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--- In amibroker@xxxx, "Herman van den Bergen" <psytek@xxxx> wrote:
> The question remains: Has "Anybody" on
> this list improved their system
> returns by applying MM techniques?
> We have seen advocates of MM but not a
> single person comes forward to say that
> the performance of their System+MM
> is better than the System alone.
>
> We all use simple common sense MM methods,
> like DT uses a personal MM scheme,
> and most of us have one to suit our
> personal tolerance for stress
> and financial loss.
Herman,
I think I see where you are coming from. But the point of MM is not
to improve profits, but to keep one in the game -- both financially
and emotionally.
In the short and medium term, MM will almost certainly reduce one's
gains. But in the longer term, MM can mean the difference between
success and failure. Consider the following "thought experiment".
Trader A and B and C jointly discover a tremendous system that
averages a 100% gain per trade. Let's make the math simple by
assuming the 100% is after paying fees and taxes. A super system.
There is only one drawback: very occasionally (about 1 out of every
100 trades) back testing shows the system will experience a 50%
drawdown. Once the system is discovered the three traders can not
agree on MM, so they part ways.
Trader A is very aggressive and decides to trade the system on
margin. Since he plans to stop after 10 trades, he considers it
unlikely that he will never see the 50% drawdown. He realizes there
is 10% change he will see that drawdown and will loose all his
portfolio since margin will make the loss 100%. Trader A considers
this a reasonable risk since he will only be putting $1,000 into
play at the beginning. He plans to leave all profits in play until
the 10 trades are complete. Prospect: a 90% likelihood of a $59
million gain. That is more than enough to stop trading and move the
South Sea island he dreams of. So Trader A gets started.
Trader B takes another approach. He wants a 100% chance of making
$50 million. He is willing to put in $200,000 to start but he will
not use margin, so a 50% drawdown will not kick him out of the game
(at least not financially). Furthermore, he wonders if the 50%
drawdown might come more frequently than 1/100 times. What if it
come 1/10 times? Doubling 9 times and being cut in half once along
the way will result in 8 doublings. So $200,000 will turn into $53
million. Nice target and the odds look good, so he starts.
Trader C is rather prudent, but he is also pleasure loving. He has a
total nest egg of $400,000 but much of that is for the kids' college
tuition, for a major addition to the house being planned by his
wife, and for retirement. So he figures he could not want to see
anything more than a $20,000 loss. If he looses $40,000 he will quit
the system. He could put $40,000 into play, but what if the first
trade is the 50% drawdown? So he decides to only put $20,000 into
play. Furthermore, he does not want to wait for all the trades are
complete to enjoy some pleasures. So he decides to only leave 44% of
any profits on that table. The other 56% will be split evenly
between buying bonds (boring) and fast cars and boats (for
excitement). Result: $20,000 doubling every two trades. After 10
trades, he will have 1.2 million in his trading account plus a
sizable pile of bonds -- and so many cars that he is planning to
enlarge the garage while his wife remodels the house.
What can go wrong?
Trader A has a 1/10 change of loosing all he put in. But he only put
$1,000 in so it is "survivable". He can always start again -- with a
different MM plan.
Trader C is also in good shape.
Trader B plan looks pretty good as well -- unless his first trade is
a 50% loss and the emotional shock is so great he looses all
confidence in the system and does not continue to trade it.
Money Management is an interesting topic. For me, the basic question
is this: can I stay in the game (both financially and emotionally)
no matter what the market throws my way?
b
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