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Thank
you Al, as always your posts are very informative and enjoyable to read! i am
pleased to respond :-)
<SPAN
class=250430113-26102002>
First
of all, I should once more clarify the position from which I speak :-) I
am not an experienced trader, I am not a successful trader either; a few
years ago I got interested in stocks and experienced a 50% loss of trading
funds. At that point I decided not to trade again until I had a good system, and
that time has not come yet. I am not interested in the markets, in news, in
economy, analysts, company fundamentals, chart reading, etc. Not getting
involved with all that stuff makes it much easier to trade mechanically. I ONLY
play with the numbers - that is what i enjoy. Having said that I hope I have
eliminated the risk of somebody taking my words too serious
:-)
<SPAN
class=250430113-26102002>
<FONT
color=#000000>Al: I don't know what you mean by high performance>.
"High Performance systems" are those that give >100%ann.. on the average
(N100) per year when they work. No system will work all the time, to
look for a single system that produces consistently (year after year) this type
of gain is a waste of time - they may not exist. Taking a ten year span a
typical system may work 70% of the time. You will have to have a collectionof
systems-stock combinations you monitor and trade. There will be times that none
works and you are in cash - nothing wrong with that. Never argue with your
system performance indicators as they are much more important than market
(trend) indicators.
<SPAN
class=250430113-26102002>
<FONT
color=#000000>Al: I asked you to define what you meant by MM>. My
understanding of MM was, at the time of my first post, wrong. The thread
taught me a lot but did not made me a strong believer of MM for my type of
systems and for my trading methodology. My revised :-) understanding of MM
is that it trades profits for safety. I believe you can reduce risk by
diversification in stocks and systems. Even "Market Wizards" and
"Gurus" go out of style ...most of them talk about past
accomplishments. They can use knowledge and trading methods
way beyond anything we will ever command - they are out of our
league.
<SPAN
class=250430113-26102002>
<SPAN
class=250430113-26102002>Commenting on your numbered comments
below:
<SPAN
class=250430113-26102002>
1)
Stops. Stops can or cannot be part of MM. You give a
good example but in the end profits may be good but might still be less than
those obtained with my diversified stock-system approach outlined above. Itwill
take us years to prove one or the other.
2) I
emphasized that my statements were based on personal experience, they reflect
what happened when I applied van Tharp's ATR stops to my systems: it
literally killed them flat. Perhaps wrongly, I assumed that since they are
called Tharp's stops that they are part of MM. I didn't know how to test
anything else in MM.
<SPAN
class=250430113-26102002>
3)
"In fact, I'm not even sure you can program and backtest the
innovative ways to use MM." So, we are really talking
about something they say that works but nobody has confirmed it at our
competence level? I don't recall anybody coming forward with positive real life
experiences (except modified/personalized MM systems)...Only lots of quotesfrom
what the big guys do...
<SPAN
class=250430113-26102002>
<SPAN
class=250430113-26102002><FONT color=#0000ff face=Arial
size=2>5) "Again, it appears
you are equating MM with stops. " Not at all. My form
of "MM" includes: Stops, Long/Short/Cash position utilization, Position
Sizing, Stock/Sector/Industry selection, System selection, fund allocation,
portfolio management, Equity Feedback, anything really. It doesn't matter how
you do it and it doesn't have to come under a specific label. Use what
works.
<SPAN
class=250430113-26102002>
6)
Do you mean groups OF stocks? How
to optimize for MM on a AB group (or watch list) of stocks.
What are TTM
systems? Trade-The-Market systems as documented by Dimitris
on this list as well as in files. If you haven't tried them you owe it to
yourself to read up on it and try a few.
<SPAN
class=250430113-26102002>
7)
"Many MM examples use simplistic conditions to exaggerate
the effects of MM." Can you elaborate here? Examples
using single stocks, single systems, run down to ruin without intervention,
experiments using trading-naive subjects, random trading systems,
excluding even simple portfolio management, etc. etc. etc. All examples use
sophisticated MM procedures compared against "brainless" trading methods.
Anything will look good that way. They should compare it against trading
methodologies of equal stature. I attended seminars on the use of the MA() in
which they made it look like the HG using the same
approach.
<SPAN
class=250430113-26102002>
8)
"I really feel you have not given it anywhere near a
complete or scholarly enough consideration to enable you to reach a proper
conclusion or even to support your current conclusions." <FONT
color=#0000ff>I agree completely and i indicated this a number of times. But the
discussion raised points that would not have been covered after I'd been
brainwashed like you. It is like TA, you can really get sucked into
sophisticated chart analysis using the weirdest (sorry folks) graphing tools or
even the position of the moon (sorry again) while simpler methods work justas
well or better. Please don't react by starting a thread on the merits of
golden age TA... :-)
<SPAN
class=250430113-26102002>
My
most successful high performance systems only use a relatively simple smoothing
function, the stochastic formula, and (OF COURSE!) the AddToComposite().
<FONT
color=#0000ff>
Thanks
Al, great comments,
<SPAN
class=250430113-26102002>Herman.
<SPAN
class=250430113-26102002>
<SPAN
class=250430113-26102002> -----Original Message-----From:
Al Venosa [mailto:avcinci@xxxx]Sent: 25 October, 2002 9:06
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: Re: [amibroker]
Money Management (MM) - Thread Summary
<BLOCKQUOTE
>
Herman,
A few thoughts, if I may. First of all, the ideas expressed by Tharpare
not his per se. They were derived from interviewing numerous of the most
successful 'market wizards' over the last 15 years. They all shared a few
common traits, and the one trait that was common to all was MM. The systems
these successful traders have and still use are, indeed, high performance
systems. I don't know what you mean by high performance. It would be niceto
hear your definition of high performance. If you define high performance as
something that yields >100% ROI per year, no one does that consistently
year after year. As I said to you in one of my posts, soon you would own the
world with that kind of return. What Tharp teaches is that you can designany
type of trading system to yield any kind of ROI, but the higher the ROI, the
higher the dd's you must be willing to experience. Most sane people are simply
not psychologically equipped to withstand 60, 70, 80% dd's. I believe most
contributors to the AB forum would be very pleased making 15-20% per year
compounded annually consistently in any kind of market (up, dn, sideways). I
certainly would. Having personally experienced huge dd's myself as a buyer and
holder, not as a trader, has taught me the need to have stoplosses. Now,
stoplosses, although integral to good MM practices, are not the only thing
that encompass MM. They are only one small part of the whole picture. The
biggest part of MM is the objective methods that can be designed to enable you
to determine how much to invest per trade. In one of my posts, I asked you to
define what you meant by MM, but you never did. I'd really like to know
exactly what YOU mean by MM. Without a firm definition of terms, it is
difficult to have an intelligent discussion of a concept. Now, let me respond
to some of your conclusions:
1. "The need for MM increases with the amount of leveraging you use."
This may well be true with respect to stoplosses, but the need for MM applies
at all levels of leverage. MM controls your risk of ruin, your drawdowns,your
profitability, lots of things. Neither I nor anyone else on this forum have
scratched the surface with all the ways you can improve profitability using
innovative MM techniques. Here is but one simple example. If you are risking
1% of equity on each trade, and you begin making money to the point that your
equity has risen, say, 20%, you can begin, if you so choose, to start playing
with the market's money. So, if your equity were, say, $100 K and you are
risking $1 K per trade and suddenly you find your equity has grown to $120 K,
you can elect to still risk 1% of YOUR money (now $1200 per trade) plus, say,
5% of the market's money (the extra $20 K you have just made). So, now,
instead of risking $1200 per trade, you risk $1200 plus 5% of $20 K or $1K
more, or $2200). Now, your profitability is much higher than before. Why?
Because you are taking a bigger position but still only risking 1% of your
equity (plus 5% of the market's equity). You can increase this even further if
you want. At some point in the future, after you have attained, say, $150K of
equity, you can call this YOUR equity and return back to 1% max risk. Youthen
repeat the process as equity grows again. This is but one small way one can
increase one's profit potential with his system. There are many other ways.
Another is to use pyramiding. All of this and more is explained in Tharp's $80
Money Management Manual, and it is all part of MM. So, you see, MM is not
simply use of stops.
2. "MM will suck the life out of any high performance system." I strongly
disagree with this. All you have to do is follow the huge success of people
like John Henry, Bill Dunn, the market wizards in Schwager's book, any ofthe
Turtles and their successors, etc., all of whom have used MM techniques
successfully for many years. Reaching such a dire conclusion based solelyon
what you read and heard from us on the AB site is unfair and unscientific.
Don't take this personally, Herman. It's just an observation.
3. "Don't believe that if you have a marginal trading system MM willmake
you rich." No one that I recall ever said this. In fact, I myself admonished
that no amount of MM will make a negative expectancy system profitable. You
HAVE to have a positive expectancy system first, then allow MM to enhanceyour
profitability. Simply comparing a backtest without stoplosses with another
backtest that used stoplosses is not an objective, scientific way to evaluate
MM. In fact, I'm not even sure you can program and backtest the innovative
ways to use MM. Perhaps when TJ comes up with pyramiding, one will be able to
begin such testing. One thing you must keep in mind: expectancy is
expressed per dollar risked, so MM has no effect on expectancy sinceit
only determines how much to trade. A 2:1 expectancy does not change if the bet
size increases. MM determines bet size.
4. "Probability of profits and risks should be factored into trading
systems." Absolutely true. No question about it. Risk management is part of
MM!!
5. "Most of the protection provided by MM can be duplicated through good
system design and common sense portfolio management, and so without the
disastrous effect on profits due to the application of universal statistical
rules." Again, it appears you are equating MM with stops. That's only one
small part of MM. And, you appear to denegrate statistical rules, yet most of
the systems discussed on this and many other boards use statistical rulesfor
their system parameters. So, when do you suggest using statistical rules and
when not?
6. "I still do not know how to apply MM to groups or stocks or to TTM
systems." Do you mean groups OF stocks? What are TTM systems? You apply MM to
each trade the same way, and the amount you risk will vary with your equity.
Like I said before, I'm not sure if it is possible to backtest MM techniques
even with AB. I use AB to help me develop my system. When I trade, I willuse
MM techniques after I have developed confidence in the system with real
trades.
7. "Many MM examples use simplistic conditions to exaggerate the effects
of MM." Can you elaborate here? I'd like to know what you mean so I can
respond intelligently.
Herman, you said you will be reading Tharp's book in a couple of weeks.
Perhaps your views will change after you have given yourself enough of a
chance to truly understand what MM is all about. The discussion on this board,
although excellent, doesn't do justice to the concept in my estimation. You
posted some links on MM, and I have read most of the 10 lessons link. That
link consisted mostly of emails from traders, but there was a lot of excellent
discussion of MM that is valuable. Did you read and study all of it? You
should. It is worth the read. MM is indeed not outdated, as you explicitly
stated. I'm convinced (as strongly as you are not convinced) that MM can and
does improve your profitability.
Again, thanks for the provocative discussion on MM. I really feel you
have not given it anywhere near a complete or scholarly enough consideration
to enable you to reach a proper conclusion or even to support your current
conclusions. Good luck with your readings.
Al Venosa
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Herman van den
Bergen
To: <A
href=""
title=amibroker@xxxxxxxxxxxxxxx>Amibroker@xxxx Com
Sent: Friday, October 25, 2002 12:04
PM
Subject: [amibroker] Money Management
(MM) - Thread Summary
<SPAN
>A
personal review by Herman van den Bergen.
<SPAN
>October
– 2002
A sincere
thank you to all who participated!
This thread took place on <SPAN
>17 October, 2002 <SPAN
class=890574215-25102002>and started with my post “<SPAN
>Once again: Money Management”.
I collected all the posts in a word file (27 pages!) and read it several
times. Some of the examples were very convincing however in the end
they, except for some "personalized
versions", lacked practical
substance. Most were based on or were
similar to van Tharp’s examples. I have not read van Tharp’s books and
reports (but will in a few weeks) so consider my words in that context.
<SPAN
>Whenever somebody tells me this
or that works fantastic I turn skeptical, so it went with MM. If you want
limited risk: go with it! If you have developed a high performance trading
system, don’t use it: find a better way! Van Tharp’s style of MM has great
appeal to traders because it promises limited risk. Many readers are excited
that van Tharp can make a random system profitable – personally Ithink he
wishes he had never voiced that example.
For
van Tharp, Ralph Vince and others to perform experiments with basically
market-naïve people is deceiving.
Nobody on this list (I hope) is suggesting that you trade without planning,
without research, and without many hours of system development. If you do so
you will loose money, no doubt about it.
I have
been investigating MM only for a couple of weeks and while I agree it may
have lots of merit when trading margin or futures I am still not convinced
that van Tharp’s style of money management is the way to go for high
performance mechanical trading systems. I don’t think his style of MM was
designed for those systems, we are in a new <SPAN
class=890574215-25102002>era of system design, his ways are the old
ways. Markets and technology change.
I am saddened by the fact that quite a few system
developers are satisfied with low performance systems; perhaps they aremore
traders than system designers. I am not looking for the HG and I am not
chasing a mirage; however two years of testing have convinced me that it is
possible to design many different styles of high performance trading systems
– if you work hard at it.
Let me share with you what I learned/concluded from the
thread:
<LI class=MsoNormal
>Even if one doesn’t
strictly adhere to MM one should know about it.
<LI class=MsoNormal
>The need forMM
increases with the amount of leveraging you use.
<LI class=MsoNormal
>MM Will suckthe
life out of any high performance mechanical trading system
<LI class=MsoNormal
>Don’t believe that
if you have a marginal trading system using MM will make you rich.
<LI class=MsoNormal
>Probability of
profits and risks should be factored
into trading systems.
<LI class=MsoNormal
>Most of the
protection provided by MM can be duplicated through good system design and
common sense portfolio management, and
so without the disastrous effect on profits due to the application
of universal statistical rules.
<LI class=MsoNormal
>The greatestrisk
to traders is emotional trading, use a mechanical trading system if you
can, invest small amounts you can afford to loose, <SPAN
class=890574215-25102002>trade multiple systems, perhaps use
AT or have somebody else trade for you.
<LI class=MsoNormal
>Nobody has embedded
MM into a mechanical trading system, <SPAN
class=890574215-25102002>however it should.
<LI class=MsoNormal
><SPAN
class=890574215-25102002>I still do not know how to apply MM to groups or
stocks or to TTM systems
<LI class=MsoNormal
>Do not use MM to
compensate for weak system design
<LI class=MsoNormal
>Even when using MM
profits will increase when system performance goes up, <SPAN
class=890574215-25102002>do not use MM as an excuse to stop work onyour
trading systems
<LI class=MsoNormal
><SPAN
class=890574215-25102002>I still know of no way to evaluate or
backtest MM techniques
<LI class=MsoNormal
>Many MM examples
use simplistic conditions to exaggerate the effects of MM.
<LI class=MsoNormal
>Parameters like
Expectancy may have a place in stock and system screens
<LI class=MsoNormal
>One can Optimize
trading systems for probability based parameters, like probability of
profits, winners/losers, DDs, etc<SPAN
class=890574215-25102002>.
Here are some of the URLs and other sources of
information that were mentioned:
<DIV class=MsoNormal
>Van Tharp’s book
“Trade Your Way to
Financial Freedom”
<DIV class=MsoNormal
>Van Tharp’s “<SPAN
>Money Management
Report”<SPAN
>
<DIV class=MsoNormal
><SPAN
><SPAN
> <SPAN
><A
href=""><SPAN
>http://www.turtletrader.com/money.html
for a good discussion on MM<SPAN
><FONT
size=3><SPAN
class=890574215-25102002>.<SPAN
><A
href="">http://www.turtletrader.com/money5.html
<SPAN
>another
good MM article
<DIV class=MsoNormal
><SPAN
><A
href="">http://keplerweb.oeh.uni-linz.ac.at/trading/moneyMan.htm
10 Free MM lessons
<DIV class=MsoNormal
><SPAN
><A
href="">http://www.streetstories.com/vt_futures96.html
Interview With Van Tharp:
<DIV class=MsoNormal
><SPAN
><A
href="">www.iitm.com <SPAN
>to learn more about
MM
<DIV class=MsoNormal
><SPAN
><A
href="">http://www.travismorien.com/FAQ/gfallacy.htm<SPAN
> On the gambler's
fallacy
<DIV class=MsoNormal
><SPAN
>Fundamentals of Money ManagementPart
I<A
href=""><SPAN
>http://www.tsresearchgroup.com/print.php?lang=en&page=public&article=public_20020402010830
<DIV class=MsoNormal
><SPAN
>Fundamentals of Money ManagementPart
II<A
href=""><SPAN
>http://www.tsresearchgroup.com/print.php?lang=en&page=public&article=public_20020402010739
<DIV class=MsoNormal
><SPAN
>Fundamentals of Money ManagementPart
III<A
href=""><SPAN
>http://www.tsresearchgroup.com/print.php?lang=en&page=public&article=public_20020402010706
There were many excellent posts, I have a Word file if
you would like a copy send me an email with “Please email MMSummary.doc” and
I’ll send you a copy.
<SPAN
class=890574215-25102002>Thank you all for you marvelous
participation!<SPAN
class=890574215-25102002>Best regards,<FONT face=Arial
size=2><SPAN
class=890574215-25102002>HermanPost
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