Thursday, September 16, 2010

Direction Discipline Risk Leverage Equation - DDRL®


“By keeping your losses small, relative to your account, a margin call will be very unlikely.” – Robert Deel


You need to stop fooling yourself and be honest in your trading activities, learn from your past mistakes and never repeat them again. Otherwise there’s not going to be any noteworthy progress. The DDRL equation from Robert Deel is one easy tool you can use to gauge the effectiveness of your trading strategies. No matter the type of strategy you’re using – whether it’s the one that shows results in months or the one showing results in weeks, you’ll need to determine whether it’s a strategy that can survive all market conditions. Whenever I backtest a strategy I tend to focus on the areas where the strategy would’ve generated poor signals. It’s unthinkable for me to deceive myself by seeing only what I’d like to see when bactesting a system. I like to document my trading results so that I can know whether the strategy is worthwhile or worthless.

There are many factors that need to be taken into consideration when developing a trading system. As time goes on, you may need to tweak or fine-tune a strategy in order to get better results. For example, you can be correct on the market direction and trade selection and still lose money because your timing (entry) was wrong. And incidentally when it comes to stops, never think in terms of ‘’if’’ your stop gets taken out, think in terms of ‘’when’’ your stop gets taken out – what will the loss be? Those who’re consistently profitable without using stops strictly keep their risk very low and know exactly when and where to get out of the market – never violating their rules.

Let’s see how the Direction Discipline Risk Leverage Equation (DDRL®) works:

1. Traders X has ten wins and six losses.
2. Trader X’s average dollar gain was $900.
3. Trader X’s average dollar loss was $400.
4. Traders X’s gains were $9000.
5. Trader X’s losses were $2400.

Plugging those figures into the equation gives us the following:

10 Wins X $900 Average $ Gain $ = 9000 Gains
6 Losses X $400 Average $ Loss $ = 2400 Losses
9000/2400 = 3.75 = DDRL SCORE

How can you use the formula above to measure your trading skill? According to Robert Deel, in most cases an excellent DDRL score will be from +2 to +2.5. A score greater than +2.5 reveals a high degree of trading skill. Over time a score greater than 3.0 will be a rare occurrence. You should strive to achieve at least +1.4 to +2.0.

We’re grateful to the author of DDRL®.

In conclusion to this article, I put a quote from Sam Evans below. It’s all about the reality of the acceptance of the factors that are beyond our control (as it’s also true in trading):

“Here, just like many times before, I had a student who felt uncomfortable about the fact that there is never any guarantee of a trade working. He was looking for any tell tale signs which would have warned him in advance if the position had a lower chance of turning into a winner. I asked him what was really behind his question and to his credit, he said that he was searching for a way to prevent a loss. I admired his honesty and only when a trader is completely honest with others and more importantly, with themselves, can they really look for success in the markets. Making this crossover is about acceptance and realizing that trading of any kind will never be a process of absolutes. The sooner we can accept that nobody out there really knows what the market is going to do next, the sooner we can relieve the pressure to be right. Ironically, it is the need to be right which often costs the novice trader dearly, as they typically do not follow any kind of plan, jumping into the market and changing the parameters of the playing field midway through, all in the quest to be right. Let go and accept that this is an impossibly futile effort from the very start. Trading is just like life. We live our lives day-to-day and never really know what is coming next. Sometimes unexpected good things happen, while other times something bad occurs right out of the blue. Often we live out our days according to routine and things mostly work out as expected, but we all know that surprises of some kind are always around the corner. This knowledge doesn't stop us from living our lives though, does it? Trading my friends is no different to life at all – accept the risks, understand the rewards and just take each day as it comes.”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha
Forex Signals Strategist, Funds Manager &Coach

Senior Analyst
FX Instructor, LLC

Are you facing any challenges in trading? You might want to explore the secrets of markets wizards and duplicate their success. Get the secrets from my past articles at:

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NB: There is risk of loss in trading, but it is possible to be a successful trader.

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