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Fred,
I think one of the sensible things to
achieve with a backtest is a conservative result. If you allow compounding to
run unchecked then pretty soon you find the system is casually putting
$1,000,000 or so into a single position. Fixed position size doesn't necessarily
reflect the way any of us invest, but it does show whether the system produces
consistent winners and is IMO a much better basis for comparison between
systems.
As a, contrived,
example:
System A produces a steady 20% gain
on every trade. System B produces a steady 15% gain on every trade except the
last one which makes 80% gain. With compounding system B looks so much better,
but I for one would rather trade system A going forward. The effect of one
fortuitous trade can be overwhelming when compounding occurs (depending on
when it occurs).
Attached are the results of one
simple system traded on one index, initial equity is $10,000 in each case. Shown
are results for a)No positionsize, b)fixed positionsize of £1,000, c)fixed
positionsize of £10,000, d)positionsize of 10%.
I'm particularly interested in the
Expectancy. Is this a good measure of the quality of a system? Most of the other
parameters are 'adjustable' simply by changing positionsize. Expectancy seems to
cut through some of the fog generated.
Steve
I am curious if the methodology of limiting position sizes to fixed
dollar amounts is something you actually do. The construct of
PositionSize = Percent as opposed to DollarAmount is also a feature in
AB which for those who trade portfolios of stocks is one I understand.
What I don't follow about using PositionSize = DollarAmount is for example
once your portfolio eventually doubles in size you'll only be trading 50% of
it won't you ? Another AB proviso here is that it doesn't seem to
limit the number of simultaneous trades one can make regardless of how one
sizes PositionSize relative to InitialEquity. By that I mean if I have
10 tradable things in my group and I specify that PositionSize = 50% of
equity, it will still allow me to have 10 open positions, same thing if
I specify my initial equity is $500k and PositionSize = $250K. Again
neither of these conditions is realistic.
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