important to know whether the account you were using can support the trading methods you want to use. So this is obviously going to involve calculating the level of risk you're prepared to take with your account, determining the size of the stop-loss in pips, based on your trading methodology, calculating your position size based on the stop-loss and your risk levels, confirming that the stop-loss you intend to use is less than the maximum stock loss. Your account can support. And if the account Constable the trading methodology, you want to use, it may be possible to use your strategy by using a different type of account that allows smaller trade size, like those mini or micro lots I was talking about.
So moving onto the next bit, we're going to talk a little bit about losses now. Pardon me? Sorry. Covering from losses for, for most people starting out, it seems like if you lose a trade, then you win a trade. You'll be back to neutral again. However, this is not really the case, because if you calculate your trade size from the bottom and keeping in mind that you can actually compound your account, your account size from a loss is generally followed by a reduction in the size of your account. And therefore your next trade size needs to be calculated. It should be smaller, but the amount to recover from the loss is also proportionately greater. Now, if I lost of any sort of type let's say, for example, you would have a 10% loss of a $10,000 accounts. That means you've lost a thousand dollars and your account balance is now $9,000.
In order to recuperate that $1,000 using the same sort of 10 pips stop, plus 20 people take profit. You would need to be having your account, your, your next position size to be 11.1%, as opposed to the 10%. So you do need to start increasing those sizes as you go up. If you were trying to cover your previous losses, if a loss of any amount requires you to have that logic gain, to recover from AAJ, the 10% loss I just spoke about, and it requiring an 11.1% sort of amount to recover that loss a single or even a small loss amount of the 1% may not have a large impact on the process. However, having a series of those small 1% losses can build up the draw down enough for it to have an impact. And alternatively, if the trade sizes a larger, so that the risk level of each trade is higher, it becomes much more important.
And the factor increases. So how do we consider managing our stops? Well, a stop loss is an order placed with a broker so that when we, when price moves to that price, the position is naturally closed. The purpose of the stock is to really limit your risk and when price moves against the open trade. So when you are long position, a buy order is usually entered. Then the stop loss will be a sell order to get you out and vice versa. If you've got a short position or sell order, then your stop loss will be a bio to put you back in, but they take you out of the market. If the stop loss is triggered, your open drawdown becomes a realized loss. It's converted to a close trade, and then your new balance becomes evident. We usually look at the idea, realized loss being, if you haven't closed a position, it's not something that's going to affect your account balance other than your drawdown factor so far.
So, but there is the possibility for a stop-loss to fail. So when try to set up a stop loss and it's hit, people are often surprised the loss is larger than they expected, and this is normal and it's caused by the need for another trader to be available on the other side of the transaction at the exact same price. So when you see a run on the market, like we've seen recently with the S and P 500, a variety of other markets where we see price moves very quickly and dramatically down. It's because there's no one on the other side willing to buy at that point in time. And you might not get out of your position for a little bit longer. The various often is only very small, but in fast moving markets, like we've just experienced from a few pips to even a hundred people.
More that factor can be attributed down to what you consider slippage. Occasionally the market sometimes moves a long way in that one direction. And in this situation, there's really only buyers or sellers in the market and not both of them operating at the same time. So you have to consider that as a scenario that occurs one of those occasions where the scenario occurs and the market suddenly reacts by selling aggressively was actually during the time that we saw with the Swiss national bank. So a real life example is in January, 2015, the Swiss national bank unexpectedly announced that they would immediately reverse the policy by actively buying Euro chef. And if the, if the Euro chef came over value, and as a result of that, the Euro chef immediately feel fell like 2000 points. And by the time of the announcement price was so far down that some trades were positioning themselves to sort of buy into it.
And it was only up until that point that it was expected. So to buy the Euro chef to try and push the price up again, but because the SMB had made this announcement, price fell so fast within seconds, that only sellers were in the market willing to actually sell positions. And I was willing to buy. So anyone who was holding a long position or by position was helpless to do anything about it, and it priced didn't actually return. It was, it ended up being 3000 pips lower, but by this time the losses were massive and many traders had obviously lies losses, but they also had sometimes negative balances at an even more sort of sobering event of that. A number of brokerages such as our pair actually became insolvent and clients kind of lost money. So after that occasion occurred, we had a lot of people sort of move to a different way of trading.
And we saw brokers implementing strategies to try and prevent that from ever happening again. Now there are a number of different ways to place a stock. There is a hard stop, a soft stop, a disaster stop, and a variety of different trailing stops. A fixed hard-stop loss can be placed at the exact time. You know, at the time they actually place a try. It, it does not move for the life of the tray, which means that it can be opened and left without supervision. So this would be, if you've watched some of my trades, maybe dealing with a, uh, double top pattern or pattern sort of thing, where you're going counter can trend trade, and I will use a fixed risk reward ratio and plugging in a stop loss on a take profit to fit in with that. So using that, because you've got an idea of what your risk reward ratio is.
So in many instances it might be a 10 PIP risk side and the reward ratio of 20 pips. Then you would operate it in that sort of way. And once you set it, you can kind of forget about it. Now, the next type of stop loss, being that soft stop or the fixed soft soft stop loss is a stop loss where price has to close over your stops. So in the fixed version before the hard stock price just has to touch your stop-loss to take you out in the soft stop process, to close over the stop loss before it's activated. So price moves during a single candle and say, it goes past your stop line. It doesn't close there, it comes back down. Then the trade won't close, unless prices over that stop loss. When the candle closes, it prevents stop-losses from being sort of touched in closing.
And it's not always demonstrated in that that can be demonstrated in change of trends, but it's shown that where a stop-loss is placed just above the previous swing high with a take profit just before the print swing, low price tends to move back on over that sort of point. And in some strategies, that's a problem. And it sort of allows price to move back down without closing with that sort of hard-stop mentality. And you can sometimes turn a position around using a soft stop as opposed to yellow and vice versa. It's double-edged sword. If you were to use it the other way around, then you may have ended up without getting a position back to a property of site. So it can be a positive outcome, can be a negative outcome. I personally tend to prefer to you just use a hard stop because then you're definitive about where it goes. And it gives you less chance of having increased slippage for a large move unexpectedly coming from a news event that occurs.
The next one is a disaster stop. And a disaster stop is something that you might consider using. If you are trading much longer term charts. The purpose of that disaster stuff is obviously to prevent loss in the event of a significant unexpected price move. So it functions as a hard stop, but it's set much further away from price action than normal. And you can use in a variety of situations. So alongside, like, let's say you had a soft stop where you had that, you know, that idea of the price needed to close below your stop loss before an act before activated, if price, all of a sudden moved way too far unexpectedly, and then you had your disaster stop behind it. Then that just sort of, you know, your, your insurance you're guaranteed that it's not going to let you go too much further. Then you can have it with sort of short-term trading and you're scalping, and you can use it to rely on manually opening and closing your trades.
So if you're someone who likes your scalping, you quite often find that you won't run a stop loss. You'll just have a set disaster stop so that if price gets away from you and you can't get your fields to occur, or you can't click the button fast enough and price moves too quickly for you to get out of the position whilst you're scalping, then that's where another benefit of being there to help sort of prevent you from getting more. You'll also find that fundamental traders, like, you know, part of, part of what I do, you know, they will sometimes trade without a nearby stop because they're not focused on the technical side of things as much, if at all, in some instances, and they'll have a really strong convict conviction about which direction the market might be going in. So that stop-loss will be used, placed and long distance way.
Just like my example, before where I've got, you know, a, a target of sort of see a stop loss of about 600 pips. So that's my disaster. I'm putting that right at the very back at cigar. This is as far as I'm ever going, because I believe price is going to move in the right direction for me. Now, the next time that we move into our trailing stops and trailing stops have a variety of different examples. But the idea is is that with a trailing stop, you're moving it along behind your prices, that advances. So when price begins to retrace, the stop-loss remains firm, but then if price moves back far enough, that stop-losses then triggered and the trade is closed. So this type of stop provides a way for the risk of the trade to be reduced significantly as the trade moves and you decide direction.
So after a period of time, you know, you may not even need to use a take profit for these because as you trail your stop down in price, it'll hit your stop loss and take you out on its own. So you can use them in that sort of way. The rationale allows it to run as long as possible. So if you were to say, find a position where you had a patent that you thought this is a reversal for a trend, then you would place that trade and hopefully let it run all the way down. It's an effective strategy. It can maximize that profit in some situations, but in others, it might, you know, take you out. So the compromise of that are that in a ranging market, trailing stops often proven effective because it's just bouncing to price chopping back and forth too quickly, and it's sort of consolidation.
And it doesn't, it sort of doesn't allow for the idea of running a, a, a trailing stop, all that well, in other instances, if the stop loss is a long distance away from where current price action is, it's really not that effective. Um, but you know, it, it's risky sort of play when you use a trailing stop. And I prefer to use them because it kind of allows you to control that profit a little bit better, uh, and allows you to set them nice and tight to where your entry is as well. So if it is close to price, it does potentially reduce the size of your loss. But it also means that if you have a retracement, it can sort of trigger a closure occasionally when you don't want it to. But nonetheless, some of the various w that I've got on here, I've got another chart for you to have a look at.
And so I know this is a bad quality picture, but this is one that I've actually taken a screenshot out of my book that I've written, and this is what we call an ATR stop. And an ATR stop indicator is something that you can use instead of the placement of like, like instead of the location of a stop-loss. So instead of not using, instead of using a stop-loss at all, you can use stuff like moving averages and other things along the way to sort of use that as your reference point. So in the instance that you've got on the screen in front of you, you can see that we have a variety of different ones in the grain. Uh, one on the bottom, the green line, and the bottom of the green ATR is what I would have used in this instance, or for this trading environment here that I've got behind me as a way of getting out of a position in an uptrend, it gives you a little bit more freedom to sort of, for price move around.
You can set the settings to be further or closer away to where price is. And by extension, you know, they, they tend to not give as much profit back, but often can prevent a trade from achieving its maximum profits. When you get a bit of a spike or a move down, which is something that plays out over where when you would use a trailing stop. So when you have that, it's something that you can use. The other instances of blue and red report pink lines that you can see on the chart in front of you, of the ATR stop are things that a day they're exactly the same. They're just was shot, slightly tighter setting. So you might use the blue line, uh, as a stop loss if you were scalping, but whilst the green one would be that if you were doing more swing trading sort of stuff, and that's just a little way that you can do it now, very much similar to that, you have the idea of using just a simple moving average and the moving average can be used as that stop loss.
If you trade is running and then it crosses over clear point on your line, then you can close that position and you can always automate these sorts of things. So in this example, I've got on the chart. The long green arrow is where a trade has been entered and the stop loss line has been occurring all along the way, but until price closes below it, and what's been coded up, you wouldn't have seen price actually closing the trade end until where that little red circle is, but it is something to consider. If you wanted to take a little bit of the guesswork out of your trading, automating things or using a different various of stop us, as opposed to having to pick where price is going, you can certainly use methods like this to do so instead. And it makes, it just takes that, that fraction of a second, that you might need for your mind to sort of think about your trading decisions.
This removes a little bit of that. So it is another option for you to, for you all to consider now using the idea of support and resistance is effectively how I trade with the trailing stop. And that doesn't make too much of a difference to me, whether I'm training from a fundamental perspective, or if I'm training from a technical, a technical perspective, I tend to prefer to almost always use a trailing stop, and I will do exactly this. I will move price down or up in this instance, uh, to each of my swing lows were suitable. And if I think that, you know, price is too close in one instance, then I will back it to the previous swing low, or just simply not move it. So in this instance, you can use your support and resistance levels that are defined by your recent swing highs and swing lows and provided they are going in the same direction as the market.
So if you're doing that, you know, keep an eye on what's going on. It does mean it's a little bit more intensive and you have to be paying attention much more vigorously, which is why I tend to trade longer timeframe charts, because you don't get as much change over an hour or four hour or a daily chart as you would on much shorter timeframes. Now, the next bit that you can use is actually about the money management side of things. And I'm just going to give you a bit of a preference on, on, on some of the strategies that I use and have been used in the past. I'm not sure if you've all heard of mountain guy, a little bit, the system of Martin guy was actually developed by casino player back in the 18th century. And he realized that if a loss followed by a wit in that like that, if a loss is followed by a win, and by doubling that bet on after the loss, then you would be covering your position effectively and you'd end up delivering a win that you were meant to win on the, like the bet that you were meant to have won on the very first go and people have used it in the past to try and apply it to trading.
Unfortunately, it's one of those strategies you need really, really deep pockets and you can't use it as much anymore, but it is still valid, but the concept and something for you to sort of consider is that, and how it works is if you were betting on, say, for example, a coin that is going to be a heads in a coin toss and a $10 bet returns, a $10 profit. The first in costs is tails. So the $10 is lost. The second toss is heads and the bed is one and you receive a $20 profit over the two bets. Then you lost $10 of the first, we made $20 on the second. So then you get a net profit of $10 across the board. So while that example sort of demonstrates that by increasing your bedding size, after a loss compensates for an earlier loss, it makes sense from it mathematically, but certainly it's very much a gamble, that sort of thing.
And you will never find this sort of strategy being operated in a lot in quantitative sort of places. So casinos actually became aware of the method and they started introducing table limits to sort of prevent people using it successfully, at least. Uh, and you know, for example, on a table, which had a $10 minimum bet and a hundred dollar maximum, then once you sort of, you keep on increasing dramatically, a gamble who loses three times, we'll have a following bet of about $80. But if that next loss loses, it goes to 160 and you incrementally keep on increasing. As you can see on this left hand side of the chart all the time, you've had 10 losses, you're now on a $10,000 bet.
Now, if we would apply that to your trade sizes, you can see how quickly your positions get tallied up from 0.0, you started with pretty much the smallest size you can do. And eventually you end up in very large trading sizes. So the question then then becomes how likely is a trader likely to experience 10 losses in a row and pre 2009. You can actually answer that question with statistical evidence and you could turn around and say, 11 times is the maximum time you'll actually lose in a row if you would do it with grid trading. So one of those sorts of statistics was, you know, that maximum number of consecutive losses and how this value would be helpful in determining the risk of a system. And it becoming too large to sort of support even armed with the statistics. It would still be possible for a number of consecutive losses to go higher in the future. And if we use the idea of 3000 point move in one direction, you can imagine how big the losses would have been for you to be able to actually turn this around. So even though the approach doesn't seem attractive because it avoids losses, there is a risk, you won't be able to sort of sustain it. This means that that sort of desire to avoid loss will be converted into a very large realized loss very quickly and easily.
So it would mean sort of then that, you know, your risk potential goes up very, very significantly, much faster than you would hopefully anticipate. Now I mentioned the idea of grid trading with Martin Gale, and this was a strategy that was used by a number of institutions in the U S at one stage when I was over there. And it sort of follows a, an idea that you are using Martin gal. So at each of these daughter blue lines, you can see on the screen, you would have a scheduled entry. And between each of these blue lines, you'd have a certain distance allocated between them. So for argument's sake on this one, I'm going to say 30 PIP as your each line has 30 PIP in between it. And the idea behind this is that, you know, when you do use a scale or grid, its greatest strength is that it relies on the money management to make a profit, not actually your entry in grid trading.
It really doesn't care whether you answer long or short, it just at the core, it's the versions. It's a trading version of Martin, Gale money management, and it carries all the same, uh, benefits and the appeal, meaning that every time you lose, you can make your money back, but also comes with much of the same problems. So grid trading works really, really well. If price is moving in a range or it's consolidated, and I still use some stuff that I've coded and made over the years that do employ this, but only during a place where I identify it to be worthwhile using. So whilst it's in a normal trending period or trending phase of the market and retracement, it's not something I like to employ because the chances of it running in the wrong direction for far too long and emptying out your account balance is very, very high.
So where it makes its money is actually based on the retracement side. So if you entered a position at say point a and then it went up to and clicked off at point B, you would want price to come down from point B back to point a and that's where you recover your money. If it doesn't make that full 30 PIP retracement, then you're still stuck in a position and probably with a larger account, larger size at lot size than you would actually want to use. It really relies on that idea and the fundamentals behind it that as far as price moves away, it will eventually retrace, which is true and pre 2008. You could turn around and say that if you were running 30 PIP levels with a guarantee, you would see price move no more than 11 levels or 330 PIP without a 30 PIP retracement.
And this is what a lot of desks funds actually did to do it. Now, whilst doing that, obviously 2008 happened and they saw 400 pips wipe off the board in an instant, without a single retracement and a load of people who had positioned their accounts to set up for that loss. A lot of money. Then of course, you had 2015 where we saw 3000 pit move and that has basically wiped out any concept of this being effective in a trending environment. When a sideways environment, you can set this up in a much source, smaller scale using five or 10 PIP increments in a range of say a hundred PIP and let it run back and forth in between it. And anytime it goes outside of that range, you turn off or stop trading in a range-bound way is very intensive. It is mathematically driven, but it is something that you might be able to take advantage of.
If you would decide to have that focus with it now to run through this chart in front of you a bit, I've just sort of marked out and I've written it down as to how it sort of plays out. So at a you make a cell entry. And for the sake of the example, let's say it was a one contract trait. There's no reason for going short at this point, but it could have been, and it could easily have been a buy at point B prices, move backwards, say a hundred pit without reaching the a hundred P goal. So now another cell entries open this time instead of made for one contract is now two contracts. And this is the point where the open profit should be negative. A thousand dollars at C prices moved back another a hundred P and we S at another new cell will be opened this time.
It's four contracts. Each time you're doubling as you go along and now your open position will be negative $4,000. At D, price has moved back, another a hundred PIP. And now another cell is put on and this time it's eight contracts as it keeps going. Now you're negative $11,000 in unrealized loss at point a, because again, you're now at 16 lots in total with a $26,000 position that is open at point F price finally turns around for you. And it comes back the hundred PIP and you allow old trades to close that point. It's at that point, they, your profit will be $5,000 at point F. But if you were to allow that to go one more level down to say where point C started and go for the full 200 pips down, you effectively nearly double your bank account size and very quickly at that point.
So at the worst point, your draw down was five times larger than what the profit would be. If you didn't let it go the second level, and I wouldn't ever consider it to be a safe approach, and I wouldn't advocate to you to do it. But if a trader does decide to use grid trading, then it's worth knowing that different markets move differently. Some are more prone to fast movements. Some are more prone to consolidation. If the approach is used, it makes it would not make sense to sort of use it with Marcus at trends strongly. And it would, it's important to sort of accept that even though 90% of the time, the strategy will work and not cause problems and generate a return, it'll be that one time. And it's that, that, that it does. And it's imperative that there is a pre-planned approach to deal with these sort of eventualities, whether that means you hedge a position to try and control the, the loss and sort of balance out your margin is one way, but it is something that I have used them in the past.
And I do do it with different ways nowadays, but that I only ever focused on trying to trade something like this when there is almost no market action out of this sideways, because you're not going to make money anyway. Right. So might as well give it a go. Now, the next one, and the reason I sort of went through the idea of bridge writing for you is more so about talking about this next slide, which is pyramiding. And this'll be the last slide we covered tonight, and we'll start wrapping it up. I understand that I'm sort of a bit over time because I had sort of internet difficulties before, but pyramiding is the opposite of scaling in or using grid trading involves creating additional positions in a losing trade, which is what you get when you sort of scale in or you're using or grid side.
You're adding additional positions, you're losing tray, but in pyramiding, it involves creating additional positions in a winning trade. So the rationale is that if the market has become favourable than it makes sense to sort of load as much from your trade as possible to improve the outcome this way, the trade can benefit from having a large position size provided the stops are in place and the risk is reduced. So in the drawing I've got on here for you at point a, a cell has been opened, there'll be a stop-loss behind that defining the opening of risk price moves in the favor down that we like, I point B trade a is in profit. The stop-loss was moved to down to break even to make sure that you're not at any more risk at that point. And there is a downtrend running. And so instead of enclosing trade a, we add another trade for the same amount.
And then we put another stop-loss in behind for that trade. And we define the risk of that trade as well at point C both trade and point B and now in profit. And we move both stop-losses for them to be at the same point somewhere likely where it's either going to be break even for point C or even potentially profitable. So when we move it to that next bit, we've moving it through swing lows and trailing stops down trade B has now become effectively a, a risk-free trade and trade a has also become, you know, you is only profit now because you've moved your stop loss, pass it to try to satisfy with that sort of side of things. You continue to add new cells and you keep going again. So now you've got three trades in total at point C and you've got two of them with basically locked in guaranteed profit, regardless of what goes on and you can't do any more harm to it.
So even if it hits break, even it's on, on trade, on your third on trade, see your third one. It's not going to matter too much. Now, once you've recognized that that next trade has been opened, you've got a defined stop-loss again, for the first point, the seeds raid, then you now move down. Then we move down in price moves on. At a point day, we smoothed out, stopped to another low. The, and we have another opportunity to sell again at point date this time, however, price moves a little bit higher and breaks the entry of trade D which represents new swing height. So this means now trade D is going to be for a loss, but trade a, B, and C are all going to be for a profit. And they hit the stop loss and close off all of our positions at the same time, by doing this pyramiding reduces the risks that, you know, in a diagrammatic trade that's occurred the first time of the trade for the sake of discussion, it's going to assume that each trade is one contract. The stop loss was going to be 30 PIB and each leg achieves 30 people on the way down. So when you're using it, it's going to be profitable. It sort of reduces the overall amount of risky. You have any reducing your risk as you go down. And it allows you to sort of find where the turn might be.
If pyramiding is going to be used, any worded, carry sort of some risk behind it, it still isn't going to affect you too much when it comes to it. But either way, you need to be sort of considering the account sizes of itself and what the risk might be and what your own risks are going to be at the end of the day. So I'm hoping that tonight you've had a bit of a good experience. I know the dropout of internet has been a little bit difficult and you know, at the moment, we're probably going to see a little bit more of that occur. I will see if I can find a work around, but purely because we have so many people starting to work from home with lockdown here in Australia, bandwidths are not as perfect as we would like them to be so for you guys to have a little bit of a think about, and to maybe do some more exploration on your own, do some simple calculations, maybe start with the $10,000 and then reduce it by 10% then calculate what sort of percentage of gain might be required to make the $10,000 back.
Repeat the process a few times, we'll say 20, 30, 50% reductions, and then have a look inside and understand what that percentage gain might be to return the account back to its original state. Another way to do it is to sort of identify a chart or another thing I'd like you to do is sort of, I open up a chart and identify an area where prices moving and maybe an uptrend or a downtrend and locate a peak and notionally enter a one contract rate at that point in time, probably do it on a demo. If you want to do a live, feel free. Uh, and since you've sort of answered it a page, then once you identify the next trough and imagine that you entered another position at this point and calculate where the average entry point might be for both traits and calculate what price the trade would move back into a breakeven or better position.
And this sort of stuff will help you to sort of manage your money when it comes to actual trade sizes themselves. And of course, some of the strategies that you've seen here tonight will be beneficial in how you might think about structuring your trading plans as well. So does anyone have any questions at this stage or something that I can sort of speak about quickly if you don't then that's all fine. I understand it is blight and I have run over time. So, if you would like to end it, I have no issues with that, but of course, feel free to send me an email talktoal@acy.com. If you have any other questions that you might think of overnight as well.
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