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Herman,
Your posts are right-justified in my hotmail email. I presume you are not doing that on purpose, are you? It's harder to read.
Al Venosa
>From: "Herman van den Bergen"
>Reply-To: amibroker@xxxxxxxxxxxxxxx
>To:
>Subject: RE: [amibroker] Re: 2 cent worth on MoneyManagement
>Date: Mon, 21 Oct 2002 21:23:04 -0400
>
>Thanks Ken, i appreciate your comments. I am a slow learner and
>will probably be swayed to MM one way or another at some future
>date. btw, I try not to over-optimize and all my final tests are
>out-of-sample, usually the most recent 260 days.
>
>I just think that giving MM priority over basic system design is
>putting the cart before the horse and will undoubtedly limit your
>profits. I also think most AB users are way too skeptical about
>high performance systems. Excellent ideas have been posted on
>this list that with a little more work can give excellent
>results. Some of these ideas are not even responded too :-) we
>all seem so preoccupied with what we are doing (all hot on the
>trail of an HG?) that we miss marvelous ideas that are posted.
>
>The difficulty of practical trading is the same for MM and non-MM
>systems. I agree with the problem of emotionally trading... that
>is why I was posting some time back on AT and having a broker do
>it for me.
>
>But I appreciate your explanations very much, as you see from my
>responses I do take this topic serious :-) when i get back to
>Canada i will try to get van Tharp's book from a library.
>
>Best regards,
>Herman.
> -----Original Message-----
> From: Ken Close [mailto:closeks@xxxx]
> Sent: 21 October, 2002 8:22 AM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: RE: [amibroker] Re: 2 cent worth on MoneyManagement
>
>
> Herman:
>
> I have held up commented on your repeated request because I
>thought others much more skilled and practiced in Van Tharp's
>book and his principles would have replied. Al V has not so
>perhaps I am misinterpreting Van Tharp.
>
> He repeatedly says that the system is less important that the
>money management techniques. He does not say it is unimportant.
>He does say:
>
> "...you could make money consistently with a random entry as
>long as you have good exits and size your position intelligently"
>(quoting a seminar participant, pg 200). He agrees with the
>participant and goes on to do various studies which confirm the
>comment.
>
> "That's it. That's all there was to the system--a random
>entry, plus a trailing stop that was three times the volatility,
>plus a one percent rick algorithm to size positions."...."This
>system made money on 80% of the runs when it only traded one
>contract per futures market. It made money 100% of the time when
>a simple 1 percent risk money management system was added.
>That's pretty impressive. The system had a relieability level of
>38%, which is about average for a trend following system." (pg
>201).
>
> I believe your premise is that you could make MORE money,
>according to the system test results you have generated. Can you
>actually trade them is the question.
>
> It seems to me that there is a vast difference between running
>an optimization over and over and getting percent returns in the
>triple digits and actually trading the same trades with real
>money in real time. Psychology is the difference and in spite of
>all you say and all the testing you do, you will not -- and can
>not -- trade as consistently as the backtest. If one can do
>that, unconcerned with drawdowns (or at least really able to not
>second guess, not swing with emotion), then perhaps the largest
>return system result will wind up in the bank account. I know I
>can not do this.
>
> Meanwhile, while I have not done Tharp's extensive testing, I
>believe him that the money management and position sizing results
>in the best balance in the bank account when all else is said and
>done.
>
> Ken
>
>
>
> -----Original Message-----
> From: Herman van den Bergen [mailto:psytek@xxxx]
> Sent: Monday, October 21, 2002 6:04 PM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: RE: [amibroker] Re: 2 cent worth on MoneyManagement
>
>
> Hi William and all,
>
> Thanks for your reply. You say "See attached excel file on how
>to calc risk of ruin"... sorry but there was no attachment. Would
>you mind emailing it again, it might have been stripped off by
>Yahoo, my email is psytek@xxxx Many thanks!
>
> The sample result attached to my earlier email was an Overall
>Performance Report for 100 stocks (N100). This brings up the
>point of whether the Expectancy test is valid on groups of
>stocks. Any comments on that? Perhaps this is why my results were
>way off?
>
> I do not understand when you say "You are also right the
>example you have with payoff ratio of less than 1, the problem
>might just be at the stop loss". I don't use stops in system
>design... I believe stops and position-sizing distorts the true
>nature of a system and handicaps equity analysis and development.
>Can you explain your statement?
>
> A point that worries me is that to apply strict money
>management techniques one must have big sums to trade. I would
>guess that if the minimum requirement is $200K than many
>subscribers on this list don't need to worry about MM :-) Any
>comments?
>
> So, this brings me back to the question of which comes first:
>developing a good trading system or a MM system. I think the
>trading system comes first, MM will only be as good as the system
>we trade. Right?
>
> However, I am intrigued with the screening possibility offered
>by the Expectancy factor. This can be implemented right in the
>trading system. Also, 2D/3D Expectancy charts for optimizations
>are very interesting. But I would like to find a better formula,
>the one I am using looks too much like my Equity curves (if
>normalized); not sensitive enough. There must be many variations
>of it out there... I'll keep looking.
>
> Best regards,
> Herman.
>
> -----Original Message-----
> From: William Wong [mailto:williamwongab@xxxx]
> Sent: 21 October, 2002 3:42 AM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: RE: [amibroker] Re: 2 cent worth on MoneyManagement
>
>
> Hi Herman,
>
> Essentially you are right. It is a mathetical expecation.
>You are also right the example you have with payoff ratio of less
>than 1, the problem might just be at the stop loss. Such low
>payoff ratio means the risk of ruin could be quite high. See
>attached excel file on how to calc risk of ruin. I would focus
>on getting a system with > 1 pay off ratio and > 50% times
>profitable.
>
> Btw, the Risk Adj Ann Return% in AB's report is not how one
>would interpret it. This return is "adjusted" by the % of
>exposure you have in the market. I.e., if your system seldom
>takes position in the market, this return will be inflated, it
>assumes when your money is not working for you in the market, it
>is working some where else which generates the same return. This
>may not be the case.
>
> The unadjusted return is more realistic as usually our money
>is idle in a trading account, a more conservative number.
>Anyway, your exposure is close to 100%, hence this return comes
>close to the unadjusted one.
>
> One more thing, focus on the drawdown, your trade and system
>drawdown are very high, close to 90%. This means you need to be
>very strong in conviction to carry through using this system as
>you will be beaten almost flat before it makes money for you.
>Most professional restricts a drawdown of a single trade down to
>2% as a rule of thumb, this got to do with the money mgmt. For
>example, if you have $10,000, you have identify a trade to buy
>SUNW at $2.50 with a stop at $2.00. The risk (include commission
>$0.02 per share per round trip) is $0.52. Using 2%, I would only
>risk $200, i.e., $200 / $0.52 = 384 shares in this trade.
>
> Something I learnt through paying tuition fees to the market
>:-)
>
> William
>
> Herman van den Bergen wrote:
>
> Thank you William,
>
> Can you help me link this to a typical AB BackTest report
>(attached)?
>
> avg win$ = Average winning trade: 15.71
> avg loss$ = Average losing trade: -17.04
> %Win = Percent profitable: 61.8
>
> Plugging these numbers in your formula I get:
>
> Expectation = ( 1 + 15.71 / 17.04 ) * .618 - 1 = 0.172
>
> I assume the minus sign for Average losing trade is
>dropped? This was a backtest on the N100 so I am not quite sure
>how to interpret this if we apply the formula to groups... ideas?
>Taking the top ten stocks from this test i get
>
> Expectation = ( 1 + 35.19 / 42.94 ) * .706 - 1 = 0.284
>still not very good...
>
> It looks like my decision to work first on trading systems
>before tackling MM was correct: i am a long way off from 0.7 !
>
> Still, I am not quite sure what to think of this... the
>first test gave me 161%/ann average for 100 stocks, the second
>test gave me 660%/ann average for 10 stocks (of course assuming I
>could screen the best stocks) over about 5000 trades. To get 0.7
>I'll have to be making thousands of percent per year... where did
>i go wrong? I guess the problem is that the losers are too big,
>adding stops might improve the Expectation rating but would
>reduce profits... hmmm sounds familiar :-)
>
> So, we need to Optimize for Expectation... now, wouldn't
>that be fun?! I might just work on that this weekend :-)
>AmiBroker can do anything, right? I love a good afl challenge.
>
> Intuition tells me the formula ought to have a factor for
>frequency/distribution of trading/profits and the testing period
>under consideration. This formula would give good results if I
>had only two very profitable trades and two small losers - not
>right... WinTradeDuration/LosingTradeDuration probably ought to
>be in there too... How can we factor those in?
>
> Many thanks triggering those sleepy neurons,
> Herman
>
> PS. Sorry for not letting this thread end...
>
>
> -----Original Message-----
> From: William Wong [mailto:williamwongab@xxxx]
> Sent: 18 October, 2002 3:31 AM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: RE: [amibroker] Re: 2 cent worth on
>MoneyManagement
>
>
> My 2 cents worth on money management.
>
> A system performance is governed by a combination of
>%winning trades and pay off ratio (avg win$ / avg loss$). If an
>expectation of a system is negative, no matter how good the money
>management, it only slows down an eventual death.
>
> Expectation = (1 + pay off ratio) * %win - 1
>
> e.g. If a system gives pay off ratio of 2:1 but only
>profitable 30% of the time,
>
> Exp = (1 + 2) * 0.3 - 1 = -0.1, not worth using
>
> But if the accuracy is improved to 40%,
>
> Exp = (1 + 2) * 0.4 - 1 = 0.2, worth using
>
> The higher the expectation, the better the system. Rule
>of thumb is to improve to at least 0.7.
>
> Now when a system has a positive expectation, then money
>management comes into play. MM is about reducing the Risk of
>Ruin, the chance of lossing x% of your portfolio before you
>decide to quit. It about staying in the game. It is the
>different between punting and making a living on trading. A
>mediocre system (positive expectation) with a sound money mgmt is
>good enough to trade for a living.
>
>
>
>
>
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> Overall performance summary
>
> Total net profit: 16397.46 Total commissions paid:
>0.00
> Return on account: 167.32 % Open position
>gain/loss -525.51
> Buy&Hold profit: -3024.58 Bars (avg. days) in test:
>25480 (375)
> Buy&Hold % return: -30.86% System to Buy&Hold
>index: 642.14%
>
> Annual system % return: 160.40% Annual B&H %
>return: -30.18%
>
> System drawdown: -82.66 B&H drawdown: -92.85
> Max. system drawdown: -1191.56 B&H max.
>drawdown: -260.31
> Max. system % drawdown: -93.74% B&H max. %
>drawdown: -95.74%
> Max. trade drawdown: -581.29
> Max. trade % drawdown: -88.23%
> Trade drawdown: -444.52
>
> Total number of trades: 5295 Percent profitable:
>61.8%
> Number winning trades: 3272 Number losing trades:
>2023
> Profit of winners: 51391.78 Loss of
>losers: -34468.81
> Total # of bars in winners: 16905 Total # of bars
>in losers: 13187
> Commissions paid in winners: 0.00 Commissions paid
>in losers: 0.00
>
> Largest winning trade: 258.56 Largest losing
>trade: -357.47
> # of bars in largest winner: 4 # bars in largest
>loser: 7
> Commission paid in largest winner: 0.00 Commission
>paid in largest loser: 0.00
>
> Average winning trade: 15.71 Average losing
>trade: -17.04
> Avg. # of bars in winners: 5.2 Avg. # bars in
>losers: 6.5
> Avg. commission paid in winner: 0.00 Avg.
>commission paid in loser: 0.00
> Max consec. winners: 15 Max consec. losers: 8
>
> Bars out of the market: 194 Interest earned: 0.00
>
> Exposure: 99.2% Risk adjusted ann. return: 161.63%
> Ratio avg win/avg loss: 0.92 Avg. trade (win &
>loss): 3.20
> Profit factor: 1.49
>
>
>
>
>
>
>
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