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Hi, Herman:
I thought you had already read Tharp's book Trade Your Way to
Financial Freedom (amazon.com). I think if you read that, you might
change your tune. It's a definite must read. Please refer to my post
in response to DT. MM determines HOW MUCH you should invest in a
trade. Your stops are still your stops, as are your entries and
exits. MM has nothing to do with any of that, so MM works with
mechanical as well as discretionary type of trading. If you use a
fast system, that's fine. MM simply tells you how much to buy or
sell, that's all. Keeping your losses to 1-2% of equity does NOT AT
ALL mean you have to trade a lot of stocks. Let's take an example.
Suppose your equity is $100,000 and you want to buy a $30 stock
tomorrow at the open. Suppose your system stoploss is, say, 1 ATR,
and the ATR for that stock is $1. So, you are willing to exit the
trade for a loss if the stock declines to 29 from 30. You also
determine that you only want to incur a 1% loss of equity if the
trade goes against you, which is $1000. To determine position size,
you divide $1000 by $1 (the stoploss), giving you 1000 shares to buy.
Your allocation is $30,000 to take the trade ($30 * 1000 shares). If
the stock declines by $1, you have lost only $1000. But, your stake
is 30% of your equity. See what I mean? That's what is meant by 1%
loss of equity. If your stoploss is larger (say 2 ATR), your trade
size is smaller (500 shares in this example). So, if your mechanical
system requires very tight stops (say, 0.5 ATR or even less), you can
take on huge positions and still control your loss to 1%. That's how
it works. Most successful traders limit their loss risk to no more
than 3% max. Anything beyond that is considered gunslinging.
Al Venosa
--- In amibroker@xxxx, "Herman van den Bergen" <psytek@xxxx> wrote:
> Thank you Al, for your very informative post.
>
> I visited the web sites you mentioned... Didn't get too far with
> the Tharp page as I had to register, I just don't want any more
> email. Read some of the material but was not too impressed. I
> don't like sites where they are too eager to get you on their
> mailing list. Will try to get a look at his book though. Looked
> like his methods may not apply to well to mechanical and active
> trading... even applying basic stops to mechanical systems seems
> to kill them - at least for me: profits drop from >300% to 75%.
> Also, to keep losses to 1-2% of total means you have to trade an
> awful lot of stocks, over diversification will also reduce your
> profits. Perhaps they practice more moderate gains trend
> following than short term mechanical trading. I am just rambling
> a bit :-)
>
> I can't help but think that any interference (MM) with a
> mechanical system leads to disaster... but I may be wrong. I have
> found that potential profits are generally inversely proportional
> to trade duration - therefore my systems are pretty fast; it is a
> trade-off between slippage and trade duration.
>
> I read the example about 100 Ph.ds or something like that,
> doesn't apply to mechanical trading at all. So I thought that one
> irrelevant.
>
> I liked the turtle site better...it was interesting to visit the
> sites and i will go back to do some more reading tomorrow. Thanks
> for the interesting URLs!
>
> I have tried PositionSizing; not much success there either. I
> must be doing something wrong...
>
> Best regards,
> Herman.
> -----Original Message-----
> From: Al Venosa [mailto:avcinci@x...]
> Sent: 17 October, 2002 8:24 AM
> To: amibroker@xxxx
> Subject: Re: [amibroker] Once again: MoneyManagement
>
>
> Herman,
>
> I haven't begun real trading with money management techniques
> yet, so I cannot give you any examples. But, from all I've read
> and studied on the subject (over the last 11 months), I'm
> convinced beyond all doubt that MM is the ONLY way to go to make
> good money, period, regardless of the system you are using. The
> whole idea behind MM is to control risk. The underlying theme is
> let your profits run, cut your losses short. If you cut your
> losses (limited to only 1 or 2% of equity, max), you are still in
> the game. Now, keep in mind that you MUST have a positive
> expectancy system to begin with. No amount of MM will make a
> losing system profitable. You should play one of Tharp's marble
> games to convince you of the wisdom of proper MM. Visit
> www.iitm.com to learn all about MM. Also, check out
> www.turtletrader.com.
>
> Regarding AB's ability to accommodate MM, it does so somewhat
> with the position sizing function. However, innovative MM
> techniques are not codable currently (such as pyramiding, playing
> the market's money, and other forms of equity manipulations). TJ
> has promised that capability by years end. Once that's
> implemented, I think you may be able to begin creating code that
> addresses MM do the degree you need to convince you of its
> veracity (I hope). In the mean time, if you want to plunk down
> $80 to read Tharp's Money Management Report (a bit expensive but
> well worth the investment IMO), you will be in for a good
> awakening.
>
> Al Venosa
>
>
> >From: "Herman van den Bergen"
> >Reply-To: amibroker@xxxx
> >To: "Amibroker@xxxx Com"
> >Subject: [amibroker] Once again: MoneyManagement
> >Date: Thu, 17 Oct 2002 15:59:48 -0400
> >
> >I have just one question: Does it really work?
> >
> >Is it worthwhile for me to spend hundreds of hours reading
> boring
> >books and trying all kinds of code that doesn't work?
> >
> >Can anybody honestly tell me that they increased performance
> of
> >their trading system by more than 100% or reduced their
> Drawdowns
> >by 50% or more, using money MM techniques? Or even better:
> turn a
> >loosing system into a winner?
> >
> >Or is it ALL about reducing risk and never mind that the
> profits
> >dwindled to 20% of what it was before MM?
> >
> >Any encouragement for me to dig into, or not to dig into, this
> >topic would be appreciated. Examples of how MM benefited you
> >would be appreciated...
> >
> >Many thanks,
> >Herman.
> >
> >PS. Are MM techniques implemented in AB or externally?
> >
>
>
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