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Jean Jacques
I'm not sure I agree with your statement about initial margin being
absolutely irrelevant. We use it to determine our 'investment' in our
futures trading, and we have been doing that for almost a half a century.
Maybe we've been wrong for the last 50 years, but I don't know of any other
base to use for estimating our R.O.I.
I guess I need to reiterate what I've said many times before. First, we use
NO STOPS! Absolutely NO STOPS! We have discovered over the last 60 years
plus (going back to when our dad traded before we got involved) that we had
this wonderful knack of being able to pick absolute tops and bottoms with
our stops. Subsequently, we started using 'visual stops' basis close to
protect our capital. Again, we have found that for our system, we are
substantially better off using no stops. Again, that's for our system and I
don't claim that it will apply to anyone else's.
How do you determine risk? Again, we feel that it's got to be based upon
actual results of a particular system over a long period of time. In our
case, all of our decisions are based upon our system going back to 1986. We
could go back further, but consider it to be irrelevant. In terms of
maximum risk, we are comfortable with investing one-third of our working
capital that we have allocated for futures trading. This is not one-third
of our total capital, so if we use that measure our investment in each trade
amounts to one-third of twenty-five percent of total capital. I don't think
this really means anything, since we used to have almost 100% of our capital
allocated to futures trading and it's only been the last year or so that we
have diversified. Even my wife (who is as conservative as they come) asked
my last night why we're trading stocks and not staying completely with
futures. I had to tell her that I didn't want to keep all of my eggs in one
basket.
We have always felt that this is an acceptable level of risk and we have
based it upon our trading history. I'm not talking about paper trades. I'm
talking real money, so let's not confuse theoretical results with actual
results. While we can go back to 1986 in order to evaluate any major
changes to our system, any minor changes (adjustments) are just check back 4
to 5 years with a greater emphasis placed on the current time period (the
last 6 to 12 months).
In addition, I maintain several systems. When we make a change (usually to
our trading rules as opposed to changing the actual system) I continue to
maintain most prior systems. While we trade one system, I maintain at least
7 prior ones, keeping track of their annual profits and losses, the current
year's results and the last 30 to 60 days of trading. This way I'm able to
identify minor deviations in the market quickly.
Finally, we don't "cut our losses" in our trading. We are willing to risk
our margin and any additional funds called for by our trade. Now I know
this sounds reckless, but it is based upon our system.
First let's look at the system. The system runs, on average, 75% profitable
trades. It has dropped down to 70% once in the last 15 years and has hit a
high of 97%. We're currently running at 87.5% for the current year and 85%
going back to last October (real trades and real numbers). If we utilize
the October start date (less beneficial to us) we had three losses in 20
trades. There were six and five trades separating these respective losses.
One of the losses amounted to an 87.5% loss of initial margin, the next loss
amounted to a loss of 109% of initial margin and the final loss amounted to
2% of initial margin. Second, in the last 15 years, we have never had two
major losses in a row, ever. That's not to say it might not happen, just
that it never has. I've never been struck by lightning either but that
doesn't mean I'm going to wander around the golf course in a thunderstorm
waving a metal umbrella either. I've said all along, "Our system is playing
probabilities." We know, on average, we'll be right three out of every four
trades. We have no price, date or other targets. All we know is that the
market will go our way 3 out of 4.
In the past, we have had a couple of losses back to back that amounted to
30+% of initial margin. What this means is that we scale back our next
trade, insuring that we always follow our 33% rule..
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: Tuesday, July 11, 2000 6:06 AM
To: metastock@xxxxxxxxxxxxx
Subject: Re: Risk of ruin, amount per trade formula?
Guy;
Initial margin is absolutely irrelevant for naything related to trading and
results and specially it has absolutely nothing to do with your risk. The
level of margin can be changed by the exchange without notice. It's is a
regulatory consideration, not a trading consideration. If you want to have
money under management this is a question that you will not even be asked.
Nobody cares. What you will be asked is what is your maximum risk: ie when
do
you cut your losses? If you cut your losses after you have lost your initial
margin, and if your initial margin is 30% of your capital, your rik of ruin
is 100%. Even if your risk is 3% how are you sure that you you will not go
over that? What about stops during night session?
Jean Jacques
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