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[amibroker] Re: Managing drawdowns (was % channels)



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In my view, all systems are trend following:  you catch the trend 
(which is your friend but not when it is going to end), when it is 
just starting (Trend-change pullback or Trend-change breakout 
Reversals) or you catch it when it is already in full swing 
(Continuation of previous Trend systems which some call Breakout) or 
try to catch the trend on a pullback for an existing uptrend or a 
rally for an existing downtrend...

rgds, Pal
--- In amibroker@xxxxxxxxxxxxxxx, "Al Venosa" <advenosa@xxxx> wrote:
> 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
>   ----- Original Message ----- 
>   From: palsanand 
>   To: 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 profits
> 
>   So 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 ...
>   > 
>   > 
>   
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:
>   > > > > > > > > > > > > 
>   > > > > > > > > > > > > 
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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