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Hi Lionel,
Right you are about drawdowns. They are statistically meaningless and are
usually reported in trading software for the traders "peace of mind."
Drawdown is uncontrollable and is a necessary evil of any trading system.
What is controllable, at least more or less, is the size of the largest
loss. How you control the largest loss and its frequency is the crux of the
money management strategy. Whether you use a fixed percentage price stops
like 2%, options or a diversified portfolio as a hedge, or just limit
yourself to daytrading to eliminate price gap risk, the money management
strategy is the key. I myself found John Sweeney's concept of Maximum
Adverse Excursion to fit very nicely with my trading ideas.
If you want to measure the downside of a system, look no further than the
biggest losing trade. To measure overall system performance, I've been using
Ralph Vince's Pessimistic Return Ratio.
Hope this helps,
rick
-----Original Message-----
From: Lionel Issen <lissen@xxxxxxxxxx>
To: Rick Mortellra <rmjapan@xxxxxxxxxxxxx>
Date: Wednesday, February 11, 1998 9:15 AM
Subject: Re: Why do trading gurus market services?
>Rick:
>
>Thanks for sharing your experience. It all fits together.
>
>Concerning drawdowns, we can never know the future. Wouldn't it be wise do
>have temporary exit/entry points, like crossing a moving average?
>Remember the "drawdown" in 1929 lasted 20 years! I would look at a
>drawdown of more than a few %s as a reason to sell.
>
>Lionel Issen
>
>At 08:36 AM 2/11/98 +0900, you wrote:
>>Having worked with a few professional system designers, I would say they
>>fall into basically 2 camps: those who can "talk the talk, but can't walk
>>the walk"; and those who can DO, but lack the necessary capital to trade
the
>>system correctly.
>>
>>
>>The first group have a lot of market knowledge, have built good systems,
>>etc. but fall down on their mental game. They simply can't trade well
>>Realize that many good systems actually win less than 50% of the time. In
>>fact, I could argue that 34% is about as good as you can get. Higher
>>percentages are usually only exploitable for short periods.
>>
>>These guys are the ones that prefer others to trade their systems and many
>>times acknowledge doing so. Joe Krutzinger (sp?) may be a good example of
>>this group.
>>
>>The other group is a bit more tricky in that they have blockbuster ideas
but
>>the system drawdown exceeds their capital to trade it properly. They sell
>>system ideas to raise money to trade with. As naive as this may sound, I
>>fully accept it.
>>
>>Why so? Because one common thing left out of most trading systems offered
>>for sale is a robust money management system. This is the REAL TRADING
MONEY
>>MAKER. Since most systems LOSE on the majority of trades, this is the only
>>edge a trader can use to turn things in his favor (a good analogy is card
>>counting in blackjack). Without this key part, the system seller is really
>>just selling a market observation. But beware, this last group has more
than
>>its share of con artists.
>>
>>The best trading systems are so simple too, but we have a human tendency
to
>>place value on complexity. No one will pay for a simple moving average
cross
>>system based on just 1 indicator and 4 rules. But throw in 6 or 7 more
>>indicators and a couple of pages of rules and we'll all say that's worth
>>some money! Nevermind about robustness or performance degradation.
>>
>>My advice is to spend time developing a good money management strategy
>>first, then apply it to a general market observation for you trading
system.
>>As long a you have discovered an observation that wins more money than it
>>loses (not how often!) the money management system will keep you ahead.
>>
>>regards,
>>Rick
>>Tokyo, Japan
>>
>>
>>
>>
>>
>>-----Original Message-----
>>From: Lionel Issen <lissen@xxxxxxxxxx>
>>To: diamond@xxxxxxxxxxxx <diamond@xxxxxxxxxxxx>; MetaStock-list
>><metastock-list@xxxxxxxxxxxxx>
>>Date: Wednesday, February 11, 1998 5:04 AM
>>Subject: Re: Why do trading gurus market services?
>>
>>
>>>Zane:
>>>
>>>Last summer there was a lively exchange on this very topic.
>>>
>>>I agree with the other responses that mentioned recognition, another
factor
>>>is self promotion.
>>>
>>>If anyone had a superduper trading system, why indeed would they sell it
or
>>>give it away for the price of a book or seminar? While the author(s) of
>>>books have to give some information to the reader or the course attendee,
>>>they probably don't/wont tell everything that makes the system work for
>>>them.......
>>
>>
>>
>
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