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Thank you for the Excel
worksheet, William!
Best
regards,
Herman
<BLOCKQUOTE
>
-----Original
Message-----From: William Wong
[mailto:williamwongab@xxxx]Sent: 21 October, 2002 9:32
AMTo: amibroker@xxxxxxxxxxxxxxxSubject: RE: [amibroker]
Re: 2 cent worth on MoneyManagement
Hi,
Here is the attachment I forgot. What I meant is the losses outweight
the gains, that is why the pay off ratio is less than 1. I have a
different opinion on not using stop in testing as I personally will not rely
on the results as I am very risk adverse. It will not be a realistic
system to trade as you will very soon find out that you will not sleep well
with an open overnight position :-)
I only have USD10k in my trading account, I still observe very strict money
management though I use 5% instead of 2%. This ensures that I stay in
the game even if I have 20 consecutive losses.
A positive expectation system with strong money mgmt discipline is oneI
will subscribe to.
Regards,
William
Herman van den Bergen <psytek@xxxx> wrote:
<BLOCKQUOTE
>
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 <A
href="">psytek@xxxx. Many thanks!
The sample result attached
to my earlier email was an Overall Performance Report for 100
stocks (N100). <SPAN
class=360175820-21102002>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?
<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".
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 sumsto
trade. I would guess that if the minimum requirement is $200K thanmany
subscribers on this list don't need to worry about MM :-) Any
comments?
So, this brings meback 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 asgood
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 ofit
out there... I'll keep looking.
Best
regards,
Herman.
<BLOCKQUOTE
>
<FONT
size=2>-----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 / $0.52 = 384 shares in this
trade.
Something I learnt through paying tuition fees to the market :-)
William
Herman van den Bergen <psytek@xxxx>
wrote:
<BLOCKQUOTE
>
<SPAN
class=060393621-18102002>Thank you William,
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Can you help me link this to a typical AB
BackTest report (attached)?
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>avg win$ = 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>
<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 stocksfrom
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>
<SPAN
class=060393621-18102002>It looks like my decision to work first on
trading systems before tackling MM was correct: i am a long way offfrom
0.7 !
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Still, I am not quite sure what to thinkof
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. Toget
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 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?
<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, 20023:31
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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