Your journey – Elements of a RBT


All things are difficult before they are easy!


Over the last three decades of being involved in the markets in many different capacities I was very fortunate to have been exposed to the non-retail side of trading.  Conducting live in-house training sessions for some of the major brokerage and banking institutions enabled me to see a side of the markets that few get to see.  Inside the dealing rooms of companies such as Nomura Securities in Hong Kong, Commerz Bank in Singapore and the Commonwealth Bank of Australia in Sydney, to drop a few names, is a markedly different world.

There the trading of currencies, either as market makers or as prop traders, focuses mainly on numbers.  In part this is in recognition that trading is simply a numbers game, in more ways than one.  In the world of private trading it seems to be more a case of trading a view or a forecast.  To me there is no logical reason why individual traders cannot adopt at least some of the ways of the better capitalised players.  In this group I include also include funds that do not make a market.  They simply trade the markets to make a profit, for themselves and their investors.

The graphic below illustrates part of the journey of a student in his quest to put together his own RBT using the L.I.V.E. setups.  The brief was to construct an active RBT that allows compounding to weave its magic as quickly as possible.  By definition, this requires frequent campaigns so that position sizes can be adjusted rapidly.  This also means spending more time at the helm.

Let's go through the columns to get a feel for what the numbers refer to and how they apply from a trading perspective.   Baseline  refers to the 'plain vanilla' application of the setups before any modifications are made to either the Campaign or Money Management aspects.  As you can see, the R returns for the Baseline were negative 2.88 for April and 19.06 positive for the month of July.  In other words, April was a losing month whilst July more than recouped those losses.  Based on a 50,000 US$ account size, the actual loss was just over 10% in April and over a 30% gain for July.  The Dollar values do reflect the impact of both slippage and commissions.  This aspect is often overlooked and can play a significant role in the overall profitability of any RBT, especially an active one such as this one.  Give or take 70 campaigns in one calendar month qualifies as an active RBT.

From a tradeablity perspective the next columns are of immense importance.  Maximum Drawdown  in R, Maximum Drawdown as a percentage and the  Maximum Days  in the Drawdown all deal with the size of hole that you can find yourself in when trading.  Without some idea of what your RBT has encountered before you start trading it means that self-doubts and fears can surface rather quickly.  This can have the effect of your walking away from the RBT at the worst possible time ... just before it starts on the road to new equity highs.

Consecutive Losses
and  Consecutive Wins  are self-explanatory.  Not only do they highlight the clustering nature of results, they also open the door to working with Dependency factors.  These in turn can allow for certain Money Management concepts to be applied when refining a RBT.  Win to Loss  simply gives you the strike rate.  Even though a strike rate of above 50% is no guarantee of an overall profit many traders overly focus on this metric.  Entry Efficiency  is one of my unique ways of gauging any trading approach that claims to 'time the market'.  It looks to establish how often a position is in profit by the end of the period of entry and I have found this to be far more significant than the strike rate when looking at the overall profitability of any RBT.

That covers the columns ... now on to the rows that show the effects of applying different Campaign and Money Management routines.  The idea here is to see if, or how, the results can be improved for the losing month of April without those same changes dramatically affecting the very positive results of July.  Sort of being able to have your cake and eat it as well..

Dependency and  Universal  are two Money Management routines that seem to generally have a positive impact on all RBTs.  When I share these concepts with students, usually their eyes light up and they make comments such as ... "Why didn't I see this before"!  My usual answer is that they have never examined trading results so closely or unconventionally.

CM # 1, 2 and 3 are three different ways of managing a campaign and highlight the effect that various exit rules, or strategies, can have on the results of your RBT.  CM # 3 is highlighted as it was the only exit variant that had a positive effect on both sets of results.  The result for April showed a smaller loss, whilst the profit for July was increased by about 10%.

So far the negative Baseline results for April have been improved by applying any and all of the refinements, from Dependency all the way through to CM # 3.  The pleasing aspect is that the same refinements have only had a nominal impact on the already positive results of July.  That cake is beginning to taste rather nice!

Natural Sequence deals with the order in which the L.I.V.E. setups appear in markets.  Applying this concept to the April results showed a marked improvement whilst there was a more subtle effect in the July results.  For both months the number of campaigns was dramatically reduced and the profit per campaign showed a marked improvement.  When constructing a RBT it is vital to clearly have in mind what is looking to be achieved when working with refinements to the plain vanilla application of the setups.  Overall profitability is just one of the ingredients of that cake.

The penultimate step is to see what is the effect of combining the concepts, in a mix and match fashion.  This allows you to be creative and to play the 'what-if' game.  To a very large extent, this is the fun part of trading.  Fun with serious intent, naturally.  The act of simply following a set of rules was described, not inaccurately in my mind, by a student as 'vacuous'.  To me this description showed that the student was quite detached from the outcome and hence more likely not to over-ride or second guess his own RBT.

Universal plus CM # 3 is highlighted by the student as being the best combination of refinements across all the metrics.  The next stage is to apply exactly the same process to another sample month to see whether the outcome is broadly the same, in terms of overall stats.  Should this come to pass, then this RBT is just one step away from being able to be applied in real time with real money.

Some people are more visual and others are more numerate.  And some are lucky enough to be both.

In my mind, the saying of a picture being worth a thousand words is extremely accurate.  So much can be, and often is, hidden behind numbers.

The graphic on the left gives you a visual of the equity line of four different exit strategies applied to the same entry rules.  No other changes have been applied.

Whilst in general terms, all four exit rules result in a positive result, the variance in the end value is very significant.  From about 7 R on the low side to just over 15 R on the high side.  'Significant' may be an understatement.

The other marked difference is the size of drawdown, both in terms of depth and the amount of time before new equity highs are achieved.


The final aspect of developing a RBT is to apply the Power of Compound to the results.  Two factors are pivotal in harnessing its awesome potential.  One is pretty obvious and the second one may be less obvious.

Increases in the account balance is the obvious one.  The more frequently this happens the faster incremental increases can be applied to the next campaign.  Hence the less obvious one is a large number of campaigns, the larger the number the better.

The red line on the graphic on the right is simply the equity of an active RBT with no compounding at all.  The green line traces the same results with the conventional approach to compounding applied to them.  You will notice how those two lines really start to diverge at around campaign 20 or so.  The Power of Compound has started to kick in.

Students are exposed to my unconventional approach to compounding (the blue line) as well the rationale behind it.  This concept not only increases the overall profit of a RBT, it also ensures a speedier recovery from the inevitable drawdowns.


Real time Real Money UPDATE

Another week and another R ... well, actually 2.16 R to be accurate.  Also worthy of note is that the RBT produced 3 for 3.  Three campaigns resulting in three wins.







So what do these figures mean to you?  The 16.76 R return would translate into a 33.52% increase in your account using 2% as your maximum risk per campaign figure.  On a 'nominal' account of 20,000 US$ this equates to a profit of 6,704 US$.

I shall elaborate at another time on my use of the term 'nominal'.

One metric that is not often looked at is  Recovery.  This refers to how well a RBT recovers from a drawdown.  In other words, what is the end result compared to the maximum drawdown.  A little known fact is that the only part of trading that must be covered by way of actual cash money are the losses, ie. the drawdown.  The initial margin can be covered in many different ways, other than with actual cash!

With a profit of 16.76 R for the 12 weeks and the maximum drawdown (so far) of 2.43 R, the account increased 6.90 times the maximum drawdown.  This is a very handy metric when comparing different RBTs, as well as assessing its tradeability from your own perspective.

By way of an example, let's say RBT # 1 produces a profit of 20 R with a max draw of 4 R and RBT # 2 shows the same 20 R profit but with a max draw of 8 R.  Which one is the more attractive?  Whilst they both produce the same profit of 20 R, you had to endure a much larger drawdown with RBT # 2.  Should all the other metrics be pretty much equal, then RBT # 1 should be far more interesting as it has a Recovery Factor of 5.0 versus 2.5 with RBT # 2.  Another way of viewing this is that you had to bear twice as much pain with RBT # 2 to get the same gain as RBT # 1.

What is the Recovery Factor of the approach you are using, or even are thinking of using?  Does it matter?  Only you can answer these questions and more!


Please email your questions, comments and/or charts to:
I will personally answer you as soon as possible.