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My views:
1 - Trading constant size is riskier than increasing size. Indeed, as
traders you have fixed costs, and you have to face unexpected events in
trading and or life. Let's say you have
- a $100.000 account to live off
- a 100% return yearly
- $80.000 in living, tax and trading expenses yearly
If you are trading constant size, you'll move only very slowly over the
years out of your undercapitalized status.
If you are trading with a view to increase along the way, it may still take
some time, but you will indeed take off.
Now if in two years you have to face a $100.000 instant loss due to an
accident, illness or something, which situation would you rather be in? The
prospect of higher risk due to increased size, is also a prospect of lower
exposure to unforeseen bankruptcy. I vote for the first.
2 - Increasing size is to be tested just as a system is. Sampling, back
testing, forward testing etc. Check all ratios. Is your system displaying
typical behaviors? Do winning streaks follow losing streaks, or are outcomes
randomly distributed? What are your chances of having awiner after a winner?
two winners? etc.
What are your chances of having a winning streak, after a losing one? a
positive return after a negative one? Is their seasonality?
Depending on the above, you may increase in %, in steps or according to
immediate results, period etc.
3 - Consider trading as a losing game, hence play very conservative as long
as your not in a winning position, find ways to be agressive when you are.
May be add along the way, or play much bigger in some circumstances.
4 - ABOVE ALL, BE ABSOLUTELY CONSISTENT. With money management, more than
anything else, lack of consistency will totally ruin your best laid plans.
5 - Take out profits on a consistent basis, in a consistent way. Either you
pull winnings, or you pull revenues, but decide once and for all and TEST,
TEST TEST everything. These steps should account foreway over 50% of the
time you spent on testing your system.
6 - Same for breaks, holidays etc.
7 - Test for capital accumulation. Your plan should allow self insurance.
Remember, anything can happen, and you want to still be around tomorrow.
Plan for the B scenario, your retirement, etc...
Then you may also look at system diversification, market diversification:
8 - I only trade individually working systems, which also work on a combined
basis. Last thing I want is having all drawing down together all the time.
For some time I traded a group of 4 uncorrelated systems, two of which were
underperormers, but very uncorrelated. Guess what, they "max drew down" all
together, tripling a 15 year combined max drawdown (or over 20.000 combined
trades tested).
9 - Know when to stop something that is not working. Just as for a single
trade, your activity must have a stop, if things are not right (see 8
above).
10 - Market or product diversification: Again, each must stand its own test,
and in combination. For me option writing works well with futures system
trading combined. Make sure also, you have the means and resources to follow
it all day in day out.
11 - Ideally, generate revenues elsewhere for basic living expenses. It is
amazing how much this reduces your stress level, and increases your
returns... But is difficult to implement.
Running out of things here...
best to all of you
Gwenn
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