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dear chuck,
sounds like we are pretty much almost in agreement. just a few more
comments.
recovery money management AFTER a drawdown is a secondary subject to how to
manage betsize, etc., while IN a drawdown. i think that the guideline
should be to stay small in bet size till 100% recovery. then as the account
size grows larger, the trader [after congratulating himself for dodging the
bullet] has the luxury of choosing to stay small, returning to the
pre-drawdown bet size or to increase bet size. that is a decision based
largely on the money management system of the trader. should the trader be
aggressive, for ex, and keep the percentage of the bet size/account size
below some fixed amount, in the same risk environment and market nature, bet
size can increase while risk will continue to be stable. if, on the other
hand, the risk environment has deteriorated and/or the nature of the market
has changed so much that the trading system degrades {or runs the risk of
degrading} then risk will increase. under catastrophic situations, even
small bet size can increase risk.
unfortunately--and this too is a failing of current approaches of money
management systems in trading as well--money management systems properly
should be a function of overall risk. this is what VaR analysis aims to do
[but does not necessarily accomplish] in examining portfolio risk. in
short, however one chooses to measure risk [which is a whole other huge
discussion], in increasing risk environments, money management systems
should become more conservative. similarly, in decreasing risk
environments, money management systems could become more aggressive. of
course, this is for all situations other than the once-in-a-lifetime
bet-your-life bonanza trade.
like most things in trading, what we do has to be simple. the way markets
work is way complex and dynamic--so often truly over our heads. and answers
of how to approach the markets to trade successfully are not easily given to
simple, formula responses.
regards,
brad s. yoneoka
> Brad,
>
> I think that you and I are very much on the same page.
>
> However, I'm in favor of taking small risks all the time and I
> have a problem
> with those variable position sizing strategies that cause us to
> take too much
> risk when we are on a temporary winning streak.
>
> Fortunately as traders our odds are not fixed as in gambling so we can
> sometimes have big winners with small bets or small winners with
> big bets.
> If we are making a very small bet to begin with, there is little
> to be gained
> by reducing the bet size after a losing streak. This tactic will only
> inhibit our recovery. However, if we are betting too much simply
> because we
> have been winning for a while then it is imperative that we
> reduce our bet
> size.
>
> I enjoyed your post. Very informative and right on target. Thanks.
>
> Chuck LeBeau
> traderclub.com
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