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--- In amibroker@xxxx, "Herman van den Bergen" <psytek@xxxx> wrote:
> If, like it has been mentioned on this list several times, the
> application of van Tharp's techniques are a matter of ruin or
> no-ruin then we should have at least one single person on this
> list of about 1000 who can to come forward with a practical
> example that works. My appreciation of this topic swings from
> great admiration one day to total dismay the next...
> Herman.
Herman,
I do not think I can give as full an answer as you may want, but I
will add my 2 cents worth to the discussion. My contribution will be
much more like common sense than rocket science. Those who trade the
futures markets may need rocket science versions of money
management, but I think a stock trader like myself can operate well
with a few common sense money management rules.
First, I should explain why I think stock trading is different from
futures trading with respect to money management. If a stock
trader is a heavy user of margin or trades options, then their money
management needs are likely to be similar to that of the futures
trader. So I am contrasting futures with stocks and ignoring margin
and options.
1. Future traders are -- and need to be -- much more concerned
about "total ruin" because it is an ever present danger for them in
a way that it is not for stock traders. The reason is the leverage
used in futures trading. A futures trader can easily get completely
destroyed by a 10% or 20% move in the underlying commodity or
currency. A stock trader whose stocks drop by 50% will not be happy
but he/she is still very much in the game -- not so the future's
trader.
2. Another difference between futures and stocks is the minimum
amount needed to continue trading. Those developing trading systems
for futures need to always keep in mind the minimum contract size
and they must ensure that their account size remains above this.
Typically a futures contract is a lot more than the price of stock
shares. Consider this: if a future trader begins with enough money
to buy 2 contracts and he has a 55% drawdown, he will not be able to
continue trading -- he does not have enough to buy 1 contract! But a
stock trader can experience a 75% drawdown and be quite able, from a
financial perspective, to continue trading. If the stock trader is
using a deep discount broker the fees could easily remain below 1%
when trading a very small account. In this respect, stock trading is
much more "forgiving" of drawdowns than futures trading is.
3. So my assumption -- and it is just a guess since I do not trade
futures -- is this: futures traders have to be a lot more concerned
about drawdowns and detailed money management than stock traders.
4. Money Management for futures traders is a financial issue due to
points 1 and 2. Money Management for stock traders is primarily an
emotional issue -- one needs to preserve one's emotional capital (or
that of one's spouse) to be comfortable enough to continue.
Now for the Money Management principles that makes sense to me.
Remember, I am not promising any rocket science principles:
A - Do not increase my bet size in a loosing streak. It would be a
foolish to think this way: my back testing shows that the average
number of trades in a loosing streak is 5, and I now have had 6
losses in a row, so the chance of another loss is very low, in fact
my system is "over due" for a win, so I will double the size of my
next trade -- bad idea, very bad idea! Do not increase my risks or
bet size when in a loosing period. I also happen to think using a
fixed percentage of a portfolio is better than using a fixed dollar
amount, but either one is a lot better than increasing the size
because my system is over due for a win.
B - Increase my bet size if I can set a logical stop loss very close
to the entry price (eg, if a stock has just started to bounce off a
support line). It does make sense that a bigger bet could be placed
in such cases, but there always is the chance that a loss could be
greater than the distance to the stop (if a gap down hits me) so for
me, rule B is limited by C. Due to C and the fact an equity trader
has thousands of stocks to select from, I consider B to be a rule of
secondary importance. But if I was trading futures, I would likely
view B as a virtual necessity. Why? Since I am not a futures trader
I could be misunderstanding things here, but it seems that the bulk
of a futures trader's account is sitting in cash (to be available as
a cushion so a dip does not result in a margin call or forced
liquidation). Thus, rule B helps them get the maximum amount of
money into play. They do it by looking at the distance from their
entry to their stop loss and using that as a percentage of the
portfolio to determine how big a bet they can make on a single
commodity trade.
C - No more than 10% of my portfolio in any single trade -- just in
case there is a major gap down.
D - Use A and C to keep me in the game financially. Use B, or more
precisely, a variation on B to maximize the reward/risk ratio of
methods that give price targets. Not all methods give targets so I
do not always use B.
E - Never risk more than I can afford to loose. I do not apply this
rule to individual trades (Rule C keeps individual trades from being
too large); rather it is a way to determine how much of my net worth
will be put into an active trading account.
Well those points are not rocket science, but they seem reasonable
given what and how I like to trade.
b
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