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Paul Zislis wrote:
>While it is true that you can use the same formula in drawdown as in
>equity runup, Jones' book goes into several other variations of
>how to manage drawdowns. They are worth looking into.
Admittedly I have not looked into them in any depth. For good
reason. Allow me to editorialize for a few paragraphs.
The problem I have with Jones' variations is that they seem to be
band-aids to compensate for the failings of his fixed-ratio position
sizing model. He has a stake in promoting it, so he's going to come
up with all sorts of ways to fix its failings.
Fixed ratio fails to account for capitalization, it fails to
account for trade risk or market volatility, it fails to manage
risk and drawdown, it fails to preserve capital. It reacts purely
to net profit without regard to anything else. A small account
can trade itself into nearly 100% drawdown with this technique;
an impossibility for other position sizing methods that yield far
more profit for less risk. I regard fixed ratio as one of the most
dangerous things you can do with your account, almost as bad as
trading with no plan at all.
In my Monte Carlo experiments, I couldn't help but notice that
the distribution of returns using fixed ratio always had a long
tail on the left (low) side of the mean return. This implies a
higher probability of doing worse than the mean, than better. And
invariably a tiny percent of trials achieved the dubious status of
"ruin" -- and this was using trades from a *positive expectancy*
system! In view of this observation I was not surprised to learn
recently that Ryan Jones has traded his own account into a 95%
drawdown level.
For similar mean returns and mean drawdowns, using the same trade
history, all other sizing models I implemented in ProSizer exhibited
symmetrical return distributions with zero chance of ruin.
I'm saying all this because I think that inventing variations to
manage the drawdowns associated with fixed ratio seems like trying
to fix something that was broken to begin with. Why not instead
just use something that works?
--
,|___ Alex Matulich -- alex@xxxxxxxxxxxxxx
// +__> Director of Research and Development
// \
// __) Unicorn Research Corporation -- http://unicorn.us.com
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