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Replying to your message of Saturday, August 24, 2002, 12:16:32 PM,
> I am trying to work out a good way to maximize the geometric growth of
> capital in a fixed portfolio of trading systems and stocks. Traditionally,
> I have traded using a fixed equity model and the profits were not
> invested but withdrawn.
> I could take the empirical optimal-f for each market in the portfolio
> and then readjust the bet sizes as the capital grows.
Optimal f gives optimal growth based on historical results. But,
since the future is likely to be somewhat different from the past,
trading at optimal f may well cause your account to go bust. To
reduce the likelihood of going bust you should consider backing down
from optimal f to a less "optimal" (but also less risky) level of
trading. You might also want to consider the level of f (or Delta, in
the case of Fixed Ratio) to trade at based on a portfolio level
analysis.
> Perhaps it's better to grow the portfolio as the equity grows by
> adding new markets and systems.
Diversification through adding systems and markets can be useful in
reducing risk if your portfolio is not diverse enough. If you think
you have sufficient diversity then I would study position sizing
strategies such as Fixed Fractional and Fixed Ratio.
> Is there a methodology that shows an optimal or best way to simply
> allow the geometric growth of capital (re-investing profits) to reach a
> certain size and then withdraw a specified amount of capital to reduce
> it to a "minimum size", and do this over and over again every time
> the capital reaches its "maximum size"?
I have been testing position sizing strategies that look at this
issue. I define the following portfolio money management parameters:
1. withdraw level (when profit reaches or exceeds this level I
withdraw some equity from account)
2. withdraw amount (this is how much I withdraw when I reach the
withdraw level)
I keep track of and report the number of withdrawals I've made, their
dates and the total amount withdrawn. I subtract the amount withdrawn
from a global variable that represents current account profits.
Position sizing decisions are partially based on this global variable
so that I automatically start trading fewer contracts after an equity
withdrawal.
Since the testing platform I use allows me to run tests on a portfolio
using iteration of money management parameters, I am able to test the
effects of varying withdraw levels and withdraw amounts.
Lest anybody misunderstand, I am a trader, not a vendor. I've put a
lot of energy into building and/or buying tools that I find useful for
my personal trading analysis but I do not sell any such tools.
Paul Zislis
> Thanks,
> -c
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