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What you are experiencing is positive serial correlation in trade returns. ie. win begets win, loss begets loss. You could probably improve things even more buy loading up after wins.
There are lots of articles in TASC and Futures about running stat tests to determine your 'z-score' to measure the serial correlation.
However, strange as it may seem, you cannot fully exploit a market system until you have removed the serial correlation. Because after you have remove the s.c. you can use fixed fractional strategies to really jack up your equity growth. Like optimal f. But these tools require that the distribution of returns not be serial correlated (more random). See Vince's excellent work.
Scott Hoffman
-----Original Message-----
From: Paul A. [SMTP:paulha@xxxxxxxxxxxxx]
Sent: Wednesday, September 09, 1998 12:28 AM
To: omega-list@xxxxxxxxxx
Subject: Money Mgmt neophyte
Folks:
I've never used position sizing before, but am intent on learning something
about it. I'm trading mutual funds, so leverage is questionable, but
nevertheless I'm assuming I should be able to improve my risk-adjusted return
by varying position size from 100% down to 0%.
In my first money mgmt outing, I hypothesized that my losing trades occur in
streaks. I looked to see what would happen if every time I took a loss, I cut
my position size by 10%. It helped. Then I tried 20%. That helped even
more. So I optimized and discovered that the very best risk-adjusted result I
could achieve was to cut my position size by 100%, after any loss.
This unexpected result made me wonder if something's wrong with my
understanding of money mgmt. I had assumed you wanted to increase your
position size for trades with higher expected returns, and decrease your
position size for trades with lower expected returns. But it appears that, if
you're trying to optimize for risk-adjusted return, you'll always completely
avoid the lower expected return trades, and throw 100% of your capital at the
higher expected returns.
While I'm glad I discovered how to increase my risk-adjusted return, and lower
my exposure to dangerous markets, I _still_ would like to learn how to vary my
position size in some finer increments than 0% or 100%.
Where did I go wrong in my thinking?
Thanks for any help.
-Paul
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