If you have been following my latest articles I have been writing about how we are doing things wrong regards our financial freedom. Many of us don’t even know what they are doing and don’t have a clue about how to get it started. The get rich quick idea is so tempting and we only want to make some money and then later think where to invest it. By now you should all already know there is no get rich quick, read some recommended books, Think and grow rich, Rich dad poor dad, Trade your way to financial freedom and you will see that we do things upside down, we live above our means and spend what we don’t have and dont increase our earnings. Instead we chase this illusion of get rich quick and only get the brokers, scammers and all sort of affiliates richer, “Send me 500$ and make 2000$ in a week!”; “Join bitcoin group send 200$ get 400$ every month after the 6th month!”; “Buy this EA for 650$ and make1.000$ every month!”; “Sign up for these signals for 150$ every month and see your profits growing!”, and the list goes on and on…
Everyone has a pretty clear idea of how much they would like to make, and therefore the question of how much you want to make is the main scam question you will hear and see. Invest XXX$ and make Y.YYY$ and your eyes will start glowing!
Does this sound really realistic to you??????
As a trader and investor that has been around for since 2009, and with a background as engineer and excel enthusiast, mathematics and statistics are a hardcore reality!
Backtesting is a constant daily activity, crunching numbers, analyzing data, creating portfolio’s with different volatility and diversification and risk.
Risk! Yeah Risk! Every investment carries risk! Having your money under your mattress carries risk and having it at the bank carries risk. Sending it to a stranger also carries risk and when he only promises profits without mentioning any Risk I think you are really looking for trouble. Let’s stop joking around and tackle the real issue.
What is the real question you should be asking??? Really think about it for a moment.
You know already how much you want to make, but do you know how much you are willing to RISK???????????????
Thank god we can backtest and have maths and statistics, it CAN be calculated. You are able to decide how much you are willing to risk.
When we have a specific performance and when that performance is expected to be repeated over similar timeframes and market conditions we can use the reward to risk of that performance as a constant.
Let’s say our reward to risk is 2:1, I can get 2 but risk losing 1. Now let us analyze 3 different tests with the exact same performance, the same strategy with same pair during the same timeframe 01–01–2017 to 01–10–2017 (10months), same starting amount of 20.000$ and we change only the Risk management for our position size of 1%, 2% and 5%.
Here is a table with the results of the 3 tests.
The money management follows a dynamic algorithm as it adjusts the position size with the growth of the account and therefore as the risk increases we also witness a higher reward due to the algorithm’s progressive effect. But all-in-all we can see the main picture and see that the reward to risk is approximately the same, 2:1. However as we increase our risk, the amounts in dollar will change. And they change both for the good and the bad, the first test scores a 7.8% profit with a 4.2% drawdown, the second a 16.6% profit with a 8.1% drawdown and the third a 45% profit with a 21.6% drawdown.
Now what most people when investing believe it is possible is to make 100% or more without any risk of ruin and that is a complete nonsense.
It is “possible”?, of course, anything is possible, Is it luck or skills? Well, most of time it is just luck, not something scalable nor repeatable. On the above example we would require to double the risk up to 10% for the money management and we would be doubling the scores of the last test and reaching an astonishing 100% returns. However the drawdown for this particular performance would also reach 50%.
Trying to double this again and go for the 200% would be extremely high risk and the account would most probably hit a margin call and stopped out. What most people only look for is the high returns, but always forget that there is risk and if you aim to double the profits you will also double the risk and potential losses. Having a tight Stop Loss will only increase the odds of hitting it more times if your trading is based on volatility. The risk of ruin is still very high with high risk and past performance is not indicative of future results and we don’t know if we can use a higher risk management to maximize future results. The markets are dynamic and always changing, but we can use past results and backtests as a strong indicator of what we can expect under similar market conditions and decide how much risk we are willing to take.
If we reverse engineer this particular performance and strategy with the right questions you will reach to the right answers.
How much do I want to make?? For this example let’s say 12.000$ for this 10 month period.
Now the real question is how much do I want to risk??
If I want to have a very low drawdown below 5% and still make 12.000$ I have to invest around 154.000$. If I am comfortable with a Drawdown below 10% then I should reach this target with 77.000$, but if I am very risk aware and comfortable with Drawdowns up to 30% I could make it with 27.000$.
As per my previous articles,
1# Back-testing and optimization
2# The hidden truth! Why the wealth of 99% of the population is the same as the wealth of the top 1% of the population, and
3# The ESIR Mindset. What is more important for you? Financial Independence or Displaying Status?,
we can grow our way towards our goals with the right mindset and acting according to it. Let go of the now and get rich quick dreams, budget and work to make money, stop wasting it with things you don’t need, losing it with magical systems, jumping from one to another that pops up and catches your attention because you saw a lot of $$$, read the articles mentioned above and start saving and investing for the longterm, diversify your income, maybe start a business, but start moving forward and stop making mistakes that wont get you anywhere near your financial freedom. Further articles can be found on my FaceBook Group and on the files there is a list with all my recommended articles and a link to a library of over 500 ebooks.
With steady investments you can grow your wealth trough average investing and compound growth and this is the main passive strategy followed on the ESIR Investors Pamm account (Pamm -Percent Allocation Management Module) I will be managing. I will follow a balanced mix of profits and risk and welcome everybody that adopts the ESIR mindset to grow the ESIR community.
Are you an ESIR Investor?
Visit our webpage and join us in this journey.
For further details and contacts like and join, https://www.facebook.com/ESIRinvestors/