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I'd REALLY like to see the MM discussions continue, so I wanted to
provide my 2 cents (& hopefully keep Herman & others
interested…). Maybe this is too simplistic, but I think of MM in
terms of 2 separate components, position sizing & trailing stop-based
exits.
Position sizing:
- # of shares= the minimum of [available $equity/$price OR
$risk/$volatility]
- $volatility is stock specific (ie. exponential moving average
of triple the 15-day ATR… related to trailing stops below)
- $risk is a function of two parameters: %risk per trade (2%)
and total risk of current equity (10%)
- so, the $risk for the current trade is the minimum of [2% OR
(10%-total current risk on open trades)]
- total current risk on open trades = the minimum of [zero, or
ENTRY PRICE – CURRENT STOP across all open trades]… in other
words, if the trailing stop is above the entry price on any given
open trade (for long trades), the risk is zero. Short trades work
the same way in the other direction.
Trailing stops:
- set a trailing stop that is the EMA of triple the 15-day
Average True Range, or any other $-based volatility measure
you're comfortable with (like standard deviation bands)
- Note that this is just a risk stop… trades might be exited
earlier depending on your particular system.
In practice a system with these parameters will usually result in an
average of 5 open trades (10/2) assuming you have enough equity to
take the trades as they come. Also, the more volatile the stocks you
track, the smaller the position sizes will be so the more open trades
you might have at one time. This system also works better with
stocks that are relatively uncorrelated with each other to ensure
you're always in the market, which is why I think commodity
traders use this type of system.
The challenge with AmiBroker is figuring out:
1) how to calculate the total current risk given all open trades
and the currently available equity, which I think can be coded using
the equity & ATC functions but I haven't figured it out yet
(I'm still digesting Herman's ATC tutorial!)
2) which trades to take when you get lots of buy signals at the
same time
The rest of the system is "just" the entry rules, which this
forum is REALLY good at. In general I find that implementing these
kinds of MM rules will definitely decrease the overall %return in
backtesting, but I think the underlying objective is to make any
given system much more robust by eliminating as much risk as
possible. I'd really like to hear feedback & see if anyone is
interested in trying to figure out the afl code to implement it.
Cheers!
Chris.
--- In amibroker@xxxx, "Avcinci" <avcinci@xxxx> wrote:
> I told myself I would not continue this discussion any more, but I
just gotta respond. Mark is 100% correct, Herman. And MM is not
dependent on any type of trading methodology. It doesn't matter what
type of system you use. You are simply managing how much to invest. I
don't know what resources you think you need to apply MM to trading,
but lots of people do it who are not millionaires or associated with
huge trading firms. I think all you need is your own intellect and
imagination and some knowledge of the fundamentals. As for the lack
of code submitted by anyone on this board, the reason is that the
version of AB incorporating MM is not available yet. When TJ releases
it, I'm certain that lots of great code by the many ingenious
participants on this forum will come forth. Meanwhile, you still have
available AB's position sizing algorithm to allow you to start
practicing it. That's all. I'm done.
>
> Best regards,
>
> AV :-))
> ----- Original Message -----
> From: Herman van den Bergen
> To: amibroker@xxxx
> Sent: Saturday, November 02, 2002 5:27 AM
> Subject: RE: [amibroker] Re: Dynamic Money Management
>
>
> Hello Mark,
>
> Thanks for trying to help me. I am just being practical. I am not
saying that MM doesn't work for certain trading methodologies I just
said I that I am making zero progress trying to apply it to my type
of systems and that there is no indication that I would make progress
any time soon even if I spend a lot more time on it. I do not have
resources like some of the large investment companies who have
managed to apply Tharp's MM successfully; my time and resources are
limited.
>
> If nobody out of a 1000 AB users can crank out some basic MM code
that works than certainly I will not be able to do it either. When
you have some working MM code I'd love to hear from you. :-) My
decision is to wait for others to come forward with more concrete
material or for Tomasz to implement MM in AB.
>
> MM might well be another type of unattainable HG for many.
>
> Best regards,
>
> Herman.
>
>
>
> > -----Original Message-----
> > From: MarkF2 [mailto:feierstein@x...]
> > Sent: 01 November, 2002 12:56 PM
> > To: amibroker@xxxx
> > Subject: [amibroker] Re: Dynamic Money Management
> >
> >
> > Hi Herman- Not trying to start an argument, but feel compelled
to
> > comment because you could not be more wrong. MM is incredibly
> > important and DOES give rock-solid, tangible results. Also,
much of
> > Tharp's book is NOT irrelevant to mechanical traders. It's
clear to
> > me that you just don't understand it. I remember you wrote
something
> > similar about a technique in an article by William Eckhardt,
one of
> > the greatest traders of all time, because you hadn't taken the
time to
> > grasp his concept, either.
> >
> > I offer this as constructive criticism and urge you and anyone
else
> > who has given up on MM to go back and study it until you do get
it.
> > It's not fun and it's certainly not as sexy as developing new
> > indicators. But, IMHO, it's the boring stuff and the details
most
> > people overlook that will make you money trading.
Unfortunately, that
> > takes a lot of time and effort. Thomas Edison once
said: "Opportunity
> > is missed by most people because it is dressed in overalls and
looks
> > like work." Think about it.
> >
> > Best Regards,
> >
> > Mark
> >
> >
> > --- In amibroker@xxxx, "Herman van den Bergen" <psytek@xxxx>
wrote:
> > > Thanks Rick,
> > >
> > > Enough time on MM, I stuck it out way too long. I am going
back
> > > to my other work where I am getting more tangible results.
> > >
> > > I am disappointed about all the hoopla about MM (it sounded
like
> > > the HG of MM) that hasn't resulted in any practical and
> > > verifiable code whatsoever. Much of Tharp's book deals with
> > > issues that are irrelevant to the true mechanical trader,
imho he
> > > is inconsistent in his method and presentation. He blends the
> > > most basic stuff with advanced stuff which I find very
> > > distracting. Book stuffing? But perhaps I am just not smart
> > > enough
> > >
> > >
> > > If anybody ever develops some practical afl code or has a
> > > complete an applied case with tangible results, not just
words, I
> > > would appreciate you sharing it.
> > >
> > > happy trading,
> > > Herman.
> > > -----Original Message-----
> > > From: Rick Parsons [mailto:RickParsons@x...]
> > > Sent: 31 October, 2002 10:49 AM
> > > To: amibroker@xxxx
> > > Subject: RE: [amibroker] Re: Dynamic Money Management
> > >
> > >
> > > Herman,
> > > Your formula listed at the bottom of the chart may be
outdated.
> > > Did you see Al's post on R multiples and how Expectancy
changes
> > > as equity changes?
> > >
> > > Rick
> > > -----Original Message-----
> > > From: Herman van den Bergen [mailto:psytek@x...]
> > > Sent: Thursday, October 31, 2002 1:49 PM
> > > To: amibroker@xxxx
> > > Subject: RE: [amibroker] Re: Dynamic Money Management
> > >
> > >
> > > Hi Rick, glad to see somebody else struggle through
this :-)
> > > we should compare notes someday.
> > >
> > > I am curious: what is you typical trading system like,
short
> > > term (days) or long term (months)?
> > >
> > > Rick, Van Tharp talks about Expectancy as if it were a
stable
> > > parameter which is certainly not the case for short term
trading
> > > systems (if my formula is correct). The Expectancy trends vary
> > > very similar to my Equity charts - as expected, so perhaps
both
> > > can be used for equal purposes. Van Tharp does not seem to
> > > consider that many systems fade in and out of performance and
> > > that a good trading composite system would dynamically switch
> > > systems (at best people only seem to switch stocks) to take
> > > advantage of high performance periods for the different
systems.
> > >
> > >
> > > Expectation = ( 1 + AveWinTrade/abs(AveLosTrade)) *
> > > PercentWinners - 1;
> > >
> > > Best regards,
> > > Herman
> > >
> > > -----Original Message-----
> > > From: Rick Parsons [mailto:RickParsons@x...]
> > > Sent: 30 October, 2002 7:43 PM
> > > To: amibroker@xxxx
> > > Subject: RE: [amibroker] Re: Dynamic Money Management
> > >
> > >
> > > >>long enough to earn your EXPECTANCY returns<<
> > >
> > > I am in the middle of Tharp's book, Trade Your Way to
> > > Financial Freedom, and just finished the chapter 6 on
Expectancy.
> > > The idea of expectancy is an excellent way to pick the "best"
> > > system.
> > >
> > > However if one wants to calculate Expectancy the way
Tharp
> > > does, it appears to be VERY cumbersome when one has to group
> > > trades into profit ranges then calculate each group
separately to
> > > get the overall expectancy number. (See pages 149 - 158)
> > >
> > > So I would imagine if one wants all the MM and Dynamic
> > > Portfolio features, Amibroker should first calculate
expectancy
> > > on each system to make sure we have a positive expectancy
system.
> > >
> > > Comments?
> > >
> > > Rick
> > > -----Original Message-----
> > > From: tchan95014 [mailto:tchan95014@x...]
> > > Sent: Wednesday, October 30, 2002 5:02 PM
> > > To: amibroker@xxxx
> > > Subject: [amibroker] Re: Dynamic Money Management
> > >
> > >
> > > I completely agree with the quoted message.
> > >
> > > TR is flexible enough to allow for almost any (risk)
> > > ideas you can
> > > think of to do the position sizing: newrisk,
volatility,
> > > margin,
> > > market activities, group risk, group heat, portfolio
risk
> > > / heat...
> > > and yes, the portfolio level position sizing is the
best
> > > feature. You
> > > can even combine different systems each with different
> > > portfolio. It
> > > is a DOS software but it is powerful.
> > >
> > > Money management (or rather more accurately, position
> > > sizing or bet
> > > sizing) is an area not very often discussed and not
often
> > > appreciated.
> > >
> > > I have posted some time ago, you can get some very
> > > detailed info from
> > > TradingRecipes.com as well as traderclub.com by
searching
> > > on "Mark
> > > Johnson"
> > >
> > > This gentleman was kind enough to post many of the
ACTUAL
> > > works he
> > > put in using TR.
> > > 1) He offered right there a very simple long term
> > > trend following
> > > system that works for FREE.
> > > 2) He tested it using 1-contract with the worst
> > > possible fills you
> > > can get
> > > 3) He test it using regular 1-contract test
> > > 4) He then tested it using TR with position sizing
> > > with a
> > > portfolio of more than 10 or 15 futures contracts (You
> > > even get the
> > > TR code for FREE too, it is so easy you can learn by
> > > reading it and
> > > understand the logic behind it.)
> > > 5) He tested them over 10 or 20 years of history
data.
> > >
> > > It is an eye opening experience you do not want to
> > > miss.
> > >
> > > He also listed his own trading results from actually
> > > following a
> > > vendor system for 3 or 4 years, most people would
agree
> > > it was
> > > excellent results.
> > >
> > > Go to both sites mentioned above and read as much as
you
> > > can. If you
> > > are interested in this subject, I have not found a
better
> > > place for
> > > education. All others only talk (including Tharp,
> > > although I have to
> > > admit his book is OK), but you see hard numbers here.
> > >
> > > While we are searching for a Holy grail system
spending
> > > endless time
> > > there, position sizing might offer a much easier path
> > > because it
> > > optimizes the profit while controls the risk of your
> > > choice, you know
> > > you can live long enough to earn your EXPECTANCY
returns.
> > >
> > > Wealth Lab is another software that claimed to have
this
> > > capability
> > > but again is never actually verified to be correct.
> > > (There was a long
> > > debate, discussion and even tests on the trader club
> > > board about this
> > > but was never actually confirmed whether it is working
> > > correctly.)
> > >
> > > TR will cost you > $2000 while Athena, last heard,
will
> > > cost you >
> > > $40000 (that is right!) They were originated from the
> > > same idea and
> > > might even be from the same group of persons (NOT
Tharp
> > > though)
> > >
> > > I think, AB even with its current capability is very
> > > close to be able
> > > to do the portfolio level position sizing already.
(with
> > > this
> > > AddToComposit() for now. Do not quote me, it just came
> > > out of my
> > > head.) I think Tomasz can do it in a very short time,
the
> > > only issue
> > > is to test it. It takes time to provide all the
> > > flexibility and iron
> > > out all the bugs, it is a big challenge.
> > >
> > > With current AB structure,I think it has paved ways
for
> > > much more
> > > flexibility than TR can ever provide. Monte Carlo,
2/3D
> > > surface chart
> > > built in, any taker? ;-)
> > >
> > > Bob from TR has promised a window version for years,
but
> > > nothing has
> > > come out yet.
> > >
> > >
> > > Thomas
> > >
> > >
> > >
> > > --- In amibroker@xxxx, "Al Venosa" <avcinci@xxxx>
wrote:
> > > > Tomasz:
> > > >
> > > > Yesterday, I posted a message on Van Tharp's forum
> > > about your plans
> > > > to incorporate innovative money management and
> > > pyramiding
> > > techniques
> > > > in a future version of AB. Below is a response from
a
> > > user of
> > > Trading
> > > > Recipes, who claims that TR is the only software
that
> > > handles MM
> > > > corrrectly. Here is what he said:
> > > >
> > > > "It DOES position sizing. the RIGHT way. I own the
> > > program and it
> > > is
> > > > GREAT. It took me about 5 minutes to get over the
fact
> > > that it is
> > > > still a DOS based app. But it's really the ONLY tool
> > > that does it
> > > the
> > > > correct way.
> > > >
> > > > I talked to AmiBroker about 6 months ago, and they
told
> > > me the same
> > > > thing. Plus once they do release the program with
> > > position sizing,
> > > it
> > > > still has to be proven that they have done it right.
> > > >
> > > > There are three other companies that I know have
that
> > > have tried to
> > > > do position sizing. Two of them got it wrong.
> > > www.rinasystems.com
> > > and
> > > > www.bhld.com
> > > >
> > > > The third is the athena program that is mentioned in
> > > Van's book. I
> > > > haven't ever had the privilege of playing with that
> > > program, but I
> > > > believe I read somewhere that it used output files
from
> > > trade
> > > > station. So, it would also fall into the category
of a
> > > program that
> > > > isn't truely implementing position sizing at the
> > > portfolio level
> > > like
> > > > Trading Recipes does."
> > > >
> > > > To explain what he meant by doing it 'the right
way',
> > > here is what
> > > he
> > > > said:
> > > >
> > > > "TRADING RECIPES' approach lets you combine trading
> > > signals and
> > > trade
> > > > sizing strategies into simulations which exactly
mimic
> > > the way you
> > > > would trade in real time. A core feature, which
sets it
> > > apart from
> > > > all other "money management" (or backtesting)
software,
> > > is its
> > > > ability to perform dynamic money management (DMM)
and
> > > risk control
> > > at
> > > > the portfolio level. With DMM, position sizes are
> > > determined with
> > > > full knowledge of what's going on at the portfolio
> > > level at the
> > > > moment the sizing decision is made. Just like you
do in
> > > reality.
> > > > Other software packages simply sum individual
> > > pre-calculated equity
> > > > curves. This way, position sizes are calculated
with no
> > > knowledge
> > > of
> > > > what the current portfolio conditions are at the
> > > crucial moment
> > > when
> > > > a position sizing decision is to be made. This is
not
> > > how you would
> > > > make decisions in reality and therefore such
> > > simulations offer no
> > > > useful information to the trader. DMM avoids this
> > > pitfall."
> > > >
> > > > TJ, will your approach be able to do DMM as
described
> > > above?
> > > > Personally, I have no desire to use any program
based
> > > on DOS. I
> > > think
> > > > the position sizing algorithm now included in AB
does
> > > almost what
> > > > this guy describes except for scaling in and out of
> > > trades and
> > > basing
> > > > one's decisions on the value of the entire
portfolio of
> > > multiple
> > > > stocks rather than a portfolio of one stock.
> > > >
> > > > Al V.
> > >
> > >
> > >
> > > Post AmiQuote-related messages ONLY to:
> > > amiquote@xxxx
> > > (Web page:
> > > http://groups.yahoo.com/group/amiquote/messages/)
> > >
> > > Check group FAQ at:
> > > http://groups.yahoo.com/group/amibroker/files/groupfaq.html
> > >
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> > >
> > >
> > >
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> > > amiquote@xxxx
> > > (Web page:
> > > http://groups.yahoo.com/group/amiquote/messages/)
> > >
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> > >
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