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Hi Timothy,
i don't know whether these suggestions will help..i don't have Marks
abbility to say things succinctly but i'll try
1)it may help to soften the risk by looking at the maximum volatility
over the last 30 days and using this in your calculation to dampen the
no of units..this is different from a directly normalizing to gold
2)You will still find you need to place a buffering $ figure in there
to pvevent you taking a large no of say corn where the risk may blow
out after you have entered a trade..the buffering unit will not affect
the larger contacts like the dax,jgb,coffee,s&p etc but will affect
corn ,wheat etc
two additional ares which need addressing in the portfolio
a) are correlation of underlying assets or coincident trade
risk(sector value at risk) if you like
b)ongoing and periodic evaluation of the risk of the shape of your
equity curve..some form of mean reversion or whatever(don't use MA's)
e.g..it would have been a pity 4 years back to have sat in the British
Pound with your system and hope the profits from other commodities
would overcome the dismal performance given to "equal risk" in BP's
i have probably posed more questions than i answered but this may be
of use
regards
Sam
---Timothy Morge <tmorge@xxxxxxxxxxxxxxx> wrote:
>
> Hi folks!
>
> I am playing with a spread sheet exercise and thought I'd ask for
input from
> people on this list. In my current longer-term trading, I use what I
term
> 'equivalent trading units' that allow me to risk similar amounts on
a given
> trade, relative to my capital and the average true range of X for
each of the
> commodities I trade. Now, In my normal trading, I never even
approach a level of
> margin use where I'd ever get a margin call. And when looking at
several papers
> and a few books, I see that most people use something similar when
determining
> how many contracts to trade of a given commodity. I also take this
information
> into consideration when looking at my maximum stops, which means I
won't take a
> trade that has a percieved risk that is larger than one I am
comfortable [and
> those maximum risks per trade are all equal].
>
> But this exercise is slightly different [I think]. And my guess is
that some of
> you out there, systems traders perhaps, may already have elegant
solutions. So
> here goes:
>
> You have a methodology that you are able to code and back test. It
works well
> across a broad spectrum of commodities, financials and indexes. If,
for the
> basis of this discussion, it helps you to be able to envision a
technique,
> assume it is th trend trading technique of your choice. Assume it
will be traded
> on ten seperate commodities and that for each of these commodites,
it's equity
> curve is positive in slope. To make it easier to visualize, let's
say that all
> ten commodities win an average that hovers around 50 percent, and
the average
> wins hover around 2-3 times the average losses. I don't think these
matter for
> the sake of the exercise--I am simply adding them in here to make it
easier to
> visualize.
>
> Now, also assume you will always take a trade in each of the
commodities and
> that the system is such that 95 percent of the time, you are in the
market in
> each of the commodities--the only time you will not have a position
is when you
> have hit a disaster stop, and then you will be flat in that market
until a new
> signal is generated.
>
> The question is: If you have already determined how to relate each
commodity, so
> that the risk asociated with each trade is set to an equal amount,
how do you
> decide how trade size? For example, suppose that when you do your
equivalent
> units, you find:
>
> Commodity Equivalent Unit
>
> Corn 15
> CRB 3
> Cotton 5
> DM 3
> Dollar Index 6
> Euros 12
> Five Year 6
> Copper 10
> Heat Oil 3
> Unleaded Gas 3
> JPY 3
> Coffee 3
> Lumber 3
> Live Cattle 7
> German Bunds 5
> Muni Bunds 5
> Natural Gas 10
> Swiss Francs 2
> Silver 6
> SP 2
> TYAM 5
> Bonds 4
> Wheat 5
> NYFE 3
>
>
> Now, if you traded just these amounts, you'd use much less
[something less than
> $250K] in margin. IF you were trading a $1 million dollar account,
how would you
> determine the multiple of equivalent units to trade? What if it were
20
> commodities?
>
> I hope this makes some sense.
>
> Best,
>
> Tim Morge
>
>
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