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In a message dated 06/13/2000 7:49:25 PM Eastern Daylight Time,
prosys@xxxxxxxxxxxxxxxx writes:
<< it would be an interesting comparison to take a 40/50% win system that does
500% return annually and compare to a 60/70% win system that only does
300%......and apply optimal-f or fix-ratio styles of money management.
>>
I would love to see a 60/70% win system that "only" does 300%. In almost 30
years it has consistently eluded me and for what I know most of the
professional money managers .
Jean Jacques
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From: "M. Simms" <prosys@xxxxxxxxxxxxxxxx>
To: "Dennis Holverstott" <dennis@xxxxxxxxxx>
Cc: "Omega-List" <omega-list@xxxxxxxxxx>
Subject: RE: counterargument to c.lebeau's constant bet size under drawdown--effect of win%
Date: Tue, 13 Jun 2000 19:46:52 -0500
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Well said.....I thought everyone agreed that chances of a win on the next
trade are based on the %win rate of the system's back testing plus/minus the
std deviation of that number.
A bad system is just that....no amount of money management is going to make
it a winner.....BUT changing the entry algorithm, exit technique, applying
adverse excursion rules, adding SAR logic....these CAN help.
My feeling is that a 70%+ win system is more amenable to trade-sizing than a
40 or 50% win system.
That STILL doesn't mean the former is more PROFITABLE......
it would be an interesting comparison to take a 40/50% win system that does
500% return annually and compare to a 60/70% win system that only does
300%......and apply optimal-f or fix-ratio styles of money management.
> -----Original Message-----
> From: Dennis Holverstott [mailto:dennis@xxxxxxxxxx]
> Sent: Tuesday, June 13, 2000 1:17 PM
> To: Omega List
> Subject: Re: counterargument to c.lebeau's constant bet size under
> drawdown--true mark...
>
>
> > 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
>
>
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