|
PureBytes Links
Trading Reference Links
|
> What do you think is the right way of doing MC?
I can't really comment on the portfolio approach. That gets complicated.
I trade index futures and I use the MC individually on each system. But
anyway, here's the general idea of how it works.
First, you need to generate a list of profits and losses for the
backtest. Each backtested trade should risk an equal dollar amount.
That's the tricky part because the "risk" is defined differently in
different systems. Generally speaking, it's the maximum amount you can
lose on the trade. I usually use a large disaster stop based on ATR so
it's easy in that case.
risk/trade = contracts * disaster stop
risk/contract = X * ATR
contracts (shares) to trade = Y * account size / ATR
solve for Y
Once you have your list of trades (each trade adjusted for equal dollar
risk) you calculate the max drawdown. Store that number, shuffle the
trades into a random order, calculate the MaxDD again, and store that
number. Repeat a whole bunch of times - 10,000 is good. After you have
the list of 10K drawdowns, sort them in order and play with the numbers
statistically.
In the end, you should generate a table like the one below. This is for
a real system. Every system will be different. Notice how trading just a
little bit smaller can dramatically reduce the risk of blowing out the
account with this particular system. I consider that valuable
information.
As an aside, using Vince's methods, I get an Optimal_F of 26% which is
consistent with the MC results. The MC says, if I risk 26% on each
trade, there is a 99% chance of going broke. Vince fans will say you
should find Opt_F and then back off the leverage some until you feel
comfortable. The problem is they don't give you any way to calculate
"some." The MC helps you decide how much of the account to risk to stay
within your own particular comfort level.
Probability of ruin (drawdown bigger than account size)
Percent of account risked on each trade
0.01% 5.3%
0.1% 6.1%
0.2% 6.7%
0.3% 7.0%
0.4% 7.2%
0.5% 7.4%
0.6% 7.5%
0.7% 7.7%
0.8% 7.8%
0.9% 7.9%
1% 7.9%
2% 8.6%
3% 9.1%
4% 9.5%
5% 9.7%
6% 10.0%
7% 10.2%
8% 10.4%
9% 10.6%
10% 10.8%
11% 11.0%
12% 11.1%
13% 11.2%
14% 11.4%
15% 11.5%
16% 11.7%
17% 11.8%
18% 11.9%
19% 12.1%
20% 12.2%
25% 12.8%
30% 13.3%
35% 13.8%
40% 14.3%
45% 14.8%
50% 15.3%
55% 15.8%
60% 16.3%
65% 16.8%
70% 17.4%
75% 18.0%
80% 18.7%
85% 19.6%
90% 20.6%
95% 22.3%
99% 25.4%
99.9% 28.8%
99.99% 32.5%
--
Dennis
|