152 lines
8.1 KiB
Markdown
152 lines
8.1 KiB
Markdown
# Edge positioning
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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.
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**NOTICE:** Edge positioning is not compatible with dynamic whitelist. it overrides dynamic whitelist.
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## Table of Contents
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- [Introduction](#introduction)
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- [How does it work?](#how-does-it-work?)
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- [Configurations](#configurations)
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## Introduction
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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.<br/><br/>
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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 is quite boring, isn't it?<br/><br/>
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But let's say the probability that we have heads is 80%, and the probability that we have tails is 20%. Now it is becoming interesting ...
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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.<br/><br/>
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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% * 2$ versus 20% * 8$. It is becoming boring again because overtime you win $1.6$ (80% x 2$) and me $1.6 (20% * 8$) too.<br/><br/>
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The question is: How do you calculate that? how do you know if you wanna play?
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The answer comes to two factors:
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- Win Rate
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- Risk Reward Ratio
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### Win Rate
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Means over X trades 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).
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`W = (Number of winning trades) / (Number of losing trades)`
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### Risk Reward Ratio
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Risk Reward Ratio 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:
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`R = Profit / Loss`
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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:
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`Average profit = (Sum of profits) / (Number of winning trades)`
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`Average loss = (Sum of losses) / (Number of losing trades)`
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`R = (Average profit) / (Average loss)`
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### Expectancy
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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:
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Expectancy Ratio = (Risk Reward Ratio x Win Rate) – Loss Rate
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So lets say your Win rate is 28% and your Risk Reward Ratio is 5:
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`Expectancy = (5 * 0.28) - 0.72 = 0.68`
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Superficially, this means that on average you expect this strategy’s trades to return .68 times the size of your losers. 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.
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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.
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You can also use this number to evaluate the effectiveness of modifications to this system.
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**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.
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## How does it work?
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If enabled in config, Edge will go through historical data with a range of stoplosses in order to find buy and sell/stoploss signals. It then calculates win rate and expectancy over X trades for each stoploss. Here is an example:
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| Pair | Stoploss | Win Rate | Risk Reward Ratio | Expectancy |
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|----------|:-------------:|-------------:|------------------:|-----------:|
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| XZC/ETH | -0.03 | 0.52 |1.359670 | 0.228 |
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| XZC/ETH | -0.01 | 0.50 |1.176384 | 0.088 |
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| XZC/ETH | -0.02 | 0.51 |1.115941 | 0.079 |
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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.
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Edge then forces stoploss to your strategy dynamically.
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### Position size
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Edge dictates the stake amount for each trade to the bot according to the following factors:
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- Allowed capital at risk
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- Stoploss
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Allowed capital at risk is calculated as follows:
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**allowed capital at risk** = **total capital** X **allowed risk per trade**
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**total capital** is your stake amount.
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**Stoploss** is calculated as described above against historical data.
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Your position size then will be:
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**position size** = **allowed capital at risk** / **stoploss**
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Example:
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Let's say your stake amount is 3 ETH, you would allow 1% of risk for each trade. thus your allowed capital at risk would be **3 x 0.01 = 0.03 ETH**. Let's assume Edge has calculated that for **XLM/ETH** market your stoploss should be at 2%. So your position size will be **0.03 / 0.02= 1.5ETH**.<br/>
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## Configurations
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Edge has following configurations:
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#### enabled
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If true, then Edge will run periodically<br/>
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(default to false)
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#### process_throttle_secs
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How often should Edge run in seconds? <br/>
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(default to 3600 so one hour)
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#### calculate_since_number_of_days
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Number of days of data against which Edge calculates Win Rate, Risk Reward and Expectancy
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Note that it downloads historical data so increasing this number would lead to slowing down the bot<br/>
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(default to 7)
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#### allowed_risk
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Percentage of allowed risk per trade<br/>
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(default to 0.01 [1%])
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#### stoploss_range_min
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Minimum stoploss <br/>
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(default to -0.01)
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#### stoploss_range_max
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Maximum stoploss <br/>
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(default to -0.10)
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#### stoploss_range_step
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As an example if this is set to -0.01 then Edge will test the strategy for [-0.01, -0,02, -0,03 ..., -0.09, -0.10] ranges.
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Note than having a smaller step means having a bigger range which could lead to slow calculation. <br/>
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if you set this parameter to -0.001, you then slow down the Edge calculation by a factor of 10. <br/>
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(default to -0.01)
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#### minimum_winrate
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It filters pairs which don't have at least minimum_winrate.
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This comes handy if you want to be conservative and don't comprise win rate in favor of risk reward ratio.<br/>
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(default to 0.60)
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#### minimum_expectancy
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It filters paris which have an expectancy lower than this number .
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Having an expectancy of 0.20 means if you put 10$ on a trade you expect a 12$ return.<br/>
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(default to 0.20)
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#### min_trade_number
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When calculating W and R and E (expectancy) against historical data, you always want to have a minimum number of trades. The more this number is the more Edge is reliable. Having a win rate of 100% on a single trade doesn't mean anything at all. But having a win rate of 70% over past 100 trades means clearly something. <br/>
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(default to 10, it is highly recommended not to decrease this number)
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#### max_trade_duration_minute
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Edge will filter out trades with long duration. If a trade is profitable after 1 month, it is hard to evaluate the strategy based on it. But if most of trades are profitable and they have maximum duration of 30 minutes, then it is clearly a good sign.<br/>
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**NOTICE:** While configuring this value, you should take into consideration your ticker interval. as an example filtering out trades having duration less than one day for a strategy which has 4h interval does not make sense. default value is set assuming your strategy interval is relatively small (1m or 5m, etc).<br/>
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(default to 1 day, 1440 = 60 * 24)
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#### remove_pumps
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Edge will remove sudden pumps in a given market while going through historical data. However, given that pumps happen very often in crypto markets, we recommend you keep this off.<br/>
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(default to false)
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