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Pal:
Martingale betting will kill you regardless of your W/L ratio. You
mentioned trend-following systems. Such systems notoriously have a winning
percentage less than 50%, usually around 40-45%. So, when you have a moderately
large losing percentage (55 to 60% or more), the probability of your
experiencing 5 or 6 or 7 losses in a row is moderately high (0.6^6 = 4.7%). It
makes absolutely no difference what your W/L ratio is. It could be 10:1. But if
you double your bet size every time you lose, you lose big time if you don't get
that one big 10x win inbetween. Conversely, it makes eminent sense to increase
your bet size as you win. After all, you can look at it as betting the market's
money rather than your own. If you continue to keep your risk percentage
constant but increase the percentage of profits you risk on each trade,
your winnings will compound enormously. In other words, risk 1% of your capital
on all bets but if your profits increase by, say, 10%, risk 5% of the profits
plus your normal 1% of current capital. You'll make big money without increasing
your real risk. And if you lose, you LOWER your bet size, not raise it. That
way, you stay in the game in case you experience a run of losses.
Al Venosa
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
palsanand
To: <A title=amibroker@xxxxxxxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Thursday, October 30, 2003 6:35
PM
Subject: [amibroker] Re: Managing
drawdowns (was % channels)
Thanks for link. Something interesting mentioned
there:All the multitude of money management algorithms may be divided
in two principal classes: martingale and antimartingale.
Martingale methods state that the risk should increase as the capital
decreases. These methods are popular with traders trying to extract
profit from a series of losses or break-even trades.Let us review
an application of martingale in roulette. We bet 1$ on a color and every
time we lose, we double the bet. Next time after we win, we start at 1$
again. If we lose 10 times in a row, which may happen with a probability
of (19/37)^10 or 0,13%, we'll have to bet $1024 to win $1. Since in such a
case the expected profit/risk ratio is disastrously low, it is often
supposed that martingale methods may not be used in trading. But, one
should keep in mind that in popular trend-following methods:1)
profits are usually 2-3 times larger than losses 2) series of small
losses or break-even trades are typically interspersed with large
profitsSo martingale methods in our opinion deserve a serious
study.I found this to be very true. Typically my trades have
either a series of small losses or more commonly break-even trades
interspersed with hugh gains which dwarfs these series of small
losses or break-even trades, but I use martingale method only very
rarely, i.e, only when the nature of the signal warrants
it....rgds, Pal--- In amibroker@xxxxxxxxxxxxxxx, "Fred"
<fctonetti@xxxx> wrote:> For those who have an interest in a
variety of MM techniques here's a > short course in a lot of what's
out there ...> > <A
href="">http://www.tsresearchgroup.com/en/articles/public_20020402010706.php
> > --- In amibroker@xxxxxxxxxxxxxxx, "Fred"
<fctonetti@xxxx> wrote:> > Nice try ... As far as what trading
system he used and whether or > not > > it was viable, how
would I know. As far as what MM techniques he > > used, again
how would I know except for the fact that it seems to > say >
> one of two things, either his stuff doesn't work as demonstrated in
> > his book or he didn't think well enough of it to use it as
opposed > to > > using something else. As far as
your other reference goes, your > > either part of that group in
which case you should have understood > > the reply I made and
it should have made some sense or you aren't > in > > which
case you don't have a clue as to what you are referring to.> >
> > --- In amibroker@xxxxxxxxxxxxxxx, "MarkF2"
<feierstein@xxxx> wrote:> > > "LOL, right ..."?
What simulation software did you use? No > > answer? >
> > I didn't think I'd get one. You don't know what you're talking
> > about> > > unless you've run extensive MCS on these
methods with numerous > > systems> > > and compared
them side by side. I've tested Van Tharp's stuff and> >
> would agree that it works. But there's stuff in Jones' book
that> > > produces better risk/reward curves. BTW, what
he did with his own> > > account (assuming what you say is
true) is irrelevant. How do you> > > *know* that he did
it "using his own methods?" Did he have a > viable> >
> trading system to begin with? Did he follow it? If so, which
> money> > > management method from his book did he use
and did he follow > that? > > > Your humble opinion,
lol? This from the guy who banned Tomasz > from> > >
his group, lol! Look Fred, if you've got nothing better to do >
than> > > sit there and try to start a flame war, please do it
with someone> > > else. Because you simply don't know
what you're talking about on> > > this. Have a great
day.> > > > > > > > > --- In
amibroker@xxxxxxxxxxxxxxx, "Fred" <fctonetti@xxxx> wrote:> >
> > LOL, right ...> > > > > > > > IMHO
Van K. Tharp's writings on this topic are more on target.> > >
> > > > > And in all honesty I'm not surprised that Jones
traded his own> > > account> > > > (s) into 90+%
DD's using his own mehtods.> > > > > > > >
> > > > --- In amibroker@xxxxxxxxxxxxxxx, "MarkF2"
<feierstein@xxxx> > > wrote:> > > > > Well
you didn't do it correctly. What simulation software did>
> > you > > > > use?> > > > >
> > > > > --- In amibroker@xxxxxxxxxxxxxxx, "Fred"
<fctonetti@xxxx> > wrote:> > > > > > Yes I
have which is why I said I must be one of the ignorant> > >
ones.> > > > > > > > > > > > ---
In amibroker@xxxxxxxxxxxxxxx, "MarkF2" > <feierstein@xxxx>
> > > > wrote:> > > > > > > Have you
read and tested the stuff in his book, or are you> > > just
> > > > > > making> > > > > > >
a typically provocative comment?> > > > > > >
> > > > > > > --- In amibroker@xxxxxxxxxxxxxxx,
"Fred" <fctonetti@xxxx>> > > wrote:> > >
> > > > > Ryan Jones ? OMG ... I must be one of the ignorant
ones.> > > > > > > > > > > >
> > > > --- In amibroker@xxxxxxxxxxxxxxx, "MarkF2"> >
> <feierstein@xxxx> > > > > > > wrote:>
> > > > > > > > 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:> > > > > > > > > > > >
> > > > > > > > > > > > <A
href="">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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