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Anthony,
I agree in general with your rules. However, there are a couple of
anomalies. If your total portfolio risk (I presume you are referring to
portfolio heat?) is limited to 20% of capital, how, then, can your exposureto
one particular stock or sector be as high as 25%, which is higher than your
allowed total risk? I think exposing your portfolio to one stock or sector
by as much as 25% is extremely risky. I'd limit this to no more than 5-10%
max. You don't want one stock to give you a 25% hit to your portfolio, do you?
Also, we must not lose sight of the difference between "risk of loss" and
"allocation risk". Risk is defined as the amount you are willing to lose ona
given trade. If it's 1% on a $100,000 portfolio, then your risk of loss is
limited to $1000. However, to take on that risk, your equity allocation is going
to be much higher than that. For example, if you are using a
volatility-based risk system, suppose you want to buy a $50 stock whose ATRis
$1.5. If you set 2 ATRs as your max stoploss, and assuming your risk is 1% of
$100,000, you would buy 1000/3 or 333 shares x $50/share or $16,650. So, you're
allocating $16,650 (16.7% ) of unmargined equity on this trade with a potential
of losing $1000 (1%). So, when you say you are "risking" 25% on one stock, are
you talking about allocation risk or loss risk?
Al Venosa
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Anthony Faragasso
To: <A title=amibroker@xxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Saturday, July 27, 2002 12:21
PM
Subject: Re: [amibroker] Re:Money
management
Dimitri,"you may see now the max drawdown at
28%.Is it unaffordable
?"/**************************************************************/For
some maybe not, for others maybe yes,.... I prefer to keepdrawdowns
at 25% or less.What is your initial maximum loss stop on trade entry ? How
do youprotect your capital on the entry signal ? What if the first trade
is aloss ? How about 4 losses in a row ?A Few Money
Management Benchmarks that I consider:Per Trade risk.............limit
to 2 % [or less ] of trading capitalTotal portfolio risk......limit to 20
% of trading capital [ 15 % inuncertain periods ]Exposure to a
particular stock or sector......No more than 25% ofcapital; Divest when
above 33%Drawdowns...............25% maximumHere is an intersting
Table:It shows how much your account has to recover from various
sizedDrawdownsin order to get back to even.Recovery after
Drawdowns:Drawdowns.................Gain to
recovery5%.................................5.3%
gain10%.............................11.1%
gain15%.............................17.6%
gain20%.............................25.0%
gain25%.............................33.0%
gain30%.............................42.9%
gain40%.............................66.7%
gain50%.............................100.%
gain60%.............................150.%
gain75%.............................300.%
gain90%.............................900.% gainThe results arethat
if you risk too much and lose, your chances offull recovery are very
slim./**********************************************************/"Do
you critisize the cross EMA40 method or the Equity itself ?"No, next
to the actual market charts, equity Charts are the mostimportant charts
that a trader can keep. Equity represents the profitor loss on a
given trade added to the previous equity value. You shouldanalyze your
equity very carefully to get an idea of how your trading isfairing. If you
are trading well, the equity line should be uptrending.If the tradingis
poor the line will be falling of downtrending. If theresults are
mixed, the line will be moving sideways. Each of thisescenarioscan
be very insightful to traders who can step back and lookobjectively at the
results. Uptrending equity charts are what we allstrive for because this
represents winning trades over time. The steeperthe slope the better
because that means our money is growing rapidly.Some techniques
that I apply to the equity line are Trendlines andMoving averages
among others . The same analytical techniques applied tomarkets can also
be applied to equity charts. A simple moving averagetaken of the equity
line can provide some valuable insight. A trader cansuspend trading or
lighten up on position size when equity is below themoving average. I
recommend withdrawing to the sidelines completely whenthe equity lineis
below its moving average and simply continue trackingthe systems
trades. When equity goes above the moving average, tradingshould
resume. This technique ensures capital preservation, in case thesystem
never returns to profitability.In the case of Moving averages , we
should use a moving average that isslow enough so the equity line is not
constantly crossing the movingaverage , but also, make sure it is nottoo
slow, or a series of biglosses will need to occur for the equity to fall
below the movingaverage. I usually use a length of 10 to 25
days.Also, Have you experimented with different Moving averge types
?Anthonydtsokakis wrote:>
Anthony,> I thought to begin this thread with a method I use for years,
even> with MSEXCEL the ...happy 99 times [I sold the whole thing when
the> portfolio equity crossed its 15-day MA, after a long
extra-bullish> period, no doubt about it]> Do you critisizethe
cross EMA40 method or the Equity itself ?> In the second case, we will
loose the method [I hope to see other> methods too].> I would
like your opinion for this EMA40 idea.> Of course, any other criticism
is always appreciated.> The Smoothed Stochastic CCI Equity curve is
another [perhaps> interesting] subject.> I will post later the
full formula to see better.> DT> --- In amibroker@xxxx, Anthony
Faragasso <ajf1111@xxxx> wrote:> > Dimitri,>
>> > Thank you for continuing this Thread, It is an important
part of any>> > traders success or failure.>
>> > Strategy and Money management are the two most important
parts of> any> > trader's overall plan.> >>
> The best entry rule is useless without proper risk control. You
can>> > almost perfectly analyze a developing market
situation, find the> best> > strategy to exploit that
situation, and be almost perfectly correct> in> > your
forcast of what that market will do, and yet still lose money>
if> > you do not use proper risk control and money
management.> >> > There are so many variables which
constitute Money management , that>> > just pinning it to an
Equity curve crossover would be dangerous for> most> >
traders. In the 3 gifs that you have posted , the Drawdowns in
the> > equity curves appear to be excessive even though the
equity curves> are> > above the 40 period EMA , how do
you protect yourself from these> > drawdowns ? Are you in that much
cash to absorb these drawdowns ?> >> >> >
Anthony> >> >> >> > Dimitris Tsokakis
wrote:> >> > > Another [interesting] example.Athens SE
General Index had a nice> > > fitting to the Stochastic CCI
system from A [Aug 2000] toB [April> > > 2001]. Take the Profits
[nearly +60%] and stay in cash.The 40-day> EMA> > > cross
at B is more than clear.The system is no good anymore for a> > >
quite long period.Slightest attempts for the Equity red curve to> >
> exceed its EMA were very dangerous until mid December 2001.A new>
> > fitting period seem to begin and give some interesting
profits> [+10%]> > > till Feb 2002 and out of thesystem
again and again.The actual> Equity> > > curve should point
17000, the equity without this type of> management> > > is
at 7276.The all-season "blind backtesting" has no relation
with>> > > real trading conditions.Any excellent system
may change.You> should be> > > there to stop it, instead
of insisting with some fanatism and> loose> > > the
profits and a part of theinitial equity in the name of the>
holly> > > system.Dimitris Tsokakis> > >>
> >> >
>
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