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I found an interesting new betsize selection algorithm
(a/k/a "money management procedure") on the web. It intrigued
me so I programmed it for backtesting software and tried it
out myself. I wish there was an Omega Research backtesting
product that would let me run this test across a portfolio of
tradeables, all of them traded simultaneously out of the same
account, but presently there doesn't seem to be any.
So I used Trading Recipes instead.
Then I compared the new betsize algorithm to that old familiar
standby, fixed fractional. Ran them both and plotted their
equity curves.
The source code I used, and the pair of plotted equity curves,
are at <http://traderclub.com/discus/messages/18/1431.html>
)
) By Chuck LeBeau on Wednesday, July 31, 2002 - 12:58 pm:
)
) For what its worth, here is one of my favorite money management
) strategies. I think the easiest way for me to explain it is with
) an example.
)
) We will assume that the starting equity is $100,000.
)
) We will risk $2,000 on each trade until our equity is below $80,000.
) Once equity is below $80,000 we will risk $1500 per trade instead of
) $2,000. At the $60,000 level we will risk $1,000 per trade. We could
) continue to scale down these numbers as far as we want but this is
) enough here to get the idea.
)
) As you can see this is very similar to a fixed fractional strategy
) risking 2% but I believe it is better. It is simpler and it allows
) for quicker recovery from drawdowns than a fixed fractional strategy
) because the position sizes are only reduced at threshold levels.
) At $90,000 we are still risking $2,000 instead of $1800.
)
) Now on the positive side I like to think in terms of risking the base
) amount described above PLUS a higher percentage of the realized
) profits. (I think that Tharp sometimes refers to this as "markets
) money" but I disagree and prefer to think of all profits as "my money".)
)
) Here is an example of how this strategy works when we are winning.
) Assume that we started with $100,000 and we were risking $2,000 per
) trade. Now we have $120,000. We would risk the original $2,000 PLUS 5%
) (or pick another percentage) of the $20,000 of profit. So now we are
) risking $3,000 per trade. At $130,000 we would risk $2,000 plus
) 5% of $30,000 for a total of $3500.
)
) Once we have reached a high level of profit (let's say we are at
) $150,000 now) it is very important to scale back to the original
) strategy where we risked about 2%. At $150,000 I would say the basic
) account size is now $150,00 and we have no profits again. We will
) now risk $3,000 per trade plus 5% of any equity above $150,000.
)
) We are trying to be conservative when losing and extremely aggressive
) when having winning streaks. But after each big winning streak we
) become conservative again. That way we won't get into trouble after
) big winning streaks.
)
) I'm sure that many of you could take this basic idea and refine it and
) make it better. I just like to keep things simple and logical and I
) don't like the fixed fractional approach. I see no point in
) recalculating the amount risked after every trade when losing.
) The difference is usually not that great if you take small losses.
) In the method I am proposing you only need to recalculate once you
) reach a predetermined equity level (like $80,000).
)
) Any comments? Are there flaws in the logic that I might have
) overlooked? Any suggetions to improve on this idea?
)
Hope you enjoy them.
--
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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