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Timothy Morge wrote:
> Mark:
>
> Hmm..well, I guess I am asking...how much margin on a fixed portfolio
> should be used? Obviously, if you are trading $1mill in capital, you
> don't use all of it in capital. If the drawdowns are acceptable, do
> you do something like take three times the max drawdown and then use
> the rest for margin?
>
> Tim
I take the maximum system drawdown then I make that my percentage
drawdown that I can endure and figure up from there. Example if a system
makes 14,000 per bond per year. And the max drawdown was 5000 then that
would be the percentage of drawdown. If I want no more than a 30%
drawdown then I need to allocate 14,000 per bond to trade. I would stop
and consult with myself at the 9800 level. This would reflect a 100%
return with a 30% drawdown. Of course this would be a little more
complicated if you didn't have a statistically stable trading system
that you know inside and out. It would be hard for a paper charter or a
off the hip trader to do. That's what I like about computers they have
allowed me to gain confidence that would be hard to master otherwise. A
very small change in a discretionary traders style could result in a
tremendous additional profit/loss. Computers allow one to make
experiment with trading variations without having to wait another 20
years to see how it would have done. The pitfall that I keep preaching
is that most, most don't back test properly in the first place. They
are in such a rush to create the most profits that can be had that they
overlook reality. But rest assured Mr. Reality will come knocking as
soon as the real money gets in the account.
Mark Brown
ps I have said before that I would always expect a system to exceed its
max drawdown by 2 sometime in its life. Well I've experienced that
anyway!
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