diff --git a/docs/edge.md b/docs/edge.md index dcb559f96..182c47651 100644 --- a/docs/edge.md +++ b/docs/edge.md @@ -1,92 +1,141 @@ # Edge positioning -This page explains how to use Edge Positioning module in your bot in order to enter into a trade only if the trade has a reasonable win rate and risk reward ratio, and consequently adjust your position size and stoploss. +The `Edge Positioning` module uses probability to calculate your win rate and risk reward ration. It will use these statistics to control your strategy trade entry points, position side and, stoploss. !!! Warning - Edge positioning is not compatible with dynamic (volume-based) whitelist. + `Edge positioning` is not compatible with dynamic (volume-based) whitelist. !!! Note - Edge does not consider anything other than *its own* buy/sell/stoploss signals. It ignores the stoploss, trailing stoploss, and ROI settings in the strategy configuration file. - Therefore, it is important to understand that Edge can improve the performance of some trading strategies but *decrease* the performance of others. + `Edge Positioning` only considers *its own* buy/sell/stoploss signals. It ignores the stoploss, trailing stoploss, and ROI settings in the strategy configuration file. + `Edge Positioning` improves the performance of some trading strategies and *decreases* the performance of others. ## Introduction -Trading is all about probability. No one can claim that he has a strategy working all the time. You have to assume that sometimes you lose. +Trading strategies are not perfect. They are frameworks that are susceptible to the market and its indicators. Because the market is not at all predictable, sometimes a strategy will win and sometimes the same strategy will lose. -But it doesn't mean there is no rule, it only means rules should work "most of the time". Let's play a game: we toss a coin, heads: I give you 10$, tails: you give me 10$. Is it an interesting game? No, it's quite boring, isn't it? +To obtain an edge in the market, a strategy has to make more money than it loses. Marking money in trading is not only about *how often* the strategy makes or loses money. -But let's say the probability that we have heads is 80% (because our coin has the displaced distribution of mass or other defect), and the probability that we have tails is 20%. Now it is becoming interesting... +!!! tip "It doesn't matter how often, but how much!" + A bad strategy might make 1 penny in *ten* transactions but lose 1 dollar in *one* transaction. If one only checks the number of winning trades, it would be misleading to think that the strategy is actually making a profit. -That means 10$ X 80% versus 10$ X 20%. 8$ versus 2$. That means over time you will win 8$ risking only 2$ on each toss of coin. +The Edge Positioning module seeks to improve a strategy's winning probability and the money that the strategy will make *on the long run*. -Let's complicate it more: you win 80% of the time but only 2$, I win 20% of the time but 8$. The calculation is: 80% X 2$ versus 20% X 8$. It is becoming boring again because overtime you win $1.6$ (80% X 2$) and me $1.6 (20% X 8$) too. +We raise the following question[^1]: -The question is: How do you calculate that? How do you know if you wanna play? +!!! Question "Which trade is a better option?" + a) A trade with 80% of chance of losing $100 and 20% chance of winning $200
+ b) A trade with 100% of chance of losing $30 -The answer comes to two factors: +??? Info "Answer" + The expected value of *a)* is smaller than the expected value of *b)*.
+ Hence, *b*) represents a smaller loss in the long run.
+ However, the answer is: *it depends* -- Win Rate -- Risk Reward Ratio +Another way to look at it is to ask a similar question: -### Win Rate +!!! Question "Which trade is a better option?" + a) A trade with 80% of chance of winning 100 and 20% chance of losing $200
+ b) A trade with 100% of chance of winning $30 -Win Rate (*W*) is is the mean over some amount of trades (*N*) what is the percentage of winning trades to total number of trades (note that we don't consider how much you gained but only if you won or not). +Edge positioning tries to answer the hard questions about risk/reward and position size automatically, seeking to minimizes the chances of losing of a given strategy. -``` -W = (Number of winning trades) / (Total number of trades) = (Number of winning trades) / N -``` +### Trading, winning and losing -Complementary Loss Rate (*L*) is defined as +Let's call $o$ the return of a single transaction $o$ where $o \in \mathbb{R}$. The collection $O = \{o_1, o_2, ..., o_N\}$ is the set of all returns of transactions made during a trading session. We say that $N$ is the cardinality of $O$, or, in lay terms, it is the number of transactions made in a trading session. -``` -L = (Number of losing trades) / (Total number of trades) = (Number of losing trades) / N -``` +!!! Example + In a session where a strategy made three transactions we can say that $O = \{3.5, -1, 15\}$. That means that $N = 3$ and $o_1 = 3.5$, $o_2 = -1$, $o = 15$. -or, which is the same, as +A winning trade is a trade where a strategy *made* money. Making money means that the strategy closed the position in a value that returned a profit, after all deducted fees. Formally, a winning trade will have a return $o_i > 0$. Similarly, a losing trade will have a return $o_j \leq 0$. With that, we can discover the set of all winning trades, $T_{win}$, as follows: -``` -L = 1 – W -``` +$$ T_{win} = \{ o \in O | o > 0 \} $$ + +Similarly, we can discover the set of losing trades $T_{lose}$ as follows: + +$$ T_{lose} = \{o \in O | o \leq 0\} $$ + +!!! Example + In a section where a strategy made three transactions $O = \{3.5, -1, 15, 0\}$:
+ $T_{win} = \{3.5, 15\}$
+ $T_{lose} = \{-1, 0\}$
+ +### Win Rate and Lose Rate + +The win rate $W$ is the proportion of winning trades with respect to all the trades made by a strategy. We use the following function to compute the win rate: + +$$W = \frac{\sum^{o \in T_{win}} o}{N}$$ + +Where $W$ is the win rate, $N$ is the number of trades and, $T_{win}$ is the set of all trades where the strategy made money. + +Similarly, we can compute the rate of losing trades: + +$$ + L = \frac{\sum^{o \in T_{lose}} o}{N} +$$ + +Where $L$ is the lose rate, $N$ is the amount of trades made and, $T_{lose}$ is the set of all trades where the strategy lost money. Note that the above formula is the same as calculating $L = 1 – W$ or $W = 1 – L$ ### Risk Reward Ratio -Risk Reward Ratio (*R*) is a formula used to measure the expected gains of a given investment against the risk of loss. It is basically what you potentially win divided by what you potentially lose: +Risk Reward Ratio (*R*) is a formula used to measure the expected gains of a given investment against the risk of loss. It is basically what you potentially win divided by what you potentially lose. Formally: -``` -R = Profit / Loss -``` +$$ R = \frac{\text{potential_profit}}{\text{potential_loss}} $$ -Over time, on many trades, you can calculate your risk reward by dividing your average profit on winning trades by your average loss on losing trades: +??? Example "Worked example of $R$ calculation" + Let's say that you think that the price of *stonecoin* today is $10.0. You believe that, because they will start mining stonecoin it will go up to $15.0 tomorrow. There is the risk that the stone is too hard, and the GPUs can't mine it, so the price might go to $0 tomorrow. You are planning to invest $100.
+ Your potential profit is calculated as:
+ $\begin{aligned} + \text{potential_profit} &= (\text{potential_price} - \text{cost_per_unit}) * \frac{\text{investment}}{\text{cost_per_unit}} \\ + &= (15 - 10) * \frac{100}{15}\\ + &= 33.33 + \end{aligned}$
+ Since the price might go to $0, the $100 dolars invested could turn into 0. We can compute the Risk Reward Ratio as follows:
+ $\begin{aligned} + R &= \frac{\text{potential_profit}}{\text{potential_loss}}\\ + &= \frac{33.33}{100}\\ + &= 0.333... + \end{aligned}$
+ What it effectivelly means is that the strategy have the potential to make $0.33 for each $1 invested. -``` -Average profit = (Sum of profits) / (Number of winning trades) +On a long horizonte, that is, on many trades, we can calculate the risk reward by dividing the strategy' average profit on winning trades by the strategy' average loss on losing trades. We can calculate the average profit, $\mu_{win}$, as follows: -Average loss = (Sum of losses) / (Number of losing trades) +$$ \text{average_profit} = \mu_{win} = \frac{\text{sum_of_profits}}{\text{count_winning_trades}} = \frac{\sum^{o \in T_{win}} o}{|T_{win}|} $$ -R = (Average profit) / (Average loss) -``` +Similarly, we can calculate the average loss, $\mu_{lose}$, as follows: + +$$ \text{average_loss} = \mu_{lose} = \frac{\text{sum_of_losses}}{\text{count_losing_trades}} = \frac{\sum^{o \in T_{lose}} o}{|T_{lose}|} $$ + +Finally, we can calculate the Risk Reward ratio as follows: + +$$ R = \frac{\text{average_profit}}{\text{average_loss}} = \frac{\mu_{win}}{\mu_{lose}}\\ $$ + + +??? Example "Worked example of $R$ calculation using mean profit/loss" + Let's say the strategy that we are using makes an average win $\mu_{win} = 2.06$ and an average loss $\mu_{loss} = 4.11$.
+ We calculate the risk reward ratio as follows:
+ $R = \frac{\mu_{win}}{\mu_{loss}} = \frac{2.06}{4.11} = 0.5012...$ + ### Expectancy -At this point we can combine *W* and *R* to create an expectancy ratio. This is a simple process of multiplying the risk reward ratio by the percentage of winning trades and subtracting the percentage of losing trades, which is calculated as follows: +By combining the Win Rate $W$ and and the Risk Reward ratio $R$ to create an expectancy ratio $E$. A expectance ratio is the expected return of the investment made in a trade. We can compute the value of $E$ as follows: -``` -Expectancy Ratio = (Risk Reward Ratio X Win Rate) – Loss Rate = (R X W) – L -``` +$$E = R * W - L$$ -So lets say your Win rate is 28% and your Risk Reward Ratio is 5: +!!! Example "Calculating $E$" + Let's say that a strategy has a win rate $W = 0.28$ and a risk reward ratio $R = 5$. What this means is that the strategy is expected to make 5 times the investment around on 28% of the trades it makes. Working out the example:
+ $E = R * W - L = 5 * 0.28 - 0.72 = 0.68$ +
-``` -Expectancy = (5 X 0.28) – 0.72 = 0.68 -``` +The expectancy worked out in the example above means that, on average, this strategy' trades will return 1.68 times the size of its losses. Said another way, the strategy makes $1.68 for every $1 it loses, on average. -Superficially, this means that on average you expect this strategy’s trades to return 1.68 times the size of your loses. Said another way, you can expect to win $1.68 for every $1 you lose. This is important for two reasons: First, it may seem obvious, but you know right away that you have a positive return. Second, you now have a number you can compare to other candidate systems to make decisions about which ones you employ. +You canThis is important for two reasons: First, it may seem obvious, but you know right away that you have a positive return. Second, you now have a number you can compare to other candidate systems to make decisions about which ones you employ. It is important to remember that any system with an expectancy greater than 0 is profitable using past data. The key is finding one that will be profitable in the future. You can also use this value to evaluate the effectiveness of modifications to this system. -**NOTICE:** It's important to keep in mind that Edge is testing your expectancy using historical data, there's no guarantee that you will have a similar edge in the future. It's still vital to do this testing in order to build confidence in your methodology, but be wary of "curve-fitting" your approach to the historical data as things are unlikely to play out the exact same way for future trades. +**NOTICE:** It's important to keep in mind that Edge is testing your expectancy using historical data, there's no guarantee that you will have a similar edge in the future. It's still vital to do this testing in order to build confidence in your methodology but be wary of "curve-fitting" your approach to the historical data as things are unlikely to play out the exact same way for future trades. ## How does it work? @@ -99,13 +148,13 @@ Edge combines dynamic stoploss, dynamic positions, and whitelist generation into | XZC/ETH | -0.03 | 0.52 |1.359670 | 0.228 | | XZC/ETH | -0.04 | 0.51 |1.234539 | 0.117 | -The goal here is to find the best stoploss for the strategy in order to have the maximum expectancy. In the above example stoploss at 3% leads to the maximum expectancy according to historical data. +The goal here is to find the best stoploss for the strategy in order to have the maximum expectancy. In the above example stoploss at $3% $leads to the maximum expectancy according to historical data. Edge module then forces stoploss value it evaluated to your strategy dynamically. ### Position size -Edge also dictates the stake amount for each trade to the bot according to the following factors: +Edge dictates the amount at stake for each trade to the bot according to the following factors: - Allowed capital at risk - Stoploss @@ -116,9 +165,9 @@ Allowed capital at risk is calculated as follows: Allowed capital at risk = (Capital available_percentage) X (Allowed risk per trade) ``` -Stoploss is calculated as described above against historical data. +Stoploss is calculated as described above with respect to historical data. -Your position size then will be: +The position size is calculated as follows: ``` Position size = (Allowed capital at risk) / Stoploss @@ -126,19 +175,23 @@ Position size = (Allowed capital at risk) / Stoploss Example: -Let's say the stake currency is ETH and you have 10 ETH on the exchange, your capital available percentage is 50% and you would allow 1% of risk for each trade. thus your available capital for trading is **10 x 0.5 = 5 ETH** and allowed capital at risk would be **5 x 0.01 = 0.05 ETH**. +Let's say the stake currency is **ETH** and there is $10$ **ETH** on the wallet. The capital available percentage is $50%$ and the allowed risk per trade is $1\%$. Thus, the available capital for trading is $10 * 0.5 = 5$ **ETH** and the allowed capital at risk would be $5 * 0.01 = 0.05$ **ETH**. -Let's assume Edge has calculated that for **XLM/ETH** market your stoploss should be at 2%. So your position size will be **0.05 / 0.02 = 2.5 ETH**. +- **Trade 1:** The strategy detects a new buy signal in the **XLM/ETH** market. `Edge Positioning` calculates a stoploss of $2\%$ and a position of $0.05 / 0.02 = 2.5$ **ETH**. The bot takes a position of $2.5$ **ETH** in the **XLM/ETH** market. -Bot takes a position of 2.5 ETH on XLM/ETH (call it trade 1). Up next, you receive another buy signal while trade 1 is still open. This time on **BTC/ETH** market. Edge calculated stoploss for this market at 4%. So your position size would be 0.05 / 0.04 = 1.25 ETH (call it trade 2). +- **Trade 2:** The strategy detects a buy signal on the **BTC/ETH** market while **Trade 1** is still open. `Edge Positioning` calculates the stoploss of $4\%$ on this market. Thus, **Trade 2** position size is $0.05 / 0.04 = 1.25$ **ETH**. -Note that available capital for trading didn’t change for trade 2 even if you had already trade 1. The available capital doesn’t mean the free amount on your wallet. +!!! Tip "Available Capital $\neq$ Available in wallet" + The available capital for trading didn't change in **Trade 2** even with **Trade 1** still open. The available capital **is not** the free amount in the wallet. -Now you have two trades open. The bot receives yet another buy signal for another market: **ADA/ETH**. This time the stoploss is calculated at 1%. So your position size is **0.05 / 0.01 = 5 ETH**. But there are already 3.75 ETH blocked in two previous trades. So the position size for this third trade would be **5 – 3.75 = 1.25 ETH**. +- **Trade 3:** The strategy detects a buy signal in the **ADA/ETH** market. `Edge Positioning` calculates a stoploss of $1\%$ and a position of $0.05 / 0.01 = 5$ **ETH**. Since **Trade 1** has $2.5$ **ETH** blocked and **Trade 2** has $1.25$ **ETH** blocked, there is only $5 - 1.25 - 2.5 = 1.25$ **ETH** available. Hence, the position size of **Trade 3** is $1.25$ **ETH**. -Available capital doesn’t change before a position is sold. Let’s assume that trade 1 receives a sell signal and it is sold with a profit of 1 ETH. Your total capital on exchange would be 11 ETH and the available capital for trading becomes 5.5 ETH. +!!! Tip "Available Capital Updates" + The available capital does not change before a position is sold. After a trade is closed the Available Capital goes up if the trade was profitable or goes down if the trade was a loss. -So the Bot receives another buy signal for trade 4 with a stoploss at 2% then your position size would be **0.055 / 0.02 = 2.75 ETH**. +- The strategy detects a sell signal in the **XLM/ETH** market. The bot exits **Trade 1** for a profit of $1$ **ETH**. The total capital in the wallet becomes $11$ **ETH** and the available capital for trading becomes $5.5$ **ETH**. + +- **Trade 4** The strategy detects a new buy signal int the **XLM/ETH** market. `Edge Positioning` calculates the stoploss of $2%$, and the position size of $0.055 / 0.02 = 2.75$ **ETH**. ## Configurations @@ -169,23 +222,23 @@ freqtrade edge An example of its output: -| pair | stoploss | win rate | risk reward ratio | required risk reward | expectancy | total number of trades | average duration (min) | -|:----------|-----------:|-----------:|--------------------:|-----------------------:|-------------:|-------------------------:|-------------------------:| -| AGI/BTC | -0.02 | 0.64 | 5.86 | 0.56 | 3.41 | 14 | 54 | -| NXS/BTC | -0.03 | 0.64 | 2.99 | 0.57 | 1.54 | 11 | 26 | -| LEND/BTC | -0.02 | 0.82 | 2.05 | 0.22 | 1.50 | 11 | 36 | -| VIA/BTC | -0.01 | 0.55 | 3.01 | 0.83 | 1.19 | 11 | 48 | -| MTH/BTC | -0.09 | 0.56 | 2.82 | 0.80 | 1.12 | 18 | 52 | -| ARDR/BTC | -0.04 | 0.42 | 3.14 | 1.40 | 0.73 | 12 | 42 | -| BCPT/BTC | -0.01 | 0.71 | 1.34 | 0.40 | 0.67 | 14 | 30 | -| WINGS/BTC | -0.02 | 0.56 | 1.97 | 0.80 | 0.65 | 27 | 42 | -| VIBE/BTC | -0.02 | 0.83 | 0.91 | 0.20 | 0.59 | 12 | 35 | -| MCO/BTC | -0.02 | 0.79 | 0.97 | 0.27 | 0.55 | 14 | 31 | -| GNT/BTC | -0.02 | 0.50 | 2.06 | 1.00 | 0.53 | 18 | 24 | -| HOT/BTC | -0.01 | 0.17 | 7.72 | 4.81 | 0.50 | 209 | 7 | -| SNM/BTC | -0.03 | 0.71 | 1.06 | 0.42 | 0.45 | 17 | 38 | -| APPC/BTC | -0.02 | 0.44 | 2.28 | 1.27 | 0.44 | 25 | 43 | -| NEBL/BTC | -0.03 | 0.63 | 1.29 | 0.58 | 0.44 | 19 | 59 | +| **pair** | **stoploss** | **win rate** | **risk reward ratio** | **required risk reward** | **expectancy** | **total number of trades** | **average duration (min)** | +|:----------|-----------:|-----------:|--------------------:|-----------------------:|-------------:|-----------------:|---------------:| +| **AGI/BTC** | -0.02 | 0.64 | 5.86 | 0.56 | 3.41 | 14 | 54 | +| **NXS/BTC** | -0.03 | 0.64 | 2.99 | 0.57 | 1.54 | 11 | 26 | +| **LEND/BTC** | -0.02 | 0.82 | 2.05 | 0.22 | 1.50 | 11 | 36 | +| **VIA/BTC** | -0.01 | 0.55 | 3.01 | 0.83 | 1.19 | 11 | 48 | +| **MTH/BTC** | -0.09 | 0.56 | 2.82 | 0.80 | 1.12 | 18 | 52 | +| **ARDR/BTC** | -0.04 | 0.42 | 3.14 | 1.40 | 0.73 | 12 | 42 | +| **BCPT/BTC** | -0.01 | 0.71 | 1.34 | 0.40 | 0.67 | 14 | 30 | +| **WINGS/BTC** | -0.02 | 0.56 | 1.97 | 0.80 | 0.65 | 27 | 42 | +| **VIBE/BTC** | -0.02 | 0.83 | 0.91 | 0.20 | 0.59 | 12 | 35 | +| **MCO/BTC** | -0.02 | 0.79 | 0.97 | 0.27 | 0.55 | 14 | 31 | +| **GNT/BTC** | -0.02 | 0.50 | 2.06 | 1.00 | 0.53 | 18 | 24 | +| **HOT/BTC** | -0.01 | 0.17 | 7.72 | 4.81 | 0.50 | 209 | 7 | +| **SNM/BTC** | -0.03 | 0.71 | 1.06 | 0.42 | 0.45 | 17 | 38 | +| **APPC/BTC** | -0.02 | 0.44 | 2.28 | 1.27 | 0.44 | 25 | 43 | +| **NEBL/BTC** | -0.03 | 0.63 | 1.29 | 0.58 | 0.44 | 19 | 59 | Edge produced the above table by comparing `calculate_since_number_of_days` to `minimum_expectancy` to find `min_trade_number` historical information based on the config file. The timerange Edge uses for its comparisons can be further limited by using the `--timerange` switch. @@ -218,3 +271,6 @@ The full timerange specification: * Use tickframes since 2018/01/31: `--timerange=20180131-` * Use tickframes since 2018/01/31 till 2018/03/01 : `--timerange=20180131-20180301` * Use tickframes between POSIX timestamps 1527595200 1527618600: `--timerange=1527595200-1527618600` + + +[^1]: Question extracted from MIT Opencourseware S096 - Mathematics with applications in Finance: https://ocw.mit.edu/courses/mathematics/18-s096-topics-in-mathematics-with-applications-in-finance-fall-2013/ diff --git a/docs/javascripts/config.js b/docs/javascripts/config.js new file mode 100644 index 000000000..95d619efc --- /dev/null +++ b/docs/javascripts/config.js @@ -0,0 +1,12 @@ +window.MathJax = { + tex: { + inlineMath: [["\\(", "\\)"]], + displayMath: [["\\[", "\\]"]], + processEscapes: true, + processEnvironments: true + }, + options: { + ignoreHtmlClass: ".*|", + processHtmlClass: "arithmatex" + } +}; \ No newline at end of file diff --git a/mkdocs.yml b/mkdocs.yml index ebd32b3c1..324dc46db 100644 --- a/mkdocs.yml +++ b/mkdocs.yml @@ -39,13 +39,19 @@ theme: accent: 'tear' extra_css: - 'stylesheets/ft.extra.css' +extra_javascript: + - javascripts/config.js + - https://polyfill.io/v3/polyfill.min.js?features=es6 + - https://cdn.jsdelivr.net/npm/mathjax@3/es5/tex-mml-chtml.js markdown_extensions: - admonition + - footnotes - codehilite: guess_lang: false - toc: permalink: true - - pymdownx.arithmatex + - pymdownx.arithmatex: + generic: true - pymdownx.caret - pymdownx.critic - pymdownx.details