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Hello,
I really like to see some AFL codings of such a
random entry system that is profitable.
Ken ??
Regards
Leo
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Ken Close
To: <A title=amibroker@xxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Monday, October 21, 2002 2:22
PM
Subject: RE: [amibroker] Re: 2 cent worth
on MoneyManagement
<SPAN
class=870190912-21102002>Herman:
<SPAN
class=870190912-21102002>
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.
<SPAN
class=870190912-21102002>
He
repeatedly says that the system is less important that the money management
techniques. He does not say it is unimportant. He does
say:
<SPAN
class=870190912-21102002>
<SPAN
class=870190912-21102002>"...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.
<SPAN
class=870190912-21102002>
<SPAN
class=870190912-21102002>"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).
<SPAN
class=870190912-21102002>
I
believe your premise is that you could make MORE money, according to the
system test results you have generated. Can you actually trade themis
the question.
<SPAN
class=870190912-21102002>
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 isthe
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 onecan
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.
<SPAN
class=870190912-21102002>
<SPAN
class=870190912-21102002>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.
<SPAN
class=870190912-21102002>
<SPAN
class=870190912-21102002>Ken
<SPAN
class=870190912-21102002>
<SPAN
class=870190912-21102002>
<SPAN
class=870190912-21102002>
<FONT face=Tahoma
size=2>-----Original Message-----From: Herman van den Bergen
[mailto:psytek@xxxx]Sent: Monday, October 21, 2002 6:04
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: 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 <A
href="">psytek@xxxx. Many thanks!
The sample result attached to
my earlier email was an Overall Performance Report for 100
stocks (N100). <FONT
size=2>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?
<FONT
size=2>
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". <FONT
size=2>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 worriesme 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.
<BLOCKQUOTE
>
<FONT
size=2>-----Original Message-----From: William Wong
[mailto:williamwongab@xxxx]Sent: 21 October, 2002 3:42
AMTo: amibroker@xxxxxxxxxxxxxxxSubject: 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 idlein 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 / $0.52 = 384 shares in this trade.
Something I learnt through paying tuition fees to the market :-)
William
Herman van den Bergen <psytek@xxxx>
wrote:
<BLOCKQUOTE
>
<SPAN
class=060393621-18102002>Thank you William,
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Can you help me link this to a typical AB
BackTest report (attached)?
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>avg win$ = Average winning trade:
15.71
<SPAN
class=060393621-18102002>avg loss$ = Average losing trade:
-17.04
<SPAN
class=060393621-18102002>%Win = Percent
profitable: 61.8
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Plugging these numbers in your formula I
get:
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>Expectation = ( 1 + 15.71 / 17.04 ) * .618 - 1 =
0.172
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>I assume the minus sign for Average losingtrade
is dropped<SPAN
class=060393621-18102002>? 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? <SPAN
class=060393621-18102002>Taking the top ten stocks from this test i
get
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002><SPAN
class=060393621-18102002>Expectation = ( 1 + 35.19 / 42.94 ) *
.706 - 1 = 0.284 still not very good...
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>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 !
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>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 didi 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 :-)
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>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.
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>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 Ihad
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?
<SPAN
class=060393621-18102002><FONT face=Arial color=#0000ff
size=2>
<SPAN
class=060393621-18102002>Many thanks triggering those sleepy
neurons,
<SPAN
class=060393621-18102002>Herman
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>PS. Sorry for not letting this thread
end...
<SPAN
class=060393621-18102002>
<SPAN
class=060393621-18102002>
<BLOCKQUOTE
>
<FONT face=Tahoma
size=2>-----Original Message-----From: William Wong
[mailto:williamwongab@xxxx]Sent: 18 October, 2002 3:31
AMTo: amibroker@xxxxxxxxxxxxxxxSubject: 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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