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Charles,
This sort of issue can be explored with Monte Carlo analysis. You randomly
sample a week's worth of trades, thousands of times, and explore the effect
on net profit, Sharpe ratio, drawdown, etc of say a year's worth of trading
of stopping once you reach 7 pts. You probably need a preliminary step to
determine the number of trades in each random week, which you can again do
by sampling from the system's historical performance.
This assumes that each trade is independent, so I concur with Glen Wallace's
comment to check for dependence.
Paul Barnes
-----Original Message-----
From: Charles Turner [mailto:cturner002@xxxxxxxxxxxxxx]
Sent: Tuesday, 3 August 1999 07:37
To: Omega-List
Subject: Question for you math/probability types
Let's say I have a system that takes an average of +7.0 points out of the
market each week. It has about a 65% win rate. The average trade is +1.4
points. What would happen to long term performance of the system if I stop
trading when I reach a total of +7.0 points each week. By doing this, I know
I would be skipping profitable trades, but I would be skipping losers too.
It just seems that if I hit +7.0 points on Monday or by Tuesday morning, I'm
limiting exposure to losers by standing down until next week.
Obviously, I'm going to hit a point where I encounter a max drawdown
somewhere and if that drawdown happens to start on a Monday what I would do
is continue to trade each day until I made up the drawdown and got back to a
cumulative +7.0 points per week before I would go back to skipping trade
days.
Give me reasons why this would not work in the long run.
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