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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@xxxx. Many thanks!
The sample result attached to my earlier email was an Overall Performance Report for 100 stocks (N100). This brings up the point of whether the Expectancy test is valid on groups of stocks. Any comments on that? Perhaps this is why my results were way off?
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". I don't use stops in system design... I believe stops and position-sizing distorts the true nature of 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.
-----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 means the risk of ruin could be quite high. See attached excel file on how to calc 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 identify a 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 / $0.52 = 384 shares in this trade.
Something I learnt through paying tuition fees to the market :-)
William
Herman van den Bergen <psytek@xxxx> wrote:
Thank you William,
Can you help me link this to a typical AB BackTest report (attached)?
avg win$ = Average winning trade: 15.71
avg loss$ = Average losing trade: -17.04
%Win = Percent profitable: 61.8
Plugging these numbers in your formula I get:
Expectation = ( 1 + 15.71 / 17.04 ) * .618 - 1 = 0.172
I assume the minus sign for Average losing trade is dropped? 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? Taking the top ten stocks from this test i get
Expectation = ( 1 + 35.19 / 42.94 ) * .706 - 1 = 0.284 still not very good...
It looks like my decision to work first on trading systems before tackling MM was correct: i am a long way off from 0.7 !
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 :-)
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.
Intuition tells me the formula ought to have a factor for frequency/distribution of trading/profits and the testing period under consideration. This formula would give good results if I had only two very profitable trades and two small losers - not right... WinTradeDuration/LosingTradeDuration probably ought to be in there too... How can we factor those in?
Many thanks triggering those sleepy neurons,
Herman
PS. Sorry for not letting this thread end...
-----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.
Do you Yahoo!?Faith Hill - Exclusive Performances, Videos, & morefaith.yahoo.com Post AmiQuote-related messages ONLY to: amiquote@xxxxxxxxxxxxxxx (Web page: http://groups.yahoo.com/group/amiquote/messages/)Check group FAQ at: http://groups.yahoo.com/group/amibroker/files/groupfaq.html Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service. Post AmiQuote-related messages ONLY to: amiquote@xxxxxxxxxxxxxxx (Web page: http://groups.yahoo.com/group/amiquote/messages/)Check group FAQ at: http://groups.yahoo.com/group/amibroker/files/groupfaq.html Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service.
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
Do you Yahoo!?Y! Web Hosting - Let the expert host your web site Post AmiQuote-related messages ONLY to: amiquote@xxxxxxxxxxxxxxx (Web page: http://groups.yahoo.com/group/amiquote/messages/)Check group FAQ at: http://groups.yahoo.com/group/amibroker/files/groupfaq.html Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service. Post AmiQuote-related messages ONLY to: amiquote@xxxxxxxxxxxxxxx (Web page: http://groups.yahoo.com/group/amiquote/messages/)Check group FAQ at: http://groups.yahoo.com/group/amibroker/files/groupfaq.html Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service. Do you Yahoo!?
Y! Web Hosting - Let the expert host your web siteAttachment:
Risk of Ruin.xls
Attachment:
Description: "Description: Risk of Ruin.xls"
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