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money management is an interesting topic. Is anyone using "Optimal f"
or other ideas by Ralph Vince? It doesn't make too much sense to me
that once you have a winning system one needs to calculate the
optimal fraction for each wager so I never looked at it in detail.
Interesting though is the example of the Kelly method. The problem
is: what fraction of your account should you use for each bet / wager
to maximize your profits as fast as possible when the chance to win
is 50%. Further constraints: a winning trade gives you a 200% return
and a losing trade gives a 100% loss. The answer is: 0.25 (this you
can calculate using the Kelly formula but it is easy to simulate the
situation with a little program).
Then I had the idea to treat my trades as "discrete" bets / wagers in
order to find an optimal fraction of the account or just to find out
if a system could be profitable. I had the idea to use 1/100 of my
account for each bet and take a profit quickly at 2% and use a
stoploss of 100%. In situations like this your system needs to be
pretty good. But the higher your stoploss the greater the chances are
that one day it will make a profit. And choosing the entry point
carefully, chances are pretty good you will be able to sell it with a
2% profit.
I like the idea of exposing just a small amount of the account to a
single trade and also to take a profit quickly.
I must say I didn't finish working on these ideas yet in detail....
since I am in the process of switching to Amibroker. But I would like
to read about other ideas about "money management"
rgds, Ed
--- In amibroker@xxxxxxxxxxxxxxx, "Howard Bandy" <howardbandy@xxxx>
wrote:
> Hi Guys -
>
>
>
> Remember that there is a limit to the amount of doubling up that
can be done
> when using Martingale money management. One of the reasons casinos
say $5
> minimum $500 maximum is so that Martingales hit the $500 limit and
cannot
> recover the original $5 bet. Our own limits are our trading
accounts. Do
> the arithmetic and see how many consecutive losses it takes to hit
you own
> person limit. Then look at the summary of your trading system and
compute
> the probability that you will have that many consecutive losses.
>
>
>
> Another reason to be wary of Martingale systems is that they
require ever
> larger bets as successive losing trades occur. One of the methods
many of
> us use to determine whether a trading system is broken is by
looking at the
> sequence of trades and / or the equity curve. We Decrease trade
size or
> stop using a system when it is taking serious losses. Martingale
systems
> require Increasing the size of the bet / trade when losing.
>
>
>
> Howard
>
>
>
> -----Original Message-----
> From: palsanand [mailto:palsanand@x...]
> Sent: Tuesday, October 28, 2003 9:23 PM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: [amibroker] Re: Managing drawdowns (was % channels)
>
>
>
> Dave,
>
> There is a good link I came across:
>
> http://www.arbtrading.com/moneymanagement.htm
>
> I like the Anti-Martingale and Martingale (doubling up) systems to
> manage drawdowns. I would use a combination of these systems, so
> that when I'm losing money I would use Martingale system and when
I'm
> finally making money with the final position, I would be
> automatically switched over to Anti-Martingale system, but may most
> likely exit losing positions at break-even price. I would double
up
> only when I get stronger signals verfied by OB/OS conditions in the
> subsequent session, so that my system of using 3BSMA for the next
> session is temporarily suspended. It does take usually about 3
days
> for a trend-change to fully develop. I would not double up beyond
3
> consecutive days, because if you are wrong 4 times in a row, most
> likely the market is starting a new trend in the opposite direction
> and will go against you and so better to exit. I have done this
many
> times, as I find it impossible to optimize my entry points. But
the
> safest course is to wait for the actual Trend-change signal
verified
> by OB/OS conditions, then you may never have to double up but you
may
> miss some signals. This may sound crazy for some but it does seem
to
> work for me especially with the AFL pivot points to predict the
Next
> bar approximate High/Low of Day and appropriate position sizing.
>
> Regarding whether your system has stopped working or not, it is
hard
> to say. I would try to improve the system performance using a
system
> of filters, stops and walkforward testing. Easier said than done...
>
> Regards,
>
> Pal
>
>
> --- In amibroker@xxxxxxxxxxxxxxx, "Dave Merrill" <dmerrill@xxxx>
> wrote:
> > I've been wondering, could I trade a system with 50% average gain
> per year
> > since '95, and max system drawdown of 40-50%. even if I've seen
> that in
> > backtests beforehand, could I really look at that kind of drop in
> my account
> > and still believe I was doing the right thing? or would I think
> it'd finally
> > just stopped working? and if I am able to ignore that much
> drawdown, how
> > would I know if it really *had* stopped working?
> >
> > by the half-the-gain-twice-the-drawdown tolerability rule, this
is a
> > non-starter.
> >
> > dave
> > Defense ... Yep or as I've said it's not what you make, it's
what
> you
> > keep. DD's are killers from lots of aspects not just in terms
of
> > what they do to your account balance but also what they do to
ones
> > ability psycologically to trade and stay with systems that do
> work.
>
>
>
>
>
>
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