|
PureBytes Links
Trading Reference Links
|
> recovery money management AFTER a drawdown is a secondary subject to how to
> manage betsize, etc., while IN a drawdown.
Not really. Quick recovery from a drawdown is an essential part of
achieving the goal of surviving in this business for many years with the
smoothest possible equity curve (defined by me as the highest possible
Sharpe Ratio.) Gotta look at the whole picture.
> i think that the guideline
> should be to stay small in bet size till 100% recovery.
My testing has shown that that is the worst possible way to trade. You
are trading too big while losing and too small while winning. A one
month drawdown turns into a 3 month drawdown and the Sharpe Ratio of the
system decreases dramatically. Better to not increase bet size at all if
you are going to trade big on the losers and trade small on a winning
streak.
> 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.
That's a different subject which shouldn't be confused with money
management. If your system can't adapt to changing market conditions,
you should go back to the drawing board and not trade it until it can.
No money management method is going to overcome a bad system.
> under catastrophic situations, even
> small bet size can increase risk.
Again, that's a matter of system design. Implicit in all this discussion
of "meltdowns" is the assumption that you just sit there helpless and
watch your account disappear.
In a liquid market like the S&P, a stop will get you out although not
necessarily at a price you like. Looking at a tick chart of the 87
crash, there was no lack of liquidity and plenty of opportunity for a
trader with a long position to get out before the damage was too severe
or even reverse to short and make a bundle on the downside. And, if you
were using 2:1 margin or less, you could have just sat on your long
position and done nothing. In less liquid markets, that are subject to
locking at the limit and not trading, one might consider using options
to hedge his position.
We small traders have a big advantage over a hedge fund because we can
actually get our orders executed without moving the market. LTCM is a
classic example of a fund with poor money management. They were way
over-leveraged and their positions were so big that there was no way to
gracefully unwind them. So, as Art Cashin said, they had to melt down
their Nobel prizes to meet their margin calls. :-)
The system designer has to fully consider the possibilty of those 12
sigma moves and prolonged, heretofore unseen, drawdowns and plan his
entries, exits and money management accordingly.
--
Dennis
|