TradersCALM - Calculating Risk of Ruin
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There are just two main concepts to grasp:
determining relative frequency and expected draw-down from one loss,
from two losses in a row, from three losses in a row...,
coping with a series of losses psychologically as well as financially.
Trading systems are often chosen for their repeatable patterns; the human factor can also tend to make one trade outcome dependent on the outcomes of a prior trades. Mechanical methods may be invalid if they assume independent successive outcomes.
TradersCALM strongly recommend that risk of ruin calculations are performed manually, and include comparing theoretical results with actual results. The process of manual calculation towards determining an acceptable risk of ruin helps generate calm based on confidence. There is also the opportunity to view the market through the lens of her/his trading system - and this is, after all, what the trader is formally trading.
How so how do I make this more realistic?
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Risk of Ruin