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Hi William and
all,
Thanks for your reply. You
say "See attached excel file on how to calc risk of ruin"... sorry but there was
no attachment. Would you mind emailing it again, it might have been stripped off
by Yahoo, my email is psytek@xxxxx.
Many thanks!
The sample result attached to
my earlier email was an Overall Performance Report for 100 stocks
(N100). <FONT
size=2>This brings up the point of whether the
Expectancy test is valid on groups of stocks. Any comments on that? Perhapsthis
is why my results were way off?
<FONT
size=2>
I do not understand when you
say "You are also right the example you have with payoff ratio of less than
1, the problem might just be at the stop loss". <FONT
size=2>I don't use stops in system
design... I believe stops and position-sizing distorts the true natureof a
system and handicaps equity analysis and development. Can you explain your
statement?
A point that worries me is that
to apply strict money management techniques one must have big sums to trade. I
would guess that if the minimum requirement is $200K than many subscribers
on this list don't need to worry about MM :-) Any comments?
So, this brings me back to the
question of which comes first: developing a good trading system or a MM
system. I think the trading system comes first, MM will only be as good as the
system we trade. Right?
However, I am intrigued with
the screening possibility offered by the Expectancy factor. This can be
implemented right in the trading system. Also, 2D/3D Expectancy charts
for optimizations are very interesting. But I would like to find a
better formula, the one I am using looks too much like my Equity curves (if
normalized); not sensitive enough. There must be many variations of it out
there... I'll keep looking.
Best
regards,
Herman.
<BLOCKQUOTE
>
-----Original
Message-----From: William Wong
[mailto:williamwongab@xxxx]Sent: 21 October, 2002 3:42
AMTo: amibroker@xxxxxxxxxxxxxxxSubject: RE: [amibroker]
Re: 2 cent worth on MoneyManagement
Hi Herman,
Essentially you are right. It is a mathetical expecation. You
are also right the example you have with payoff ratio of less than 1, the
problem might just be at the stop loss. Such low payoff ratio meansthe
risk of ruin could be quite high. See attached excel file on how tocalc
risk of ruin. I would focus on getting a system with > 1 pay off
ratio and > 50% times profitable.
Btw, the Risk Adj Ann Return% in AB's report is not how one would interpret
it. This return is "adjusted" by the % of exposure you have in the
market. I.e., if your system seldom takes position in the market, this
return will be inflated, it assumes when your money is not working for you in
the market, it is working some where else which generates the same
return. This may not be the case.
The unadjusted return is more realistic as usually our money is idle in a
trading account, a more conservative number. Anyway, your exposure is
close to 100%, hence this return comes close to the unadjusted one.
One more thing, focus on the drawdown, your trade and system drawdown are
very high, close to 90%. This means you need to be very strong in
conviction to carry through using this system as you will be beaten almost
flat before it makes money for you. Most professional restricts a
drawdown of a single trade down to 2% as a rule of thumb, this got to do with
the money mgmt. For example, if you have $10,000, you have identifya
trade to buy SUNW at $2.50 with a stop at $2.00. The risk (include
commission $0.02 per share per round trip) is $0.52. Using 2%, I would
only risk $200, i.e., $200 / $0.52 = 384 shares in this trade.
Something I learnt through paying tuition fees to the market :-)
William
Herman van den Bergen <psytek@xxxx> wrote:
<BLOCKQUOTE
>
<SPAN
class=060393621-18102002>Thank you William,
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Can you help me link this to a typical AB
BackTest report (attached)?
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>avg win$ = Average winning trade:
15.71
<SPAN
class=060393621-18102002>avg loss$ = Average losing trade:
-17.04
<SPAN
class=060393621-18102002>%Win = Percent
profitable: 61.8
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Plugging these numbers in your formula I
get:
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Expectation = ( 1 + 15.71 / 17.04 ) * .618- 1 =
0.172
<SPAN
class=060393621-18102002>
I
assume the minus sign for Average losing trade is dropped<FONT
color=#0000ff face=Arial size=2>? This was a
backtest on the N100 so I am not quite sure how to interpret this if we
apply the formula to groups... ideas? <FONT color=#0000ff
face=Arial size=2>Taking the top ten stocks
from this test i get
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002><SPAN
class=060393621-18102002>Expectation = ( 1 + 35.19 / 42.94 ) *
.706 - 1 = 0.284 still not very good...
<SPAN
class=060393621-18102002>
It
looks like my decision to work first on trading systems before tacklingMM
was correct: i am a long way off from 0.7 !
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Still, I am not quite sure what to think of this...
the first test gave me 161%/ann average for 100 stocks, the second
test gave me 660%/ann average for 10 stocks (of course assuming I
could screen the best stocks) over about 5000 trades. To get 0.7 I'll have
to be making thousands of percent per year... where did i go wrong? I guess
the problem is that the losers are too big, adding stops might improve the
Expectation rating but would reduce profits... hmmm sounds familiar :-)
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>So, we need to Optimize for Expectation...
now, wouldn't that be fun?! I might just work on that this weekend:-)
AmiBroker can do anything, right? I love a good afl
challenge.
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Intuition tells me the formula ought tohave a
factor for frequency/distribution of trading/profits and the testing period
under consideration. This formula would give good results if I had onlytwo
very profitable trades and two small losers - not right...
WinTradeDuration/LosingTradeDuration probably ought to be in there
too... How can we factor those in?
<SPAN
class=060393621-18102002><FONT color=#0000ff face=Arial
size=2>
<SPAN
class=060393621-18102002>Many thanks triggering those sleepy
neurons,
<SPAN
class=060393621-18102002>Herman
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>PS. Sorry for not letting this thread
end...
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>
<BLOCKQUOTE
>
<FONT face=Tahoma
size=2>-----Original Message-----From: William Wong
[mailto:williamwongab@xxxx]Sent: 18 October, 2002 3:31
AMTo: amibroker@xxxxxxxxxxxxxxxSubject: RE:
[amibroker] Re: 2 cent worth on MoneyManagement
My 2 cents worth on money management.
A system performance is governed by a combination of %winning trades
and pay off ratio (avg win$ / avg loss$). If an expectation of a
system is negative, no matter how good the money management, it
only slows down an eventual death.
Expectation = (1 + pay off ratio) * %win - 1
e.g. If a system gives pay off ratio of 2:1 but only profitable
30% of the time,
Exp = (1 + 2) * 0.3 - 1 = -0.1, not worth using
But if the accuracy is improved to 40%,
Exp = (1 + 2) * 0.4 - 1 = 0.2, worth using
The higher the expectation, the better the system. Rule of thumb
is to improve to at least 0.7.
Now when a system has a positive expectation, then money management
comes into play. MM is about reducing the Risk of Ruin, the chance
of lossing x% of your portfolio before you decide to quit. It about
staying in the game. It is the different between punting and making
a living on trading. A mediocre system (positive expectation) with a
sound money mgmt is good enough to trade for a living.
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Overall performance summary
Total net profit:
16397.46
Total commissions paid:
0.00
Return on account:
167.32 %
Open position gain/loss
-525.51
Buy&Hold profit:
-3024.58
Bars (avg. days) in test:
25480 (375)
Buy&Hold % return:
-30.86%
System to Buy&Hold index:
642.14%
Annual system % return:
160.40%
Annual B&H % return:
-30.18%
System drawdown:
-82.66
B&H drawdown:
-92.85
Max. system drawdown:
-1191.56
B&H max. drawdown:
-260.31
Max. system % drawdown:
-93.74%
B&H max. % drawdown:
-95.74%
Max. trade drawdown:
-581.29
Max. trade % drawdown:
-88.23%
Trade drawdown:
-444.52
Total number of trades:
5295
Percent profitable:
61.8%
Number winning trades:
3272
Number losing trades:
2023
Profit of winners:
51391.78
Loss of losers:
-34468.81
Total # of bars in winners:
16905
Total # of bars in losers:
13187
Commissions paid in winners:
0.00
Commissions paid in losers:
0.00
Largest winning trade:
258.56
Largest losing trade:
-357.47
# of bars in largest winner:
4
# bars in largest loser:
7
Commission paid in largest winner:
0.00
Commission paid in largest loser:
0.00
Average winning trade:
15.71
Average losing trade:
-17.04
Avg. # of bars in winners:
5.2
Avg. # bars in losers:
6.5
Avg. commission paid in winner:
0.00
Avg. commission paid in loser:
0.00
Max consec. winners:
15
Max consec. losers:
8
Bars out of the market:
194
Interest earned:
0.00
Exposure:
99.2%
Risk adjusted ann. return:
161.63%
Ratio avg win/avg loss:
0.92
Avg. trade (win & loss):
3.20
Profit factor:
1.49
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