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EXCELLENT!
WISH THERE WERE MORE OF THIS TYPE SUBMITTED TO OMEGA-LIST
JERRY ROSS
Mark Johnson wrote:
> Over the Labor Day weekend, I decided to try out the
> Fixed Ratio approach for choosing position sizes when
> trading commodity futures. This scheme appears in Ryan
> Jones's book "The Trading Game":
>
> http://www.amazon.com/exec/obidos/ASIN/0471316989/
>
> The book is pretty forceful in asserting that its
> Fixed Ratio concept is powerful, profitable, and
> conservative. So I decided to take a look and
> see for myself.
>
> I compared Fixed Ratio against a betsizing algorithm
> by Bob Spear (author of "Trading Recipes" software),
> which was included free when I purchased the software
> in 1995. Both betsizing algorithms (the Jones "Fixed
> Ratio" algorithm , and the Spear algorithm) were applied
> to the exact same underlying system-of-entries-and-exits,
> namely Channel Breakout.
>
> Channel Breakout is neither secret nor exotic; in fact
> it is well-known and more than 40 years old. I am using
> it with the parameters (89 and 13), both of which are
> Fibonacci numbers, giving the following rules:
>
> Enter Long 1 tick beyond the Highest_High of 89 days
> Exit Long 1 tick beyond the Lowest_Low of 13 days
> Enter Short 1 tick beyond the Lowest_Low of 89 days
> Exit Short 1 tick beyond the Highest_High of 13 days
>
> This is NOT a reversal system. It goes flat (has no
> position) between trades.
>
> The Fixed Ratio betsizing algorithm seems to have been
> invented in the summer of 1995, and it seems to have
> first appeared in Ryan Jones's "Kamikaze Trading Newsletter"
> dated September 1995. I don't feel like typing up a
> description of Fixed Ratio; if you are curious, read the
> book or the newsletter or look at the code below.
> The flavor I tested is what Jones calls "100% Rate of
> Decrease".
>
> Bob Spear's betsizing algorithm is in a software file
> whose creation date is 12 August 1994. It's a combination
> of 3 very simple position sizing ideas:
>
> 1: Don't risk more than 4% of total equity on one trade.
> Of course this is nothng but dear old Ralph
> Vince's FIXED FRACTIONAL idea, dressed up a bit.
>
> 2: When you get an entry signal, don't put on so many
> contracts that the dollar volatility of the
> position will exceed 1% of total equity
>
> 3: Never trade a position size more than 200 contracts,
> regardless of total equity
>
> You calculate how many contracts are allowed by rule 1,
> and how many are allowed by rule 2, and how many are allowed
> by rule 3. Then you pick the smallest. Simple. Code
> is provided below. By the way, these ideas are also
> discussed in Van Tharp's new book "TYWT Financial Freedom",
> pages 292 and 296.
>
> Please observe, this is a COMPARISON BETWEEN TWO BETSIZE
> ALGORITHMS. It is not a "study" of a "trading system".
>
> Description of Test Procedure
> ------------------------------
>
> I decided to investigate what happens when you trade
> the Channel Breakout system on a portfolio of fifteen
> commodity futures markets, simultaneously, out of a
> single account. I ran a test the first time, using
> betsize selection according to Fixed Ratio, and I
> ran it again the second time using betsize selection
> according pto Bob Spear's betsize algorithm. The
> fifteen markets I used in the tests were:
>
> CD DM FV LB TU
> CL DX JY MB TY
> CT ED KC SF US
>
> Commission+Slippage was set to $75.00 per contract
> per round trip trade. Interest on T-bills (held as
> margin) was ignored. The tests ran from 01 Jan 1987
> to 10 Aug 1999, a total of 12.7 years.
>
> Tests were performed using the Trading Recipes software
> package, a marvelous backtesting product which (alas!)
> has been killed by the Omega juggernaut. TR code for
> both of the tests is presented in the Appendices below.
>
> Both tests started with $80,000 in the account on
> the first day of trading. The Fixed Ratio algorithm
> parameters were S=$80,000 and Delta=$12,000. The
> Spear algorithm parameters were risk=4%, volatility=1%,
> and nmax=200.
>
> These parameter sets were chosen to give approximately
> equal drawdowns in the two tests. If you consider
>
> "drawdown" to be equivalent to "pain" and if you
>
> consider "net profits" to be equivalent to "gain",
> then these two betsize algorithms had approximately
> equal "pain". The only difference was the "gain"
> that they produced.
>
> TEST RESULTS
> TEST RESULTS
>
> FixedRatio SpearAlgorithm
> ------------------------------------------------------------------------
> Starting equity........................... 80000.00 80000.00
> Final equity.............................. 5319261.50 13159391.00
> Net profit................................ 5239261.50 13079391.00
> Compound Annual Growth Rate (percent)..... 39.06 49.32
> Max Drawdown (percent).................... 40.61 39.12
> (CAGR / MAXDD) Ratio...................... 0.962 1.261
> # trading days in longest drawdown........ 572 302
> Annual Standard Deviation (percent)....... 38.36 36.89
> Average max annual drawdown (percent)..... 24.29 26.46
> Percent of days making new equity highs... 6.393 7.739
> Sharpe Ratio.............................. 0.888 1.201
> Semideviation Ratio....................... 1.282 1.748
> Return Retracement Ratio.................. 3.567 4.270
> Sterling Ratio............................ 0.556 1.503
> Number of Trades.......................... 715 715
> Winning Trades............................ 321 321
> % Winners................................. 44.9 44.9
> First day of test......................... 870128 870128
> Last day of test.......................... 990810 990810
> # days.................................... 3269 3269
> Comm+slippage per contract................ 75.00 75.00
>
> DISCUSSION OF RESULTS
> DISCUSSION OF RESULTS
>
> It appears that the parameter sets did indeed give roughly
> equal drawdowns, as desired. The FixedRatio equity curve had
> a worst-case drawdown of 40.6% while the SpearAlgorithm equity
> curve's worst case was a 39.1% drawdown.
>
> If we take the worst drawdown seen in calendar year 1987,
> and then the worst drawdown seen in calendar year 1988, and
> then the worst drawdown in 1989, and ..., and the worst
> drawdown seen in calendar year 1999, and we AVERAGE THESE
> SINGLE YEAR WORST DRAWDOWNS, then we get a number called
> "Average max annual drawdown". Again, FixedRatio and
> SpearAlgorithm are pretty close: (24% vs 26%).
>
> However, look at the _duration_ of the longest drawdown.
> It is 572 trading days for Fixed Ratio, but only 302
> trading days for the SpearAlgorithm. Spear is clearly
> superior here.
>
> In the "reward" category, Spear's algorithm is also
> clearly superior. It achieves a compounded annual
> growth rate of 49 percent per year, while Fixed Ratio
> only gives 39 percent per year, AT THE SAME LEVEL OF
> DRAWDOWN.
>
> Of course, Spear's algorithm is also better in the
> various reward-to-risk ratio measurements. Spear's
> Sharpe ratio is superior, and so it its semideviation
> ratio (Schwager's modified sharperatio), and all
> the others.
>
> I would conclude that in these tests, the Spear
> algorithm is clearly superior to Fixed Ratio.
> It gave greater profits at the same drawdown,
> thereby achieving a superior reward-to-risk ratio.
>
> *Why* is it superior? I suppose that calls for
> _opinion_, whereas this message is mostly filled
> with DATA. But nevertheless, I will offer my
> _opinion_, that the Achilles heel of the Fixed
> Ratio method is found in Chapter 9 of Jones's
> book. It dictates that if you are trading
> a portfolio having two components: (1) Coffee
> and (2) Corn, then you should put on equal numbers
> of Coffee contracts as you put on Corn contracts.
> Even though the average 1-week range of a single
> contract position in Coffee, swings more than 6.8
> times as many dollars as the average 1-week range
> of a single contract position in Corn, Jones
> tells you to trade the same number of Corn that
>
> you trade Coffee. Similarly he wants you to
> trade equal numbers of Oats and S&P maxi's.
> Oh Really. But of course this is my _opinion_.
>
> APPENDIX A. TRADING RECIPES SOFTWARE CODE FOR CBO + FIXED RATIO
> APPENDIX A. TRADING RECIPES SOFTWARE CODE FOR CBO + FIXED RATIO
> ************begin************
> COL1 = ATR[15]
> COL2 = MAX[H,89,1] + TICK[1]
> COL3 = MIN[L,13,1] - TICK[1]
> COL4 = MIN[L,89,1] - TICK[1]
> COL5 = MAX[H,13,1] + TICK[1]
>
> BUYSTOP = COL2
> SELLSTOP = COL4
> ' Using S=80000 and Delta=12000
> ' Ryan Jones Fixed Ratio algorithm is next 6 lines
> STARTUPCASH = 80000
> MEMORY[1] = EQUITY - 80000
> IF MEMORY[1] < 0.01 THEN MEMORY[1] = 0.01 'avoid sqrt(negative)
> MEMORY[2] = 0.5 + ((2 * MEMORY[1] / 12000) + 0.25) ^ 0.5
> IF MEMORY[2] < 1 THEN MEMORY[2] = 1
> NEWCONTRACTS = MEMORY[2]
>
> SELLSTOP = COL3
> BUYSTOP = COL5
> ************end************
>
> APPENDIX B. TRADING RECIPES SOFTWARE CODE FOR CBO + SPEAR ALGO
> APPENDIX B. TRADING RECIPES SOFTWARE CODE FOR CBO + SPEAR ALGO
> ************begin************
> COL1 = ATR[15]
> COL2 = MAX[H,89,1] + TICK[1]
> COL3 = MIN[L,13,1] - TICK[1]
> COL4 = MIN[L,89,1] - TICK[1]
> COL5 = MAX[H,13,1] + TICK[1]
> SYSTEM = COL1[1] * POINTVALUE
>
> BUYSTOP = COL2
> SELLSTOP = COL4
> ' Bob Spear's betsizing algorithm is the next 6 lines
> STARTUPCASH = 80000
> MEMORY[1] = (0.04 * EQUITY) / NEWRISK
> MEMORY[2] = (0.01 * EQUITY) / SYSTEM
> IF MEMORY[2] > 200 THEN MEMORY[2] = 200
> IF MEMORY[2] < MEMORY[1] THEN MEMORY[2] = MEMORY[1]
> NEWCONTRACTS = MEMORY[2]
>
> SELLSTOP = COL3
> BUYSTOP = COL5
> ************end************
>
> I hope you enjoyed reading this.
> -- Mark Johnson mark@xxxxxxxxxxxx
>
> --
> Mark Johnson Silicon Valley, California mark@xxxxxxxxxxxx
>
> "... The world will little note, nor long remember, what we
> say here..." -Abraham Lincoln, "The Gettysburg Address"
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