Probability of ruin
Probability of ruin. Illustration of Statistical Opportunity for Traders
You 've probably heard a lot about martingale, meshes and strong ways to drain your deposit. And indeed, these are systems that even purely theoretically will not allow you to win constantly. Yet there are plenty of traders, including experienced ones, who use grids on their accounts. You think they don 't know the theory? Of course they know, there 's just a little secret here. And that 's what we 're talking about today.
The fact is that most private traders have rather modest accounts and very often they choose rather aggressive capital management methods. Grids and martingales do quite often lead to losses of the whole deposit, but experienced traders always advise to periodically withdraw part of the earned. And so we get more or less stable earnings on seemingly even purely theoretically draining trading systems.
This most "wonderful way" to earn money from draining strategies can be quite used with the scientific approach, it is enough to get acquainted with such a concept as the probability of ruin.
Knowing the probability of ruin for a particular trading system with the management mani method chosen, one can say more or less precisely whether the trader will merge, or not. Very many traders, especially beginners, are always in a hurry somewhere, as if the markets will soon close and they will not have time to trade their millions for a no-deal life. As a result, the probability of their ruin is high and, as a result, another merged account.
The probability of ruin, or probability of ruin, abbreviated POR, is the statistical probability that the trading system will bring the bill to ruin before reaching a dollar level that is considered successful. Ruin is determined by the level of account when traders stop trading. POR illustrates to traders the statistical possibility that their trading systems will shift to success or ruin.
Some authors believe that interest in the probability of ruin is inappropriate, as it does not give traders an idea of how to make a profit. In that sense, they are right. In addition, the probability of ruin tends to be small in real earning trading systems. However, if all other aspects are equal in their meaning, then by making the choice between the two trading systems, you are likely to choose the one with the lowest probability of ruin.
Most often, long-term earning systems have a low risk of ruin. It is rare when it reaches the 5% mark. These are typically trading systems that have sufficient capital and generate profits for the trader. In beginners it is often possible to meet POR in the area of 70-100%, which suggests that the account will necessarily be leaked, even if they tell you that they have finally found a grail trading system. The POR value is non-constant and for normal traders it holds between 0 and 5% for most of the time. But if you see that this figure has increased, you are likely to take too much risk. In this case, it is enough simply to reduce the risks in each transaction, and then the probability of ruin will return to an acceptable level.