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Jean Jacques,
Maybe I need to explain myself. We have had three losses in a row, in the
past. We have never had three catastrophic losses in a row. In reality, we
have never had more than 1 catastrophic loss in a year, I think (I'll go
back and double-check the last five years though).
I'm not disputing your statements. I'm just having a problem determining
what level of investment your figures would consider prudent.
We have, in the past, been down this road before (losing too much money)
but, since this is a sideline and not our main source of income, we just
ante up the difference and start over. Now, thank goodness, this hasn't
happened since we began using "money management" about 18 months ago.
Again, we're at least using something.
I'm not sure of some of your terminology, so if I ask some stupid questions,
forgive me.
<< Largest Daily Cumulative Drawdown at portfolio Level:>>
What do you mean by this? Are you referring to our futures accounts or the
total in our investment accounts? Are you referring to EOD or intra-day
drawdowns? We used to keep track of intra-day drawdowns but don't anymore.
We were never able to put the information to any practical use. At one
time, we used this in terms of back testing to help us determine stops.
<< Time of recovery>>
What time of recovery? Recovery of what? The time required to make back
the loss on the trade? The time it takes to recover the drawdown? What
recovery?
<< Winning Percentage>>
OK, I think this is what we refer to as our winning percentage, I hope. In
our terminology this is the number of winning trades divided by the total
number of trades.
<< Frequency Distribution of Daily Portfolio Returns:
-3% or below, -3% to -2%,-2% to -1%. -1% to 0%, 0 to 1%, 1% to 2%, 2%
to 3 %, 3% and above.>>
I guess I'm at a loss here too. For instance, today our futures portfolio
is down 12.5% (based on initial margin). It was +3% on Monday, -3% on
Tuesday and -12.5% today. Now if you apply the gains and losses to the
total capital in our futures accounts, the numbers are +1%, -1% and -4.2%.
If we calculate these numbers in terms of our total investment capital, the
numbers are minuscule.
I'm not sure how I would apply this information or even what it might mean,
especially when talking about futures trading.
<< Time in the market: >>
I'm not sure I understand this concept either. My take on this is that if
you spend less time in the market you have less risk since time spent out of
the market means you have no possibility of loss. You're rated higher
because of this even though you also have no possibility of gain. Using
this, I guess a trader would rank the highest if he never made a trade,
since he would never incur any risk.
This is an alien concept to me. How would you apply it? Again, I'm not
trying to be argumentative, but this makes absolutely no sense to me.
Taking this to the not quite extreme, a day trader or minute-by-minute
trader would rank the highest, because they're hardly ever in the market.
This type of trading goes mainly to the psychological makeup of the trader
as opposed to the trading system. Certain personality types are better
suited for different trading styles. Years ago, we used to do a lot of day
trading and were fairly successful. We gradually moved over to our current
trading style as it suited our personalities better and also produced much
better results.
<< Gain/Loss Ratio:
Average Gain/Average Loss:
Average days (hours for day traders) in winners:
Average days in losers: >>
OK, I can put this together from our data. We used to use this data several
years ago. I'm not sure it really means anything, as we were never able to
figure out any correlation between this information and our real world
results. I'll run some of this by my dad. Maybe with his Masters in
Statistical Economics he'll see something I don't. We are a little jaded
when it comes to using all of this information, and question whether it has
much value or is just an exercise in fiddling with numbers that aren't
really relevant. Hopefully, with some more explanation, I might be able to
see how these might be put to better use.
With this additional explanation, I might be able to better understand how
to use this and be able to apply it to build the optimum investment level
that would maximize gains while minimizing risk.
Guy
Paranoia...you only have to be right once to make it all worthwhile!
-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of Macromnt@xxxxxxx
Sent: Wednesday, July 12, 2000 8:01 PM
To: metastock@xxxxxxxxxxxxx
Subject: Re: Risk of Ruin
Guy;
That's great that you never had three losers in a row but I am sorry that
does not convince me. The point is that with 75% winner (which is great)
your
chances (if I can call that chances) of hitting 3 losers in a row are 6.25%.
This is not a percentage that you can dismiss like that. As a matter of fact
this is your risk of ruin (OK, I consider that when you are down 70%, you
are
dead and will most probably not come back). Our job is to deal with
probabilities.
To try to be constructive to this list and not to look that I am criticizing
for the sake of it, here are some statistics that should be looked at in a
system. This is of course not exhaustive and there is no "good" or "bad"
answers but in my opinion the following points deserve consideration:
Largest Daily Cumulative Drawdown at portfolio Level:
Time of recovery:
Winning Percentage:
Frequency Distribution of Daily Portfolio Returns:
-3% or below, -3% to -2%,-2% to -1%. -1% to 0%, 0 to 1%, 1% to 2%, 2%
to 3 %, 3% and above.
Time in the market: (Everything equal, a system that is 50% of the time in
the market will be rated higher than a system that is 75% of the time in the
market. A system that is always in the market is obvyoulsy the worst)
Gain/Loss Ratio:
Average Gain/Average Loss:
Average days (hours for day traders) in winners:
Average days in losers:
Strings of Trades - Maximum Consecutive Winners :
Maximum Losers :
Edge per Trade: (average win per trade * winning percentage)/(average
loss per trade * losing percentage)
Impact of five best trades:
Impact of five worst trades:
I hope this may help some who are looking for a professional approach. It is
not necessary to reinvent the wheel. They are some principles that are
widely
accepted because they are based on sound mathematics. It does not mean that
some rules can never been violated (rules are made to be violated) but it
has
to be done knowingly, not relying on some lucky experience.
Jean Jacques
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