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Steve:
Forgive me for changing the subject in this very fascinating debate, but
you mentioned someone trading hundreds of E-minis. My question is, since 1
E-mini is equivalent to 5 S&Ps, why doesn't he just trade S&Ps and reduce
his transaction costs 5-fold?
AV
Original Message:
-----------------
From: CedarCreekTrading kernish@xxxxxxxxxxx
Date: Thu, 30 Oct 2003 12:58:51 -0700
To: amibroker@xxxxxxxxxxxxxxx
Subject: [amibroker] "He done blew up...real good"
Mark,
I looked through my emails for the last year and came up with the following
message. After reading his book, I asked for opinions from my research
associates and here's a response from a large money manager (who really
trades hundreds of minis at a whack):
"I read "The Trading Game" last weekend, and I was NOT impressed.
First off, I find it remarkable that people can get so much attention
for the radical concept of position sizing. I mean, are there that
many people out there who don't understand that you'll make more
profits (assuming a positive expectation) if you trade multiple
contracts!? Jones talks like scaling your size up is a huge
revelation.
But ignoring that, I think his Fixed Ratio approach is bogus. IMO
his entire premise is flawed: he looks at the per-contract profit it
takes to move from 1 to 2 contracts, and he says that it should take
the same per-contract profit to move from X to X+1 contracts. I.e.
if you need $10k profit to move from 1 to 2 contracts, you should
need $10k profit **per contract** to move from 100 to 101. You'd
need $1M total profit to increase by 1 contract.
I think this is flawed for 2 reasons: first, it relies much too
heavily on the size of the contract. The entire leverage structure
he computes would be totally different for, say, $250 SP's vs. $500
SP's. But the big flaw is his use of additive growth instead of
percentage growth. Moving from 1 contract to 2 isn't equivalent to
moving from 100 to 101; it's like moving from 100 to 200! I think
simple fixed-fractional approaches handle the position sizing much
more logically.
What really honks me off, though, is the way he cooks the books to
make his approach look good. Fundamentally what he's doing is using
very high leverage when the account is small, and backing off as the
account gets big. This has the advantage that it gets the small
account off the ground & running quickly. But it also exposes you to
a lot more risk early on. He uses all kinds of examples to show how
the FR approach can take a $X per contract loss with a much lower
drawdown than FF -- but he constructs his examples so that drawdown
happens AFTER he's scaled back the leverage. He conveniently
neglects to mention that the FR approach would BANKRUPT you if that
same per-contract loss happened early on with higher leverage.
Add to that a host of logical and math errors, and I was SERIOUSLY
underwhelmed.
My advice would be to use a basic Fixed Fractional approach. Decide
what leverage works for you, taking into account your risk tolerance,
the Optimal F of your system (make sure you trade far UNDER the
"optimal" F value), etc, and just risk a constant percentage on each
trade. As your account grows, you may decide to back off on the
leverage a bit. You can do all that without the Fixed Ratio
complexities."
"Extensively tested"? Isn't that what Ryan did with his own account when
he blew it up? Oh, maybe he sell books on fixed ratio and then goes out
and trades with a different style. Either way, with or without FR, he did
"blow up". And as John Candy used to say on SCTV: "Wow, he blew up real
good."
Take care,
Steve
----- Original Message -----
From: MarkF2
To: amibroker@xxxxxxxxxxxxxxx
Sent: Thursday, October 30, 2003 11:57 AM
Subject: [amibroker] Re: Managing drawdowns (was % channels)
Steve,
See my post to Fred. I've *extensively* tested this stuff. I like
Van Tharp's material and that's what got me "turned on" to money
management and position sizing in the first place. But I've got to
tell you that my home brewed variation of Ryan's fixed ratio method
works better on my systems from a risk/reward standpoint than what
I've learned from Van Tharp. The criticisms I've seen of Jones' book
have all been anecdotal. I'd love to see a *quantitative* analysis to
back up one of these opinions. There's nothing subjective about this.
Regards,
Mark
--- In amibroker@xxxxxxxxxxxxxxx, "CedarCreekTrading" <kernish@xxxx>
wrote:
> Mark,
>
> Some of the best traders I know (running 10-plus million) hate this
book. They all seem to find logic flaws in some of the chapters (I
read it twice and have little or no opinion). Are you familiar with
Ryan's disastrous trading record? Ryan has spread some bad "juju" in
Colorado. For my money, Van Tharp lays it out a bit better than Ryan.
>
> Take care,
>
> Steve
> ----- Original Message -----
> From: MarkF2
> To: amibroker@xxxxxxxxxxxxxxx
> Sent: Thursday, October 30, 2003 10:43 AM
> Subject: [amibroker] Re: Managing drawdowns (was % channels)
>
>
> Hi Leo!
>
> Let me elaborate. Although I wouldn't put $.02 on a *simple*
> Martingale or anti-Martingale method of money management, I do
think
> that the latter is certainly viable while the former is not. How
to do
> better? I'd recommend reading The Trading Game by Ryan Jones *and
> then running simulations* of the tradeoff between equity growth
and
> drawdown for the various methods *for your trading systems*. I
> developed my personal favorites after reading this book but
everyone
> needs to look at their own curves from their own simulations for
> themselves to see what suits them best. This is a tedious
project and
> not much fun, but well worth the effort in my opinion. BTW, if
you
> look at the reviews of this book on amazon, there are some
*incredibly
> ignorant* ones by people who obviously didn't take the time to
dig in
> to the material and do their homework which to me, is running
> simulations on all of the methods. I have and trust me, lol,
there's
> good stuff in this book.
>
> Best Regards,
>
> Mark
>
> --- In amibroker@xxxxxxxxxxxxxxx, "leonardot19"
<leo.timmermans@xxxx>
> wrote:
> > Hi Mark,
> >
> > Which MM technique would you use than, can you give an example
> > please ?
> >
> > Kind regards
> > Leo
> >
> >
> > --- In amibroker@xxxxxxxxxxxxxxx, "MarkF2" <feierstein@xxxx>
wrote:
> > > Neither of these is a technique I'd put $.02 on, quite easily
> > > demonstrated by bootstrapping representative trades while
applying
> > > them. Every time I mention simulation everyones' eyes glaze
> over,
> > but
> > > if you're not using it for position sizing or money
management or
> > > whatever you want to call it, you're flying blind.
> > >
> > > --- In amibroker@xxxxxxxxxxxxxxx, "palsanand"
<palsanand@xxxx>
> > wrote:
> > > > 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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