Thanks for the direction Howard...I look forward to Advanced Amibroker. Ray
--- In amibroker@yahoogroups.com, Howard B <howardba...@...> wrote: > > Hi Ray -- > > The answer to your question is a couple of chapters in my next book, > Advanced AmiBroker. While waiting for me to finish (no definite date for > release), you might read: > 1. any of Ralph Vince's books. All are worth reading. His most recent is > "The Leverage Space Trading Model". > 2. Van Tharp's "Trade Your Way to Financial Freedom". Get the second > edition. In the first edition his explanation of expectancy is wrong. In > the second, it is more nearly correct, but still non-standard. If you read > his "Definitive Guide to Position Sizing", be aware that all of his examples > are artificial and unrealistic. There is a thread on Aussie Stocks Forum > discussing that book with many of my comments. > 3. Nassim Taleb's "Fooled by Randomness". > 4. David Aronson's "Evidence Based Technical Analysis". > > Several authors correctly point out the importance of position sizing in the > long-term profitability of a trading system. The very important point to > keep in mind is that estimates of trading results used to determine the > position sizing must come from unbiased out-of-sample data. Using in-sample > data will seriously underestimate the risk and lead to significant losses or > bankruptcy. > > There are two components to the risk analysis, and they must be kept in > balance. > One is the risk a trader is willing to take in his or her account on any > single trade. The recommended maximum risk is often in the 1 or 2% range. > If a person has a (notional) $100,000 trading account, 1% risk is $1000. > This means that the trader should hold the maximum loss of any single trade > to $1000. > The other is the risk associated with the trading system. Measure the > (out-of-sample) mean and standard deviation of trades, or mean and maximum > adverse excursion of trades. The standard deviation or MAE is (almost) > always significantly greater than the mean. Per trade risk is, or at least > can be, determined as some multiple of standard deviation or MAE. If a > trading system has an expectancy of 0.5% with a standard deviation of 1.5% > (not an untypical ratio), and maximum risk is computed as 2 times standard > deviation, the risk associated with this system is 3%. > > Assume the system gives a signal to buy some issue -- say an ETF that trades > at $50.00 per share. The maximum risk is 3% or $1.50 per share. If the > entire $100,000 is allocated, 2000 shares could be purchased. If the trade > goes bad, $3000 could be lost. Since the $3000 risk associated with the > trading system is greater than the $1000 risk associated with the account, > the position size is too big. The maximum position size that can be taken > is the ratio of the account risk to the trading system risk -- 1:3. To keep > the two risk components in balance, the trader can take a position of 1/3 of > $100,000, or 666 shares. Even without using leverage or margin, a trader > who takes a position with all of the funds in his or her account is > seriously at risk. In this example, the trader allocating all the funds is > trading at 3 times leverage in a cash, un-leveraged, account > > All trading systems that have a non-zero probability of unlimited loss on > any single trade have a non-zero probability of going bankrupt. The > probability of that system going bankrupt increases to certainty as trading > continues. > > Aggressive position sizing is necessary if a trader hopes to accumulate > serious wealth. Ralph Vince developed / popularized "optimal f", an > algorithm to calculate the fraction of a trading account that should be > "bet" on any single trade in order to maximize terminal wealth. Systems > that trade at optimal f are expected to have drawdowns in the 80% range on > their way to the final wealth. Trading at optimal f, or anywhere near it, > will create drawdowns that most traders cannot tolerate. In fact, when > applying statistical methods to determine whether a trading system is broken > or not, most systems would appear to be broken before they recovered. As > Vince points out, trading at a risk level higher than optimal f assures > bankruptcy. And, as he points out in "Leverage Space", if a multisystem is > being traded (either multiple systems or multiple tradables), if any one of > the systems is traded at a level higher than optimal f, the multisystem is > assured of bankruptcy. > > The topic is a little more complex than explained here, but this should be a > reasonable start. > > Thanks for listening, > Howard > > > On Tue, Jul 20, 2010 at 1:55 PM, raymondpconnolly < > raymondpconno...@...> wrote: > > > > > > > Hi Howard, > > > > When deciding on position size vs. Max. Sys % Drawdown is it advisable to > > use the minimum (minimum negative value) or the mean of Max. Sys % Drawdown? > > Does use of the control chart methodology you outline in the ATAA > > presentation alleviate the risk of a minimum Max. Sys % Drawdown scenario so > > that more aggressive position sizing can be taken based on mean rather than > > the minimum of Max. Sys % Drawdown ? > > > > My system seems be able to recover even when minimum Max. Sys % DD = -33% > > which based on OOS results occurs with less than 1% probability but it still > > occurs. My average profit drops 75% if I constrain Position Size as % of > > equity to 2% in order to achieve minimum Max. Sys % DD = -18% . My objfn is > > RAR/MDD, I'm happy with my equity curve and have expectancy > 0 with 99% > > confidence but not sure how far I can push the position size. > > > > Thanks for your thoughts. > > > > Regards, > > Ray > > > > > > >
