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I just noticed today that Ulcer Performance Index (UPI) in AB is
better than Ulcer Index to sort for optimization, because there might
be a tie with Ulcer Index. The higher the UPI, the better. Ranking
based on Net Profit (default) may not be a good idea because it
ignores drawdowns...
rgds, Pal
--- In amibroker@xxxxxxxxxxxxxxx, "palsanand" <palsanand@xxxx> wrote:
> Sorting out the criteria for a coherent money management plan is a
> complex, detailed job. Using a spreadsheet to keep track of the
logic
> helps ensure nothing has been omitted.
>
> With a little planning, one can develop a logically sound money
> management system. Historically, too much emphasis has been placed
on
> the development of profitable entry and exit rules, whereas the
> determination of the proper number of contracts or shares to trade
> (Position Size) has been treated as a distant afterthought.
>
> Here are some Trader-Defined Criteria:
>
> Max # of Open Positions allowed: 7
> Max % of Closed Equity to risk/trade: 0.10
> Max % of Transaction Costs to anticipated profit: 0.20
> Max % Loss permitted/month: 0.05
> Max % to risk if closed equity drops 5%: 0.02
> Max % to risk if closed equity drops 10%: 0.01
> Max % to risk if closed equity drops 15%: 0.0075
> Max % to risk if closed equity drops > 15%: 0.0050
>
> An individualized money management algorithm (using a spreadsheet
> program such as Microsoft Excel) will control the equity growth of
> any positive-expectancy system as a direct function of using
correct
> position sizing. Risking too large a portion of trading capital per
> position will eventually cause even the most profitable trading
> system to fail.
>
> The second advantage to developing your own position-sizing
strategy
> is to preserve trading capital during periods of extended drawdown
or
> losing trades. This saves you the money to trade when things
finally
> turn around. Unfortunately, many traders inadvertently lose their
> hard-earned trading capital as a result of improper position
sizing.
> This becomes painfully obvious when they have risked too much
capital
> over an extended series of losing trades. -- Ray Overholser, O.D.,
> is a private trader in Gainesville, FL. He is completing a graduate
> business degree at the University of Florida, with the goal of
> opening a hedge fund based on his research in technical analysis
and
> money management. He plans to launch an online newsletter at
> www.WealthByStrategy.com. He can be reached by E-mail at
> stocktrader@xxxx
>
> A good risk index can be useful in the selection of stocks, funds,
> and trading systems. Here, then, is the ulcer index, why it is
> superior to the standard deviation statistic, and how it can be
used
> in a variety of personal investing or professional money management
> applications.
>
> What is risk, and how is it measured? Risk is commonly defined in
> terms of the volatility of an investment's total return or the
> volatility of the price. The standard deviation is a good measure
of
> volatility, since it measures the amount of variation around the
> average and is probably the most widely used measure of financial
> risk. But the standard deviation has two weaknesses for financial
> instruments. First, it measures the variation from the average in
> both the up (good) direction as well as the down (bad) direction.
> Second, the standard deviation does not distinguish between short
or
> long sequences of losses. Investors are only concerned about
downside
> risk (or the potential for losses), whereas upside changes or rapid
> increases in value create profits.
>
> The ulcer index uses only the retracements from the price peaks in
> the calculation. The standard deviation may still be the most
widely
> used because it has been around longer than other risk indices and
> most computer programs have the capability of calculating it.
> However, there is another measure of risk, superior to the standard
> deviation: the ulcer index.
>
> Peter G. Martin and Byron B. McCann are credited with the creation
of
> the ulcer index. They describe it in their 1989 book, The
Investor's
> Guide To Fidelity Funds. (To see the calculation for the ulcer
index,
> see the sidebar "The ulcer index.") In contrast to the standard
> deviation, the ulcer index has none of the aforementioned
weaknesses
> since it calculates retracement, which is the tendency for values
to
> fall from previous highs, by measuring the depth of the drop and
the
> time that it takes the performance measure to recover to the
original
> level.
>
> Another advantage is that the ulcer index doesn't measure downside
> changes from the average but from the previous high. The
measurement
> includes every drop in performance in the period being studied.
Funds
> or trading systems with high ulcer index readings should be avoided
> unless they have such exceptionally high returns that the risks are
> justified. In addition, dividing returns by the ulcer index
produces
> a useful risk-adjusted return measurement. -- Gary Elsner, Ph.D.,
is
> editor of the mutual fund timing newsletter Achieve Profits
(Website
> http://www.AchieveProfits.com). He may be reached via E-mail at
> gelsner@xxxx
>
> rgds, Pal
>
>
>
>
>
>
> --- In amibroker@xxxxxxxxxxxxxxx, "palsanand" <palsanand@xxxx>
wrote:
> > Hi All,
> >
> > I am using the following formula for position size:
> >
> > Available_Equity = (0.1 * Usable_Margin);
> >
> > Position_Size = Available_Equity/(Max_Drawdown_Percentage);
> >
> > Typically, you can determine Max_Drawdown_Percentage using MCS
> (Monte
> > Carlo Simulations)
> >
> > For e.g, if Usable_Margin is $5000, then
> >
> > Available_Equity = 0.1 * 5000 = $500 and
> > if Max_Drawdown_Percentage = 20% = 0.20
> >
> > Then, Position_Size = $500/0.20 = $2500
> >
> > So if you have 5 underlying instruments you want to trade, you
> would
> > invest $500 per instrument getting instant diversification.
> >
> > Regarding the use of volatility in position sizing, I find that
it
> is
> > automatically taken care of depending on at what price you enter
> the
> > market relative to the current price, i.e, at MOO or at support
or
> > resistance.
> >
> > For e.g, if you have a long signal but the current price is below
> > MOO, then enter at support, else at MOO Limit Order(current price
>
> > MOO) and similarly if you have a short signal but the current
price
> > is above MOO, then enter at resistance, else enter at MOO Limit
> Order
> > (current price < MOO), with the assumption that MOO is often the
> best
> > price to enter and that the instrument opens at the same price
> where
> > it closed the previous session which is the case atleast for the
> > FOREX market.
> >
> > Any comments/constructive criticisms appreciated.
> >
> > rgds, Pal
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