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Hi kris45mar,
Monday, March 13, 2006, 11:35:06 PM, you wrote:
k> b. When the Equity is above the MA, then take the signals.
k> c. when the equity curve falls below its MA, then either.
k> i. stop trading that system until such time as the curve goes back above the MA.
k> ii. or severely reduce position size.
k> iii. and/or swap over to another system that is now above its MA.
You will get various opinions on this, however I think it really
boils down to just how logical you suspect your system methodology
is, and whether you suspect it is actually and finally being
arbitraged out of existence.
If the system has worked for several business cycles in various
market modes, and has never really gotten into serious trouble -- in
other words, it's a system you can trade -- then it would seem to me,
and indeed is what I do, that the time to be more careful is when
equity has been running well above the MA for some rather lengthy
period of time. I'm inclined to bump *up* position size a little bit
when I start experiencing a losing streak -- in other words when I
get mean reversion or worse of the equity curve. I would certainly
not stop trading when that happens. I think your gut feeling is
exactly opposite of what you should do.
The sharpest gains and nicest times you are likely to ever have are
when equity is making the swing from below average to above average.
This is much more fun than the opposite, and you are going to
experience both. So why would you consider stopping trading when
equity dips below average? Immediately, you would then be preparing
to cheat yourself out of your best performing part of the cycle, and
you would be ready to embrace the worst cycle segment of your system:
when equity moves from above average to below average.
In the end, it all boils down to confidence. You either have a
viable system, or you don't. If you have one, follow it. If you
can't stand the drawdowns ... IMHO, you don't have a viable system,
and probably should not be trading it. No one should trade any
system that has drawdowns they cannot stomach, and stomach
comfortably, probably max system percentage drawdown times two, maybe
times 2.5 or three.
But if you really do have a system, take every signal. Period. If you
want to "play" your system a little bit, consider something like
*lightening* position size -- slightly -- when equity has been
running above average for some period of time, and *increasing* it
... again, slightly ... when equity has been running below the line
for some time. You have to judge when these conditions might apply
after carefully analyzing your system yourself.
But using the MA of equity to flatly refuse or take signals is simply
a different form of "Holy Grailism". It is a fear of taking losers,
or an attempt to altogether avoid taking losers, which absolutely
must be taken in any systematic trading. You simply have to have a
system in which you can *stand* to take the losers, and be
comfortable with them. If you don't, you can't trade it, and playing
around using the equity curve as an ultimate filter is not likely to
made a dangerous system safe, or an uncomfortable system comfortable.
You will never, ever, find a system that has an equity curve that
doesn't dance on both sides of a MA. Life doesn't work that way. But
if the curve is obviously solid, in other words, a real curve or
slope, and not an amusement park thrill ride, and all the metrics
look nice over thousands of trades and many years, you may want to
think about doing exactly the opposite of what your gut tells you
when you hit a soft patch.
OTOH, if the last sentence above applies ... why stress yourself at
all? Take the *&$% signals as they come, and relax. ^_^ If you
cannot stand a loss the magnitude of which would tell you that,
indeed, your system is no longer functioning, you are probably not
well enough capitalized to be in this business. Not everybody is.
And thank goodness not everyone can do this. We need some productive
members of society, too. ^_-
Yuki
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