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Gwenn,
I enjoyed your little essay. Interestingly, I have heard it said that the
more you have in your account the sloopier your trading tends to become. It
seems to ring true for me also. Just how do you manage to "get up" for all
that testing you discribe?
Best Regards,
Brent
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> From: Gwenn Ael Gautier <Gw.Gautier@xxxxxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Subject: Re: Money management and Trading business
> Date: Tuesday, March 17, 1998 4:15 AM
>
> 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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