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RE: [amibroker] Re: 2 cent worth on MoneyManagement



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<SPAN 
class=410303521-21102002>Leo:  sorry, but I decline.  However, you 
could buy the Van Tharp book, read the passages, and see if you can code the 
scenario.  I could be highly skeptical of this, and maybe I am partially, 
but Van Tharp has a good reputation and his book is full of data based 
conclusions so I assume this one is correct also.
<SPAN 
class=410303521-21102002> 
Ken 

<FONT face=Tahoma 
size=2>-----Original Message-----From: Leo 
[mailto:leo.timmermans@xxxx]Sent: Monday, October 21, 20021:34 
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: Re: [amibroker] 
Re: 2 cent worth on MoneyManagement
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 
href="" 
title=amibroker@xxxxxxxxxxxxxxx>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 color=#0000ff face=Arial 
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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