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Adjust your betsize so that your drawdown is below 10%.
Then go for tea with asset allocators.
At 11:49 PM 5/24/99 , Mark Johnson wrote:
>As those of you who have read Club 3000 News issue
>#99.02 know, I trade a 100% mechanical system that
>I bought from a vendor, called "Aberration". In
>the 2.5 years from 1/1/1997 to 5/13/1999, I have
>made $+421,000 in net profits using this system,
>including commissions, slippage, rollovers,
>human blunders, etc.
>
>I trade the system on a portfolio of >20 commodity
>futures markets, using the exact same system code
>and the exact same parameter values ("ndays=80",
>"b_signal=2.00") on all markets. These are the
>only parameter values I have used when trading my
>real-money account.
>
>I bought the system in the summer of 1995. The
>manual I received says "Copyright 1993". This
>manual suggests using the parameter settings
>"80" and "2" for all markets, and indeed
>(after my own testing), that's what I do.
>
>If you have read issue #99.02 you also know that
>I bought the system and spent a year testing it
>before I began trading it with my own money.
>That's not a misprint: a year. Twelve months.
>260+ trading days.
>
>How on earth could I take so long? What tests could
>I do that required a whole year?
>
>First, I programmed the system four different ways
>so I could run it through four different test
>packages. (If you care: <1> System Writer Plus;
><2> AWK; <3> Trading Recipes; <4> C). I kept
>testing and debugging until all four implementations
>gave the exact same trades on the same days at
>the same prices. This took a while :-).
>
>Next, I tested the system on two different and
>independent data streams. I wanted to be sure that
>it worked well on *MY* data, not just on the vendor's.
>(If you care: <1> Omega Research Historical Database;
><2> Technical Tools historical data). It didn't
>take long to satisfy myself that the good results
>I was seeing weren't the result of data anomalies.
>
>Next, I explored different settings for the two
>parameter values. I did a huge number of tests
>on this, some of which I reported in a message
>I'm still kinda proud of, and you can find it
>on dejanews in the archives for misc.invest.futures.
>It's from December 95 or Jan 96. After all of
>that, I settled on "80" and "2.00", because these
>gave a large margin of safety on either side.
>
>Next, I chose a portfolio of markets. After doing
>a lot of testing and a lot of thinking, I came to
>a decision that I expect will be controversial:
>I decided to include or exclude entire commodity
>GROUPS, rather than individual commodity MARKETS.
>Remember, this is *my* choice based on *my* research,
>and it makes *me* happy. *You* don't have to
>like it, agree with it, or find it sensible.
>
>The groups I include in my trading are:
> Energies (Heating Oil, Natural Gas, etc)
> Interest Rates (30Yr Bonds, 5Yr Notes, etc)
> Softs (Cotton, Lumber, Coffee, OJ, etc)
> Currencies (Canadian $, Swiss Franc, USDX, etc)
>
>The groups I don't trade are:
> Grains, Meats, Stock Indexes, Precious Metals
>
>
>Next, I settled upon Trading Recipes as my test vehicle.
>Although it is a lowly DOS program, and although it
>is not "Y2K compliant", it does perform portfolio level
>testing (trading multiple commodity markets out of the
>same account) and it even lets you trade several
>DIFFERENT systems simultaneously, out of the same account.
>I programmed up Aberration and gingerly began to tinker
>with betsize selection.
>
>(aside remark: I really dislike the phrase "money management".
>That's what trust departments and insurance companies do.
>What futures traders do is size their bets. So this is the
>final time you'll find the words "money management" in my
>note.)
>
>It took me a while to figure out what I wanted.
>I struggled with fear and greed, and ultimately,
>fear won out. I decided that there was a great
>danger that if my drawdown ever exceeded 40% ,
>I might become emotionally unstable and deviate
>from the mechanical system or even shut down the
>account. So I decided my goal was: Maximize
>returns with the constraint that (historical!)
>drawdown is less than 40%.
>
>I read lots of books, fooled around with differential
>
>equations* on the blackboard, and started to program
>up some geometric betting algorithms into Trading
>Recipes.
>
> *WARNING: MATH FOLLOWS, THIS IS SCARY AND INTIMIDATING
> Suppose Profit is proportional to risk, delta$/deltaT = kR
> Suppose we decide we'll take Risks proportional to equity, R = c$
> Then Profit will be proportional to equity, delta$/deltaT = kc$
> Separate the variables, delta$ / $ = kcdeltaT
> Integrate, log($) = const*T
> Thus $ = exp(const*T)
> Thus our equity ($) will be an EXPONENTIAL function of time, woo hoo
>
>
>As those of you who have read the other Club 3000
>issue (#99.04) know, I finally settled upon a betsize
>algorithm that includes dollar-distance-to-my-stoploss
>(which I define as my risk per contract, "R1"),
>semi-fixed-fractional betting, and variable
>aggressiveness which depends upon equity.
>
>
>THIS IS THE "SECRET" OF HOW I WAS ABLE TO MAKE MONEY
>USING A VENDOR-SUPPLIED MECHANICAL SYSTEM: BETSIZE
>SELECTION.
>
>In fact, about 18 months ago I wrote a message on the
>omega-list that showed test results for three different
>mechanical systems, but using identical geometric
>betsize selection. All three made huge profits!
>One was a good system (Aberration), one was average
>(Market Annihilator), and one was below average
>but profitable (Virtuoso). The size of the profits
>varied a bit, but all of them did very well, handily
>beating "buy and hold the S&P 500" by a substantial
>margin.
>
>The "magic", if there is any, isn't in the entries
>and exits. The magic is in the betsizes. Robert
>Hodge said the same thing.
>
>
>Doing all of the tests detailed above took a year
>because not only did I perform the foregoing tests
>on Aberration, I also tested several other systems
>too. It was kind of a bake-off, and the winner was
>Aberration plus the variable-aggressiveness
>betsize algorithm.
>
>A side-benefit of all the testing was, that it
>produced several notebooks full of test results.
>These turn out to be INCREDIBLY VALUABLE. Now
>I have a giant database of prior test results,
>so if I try out a new betsize algorithm (often)
>or a new entry/exit system (seldom), I have a
>bunch of data to compare against.
>
>I have discovered that I find it pointless to
>try to answer question (1). Instead, I try to
>answer question (2). It was a revelation.
>
> (1) Consider systematic approach X. Is X "good" ?
> (2) Which is "better," approach X or approach Y ?
>
>I hope you enjoyed reading this,
> -Mark Johnson
>
>
> > I use a fully mechanical system that I bought
> > from a vendor. I trade it on >20 different
> > commodities, using the exact same code and the
> > exact same parameter values (namely, "80" and "2")
> > on all markets. It trades Coffee the same as
> > Bonds the same as Crude Oil the same as Canadian
> > Dollar, the same as all the others.
> >
> > "80" and "2" are the parameter values in the
> > system manual supplied by the vendor; I've
> > done research to test out other parameter settings,
> > but have only traded my own money using
> > "80" and "2".
> >
> > I've been trading it for quite a while, and reporting
> > my actual real-money results in a newsletter called
> > _Club_3000_News_. The results of about 100 trades
> > (namely, calendar years 1997 and 1998) appear in
> > issue #99.02 of the newsletter; they will be glad to
> > sell you this backissue for $5.00. Contact info
> > is on the Club's website,
> >
> > http://www.ison.com/club3000/index.html
> >
> > I *DONT* trade using single contract position
> > sizes; instead I use a non-Ralph-Vince betsize
> > algorithm that employs a non-fixed-fractional approach.
> > This is covered in issue #99.04. I programmed
> > it in a dinky little PERL script that's about
> > 50 lines of code.
> >
> > 100% mechanical trading has done pretty well for
> > me. From 1/1/1997 to today (5/13/1999), my
> > net profits (including commission, slippage,
> > rollovers, etc) have achieved a compound annual
> > growth rate of 79.6% per year. As of today,
> > total net profits are $421K. $118K of the
> > profits came in 1997, $102K came in 1998,
>
> > and $200K of the profits have come (so far)
> > in 1999.
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