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Herman,
A few thoughts, if I may. First of all, the ideas expressed by Tharp are
not his per se. They were derived from interviewing numerous of the most
successful 'market wizards' over the last 15 years. They all shared a few common
traits, and the one trait that was common to all was MM. The systems these
successful traders have and still use are, indeed, high performance systems. I
don't know what you mean by high performance. It would be nice to hear your
definition of high performance. If you define high performance as somethingthat
yields >100% ROI per year, no one does that consistently year after year. As
I said to you in one of my posts, soon you would own the world with that kind of
return. What Tharp teaches is that you can design any type of trading system to
yield any kind of ROI, but the higher the ROI, the higher the dd's you mustbe
willing to experience. Most sane people are simply not psychologically equipped
to withstand 60, 70, 80% dd's. I believe most contributors to the AB forum would
be very pleased making 15-20% per year compounded annually consistently in any
kind of market (up, dn, sideways). I certainly would. Having personally
experienced huge dd's myself as a buyer and holder, not as a trader, has taught
me the need to have stoplosses. Now, stoplosses, although integral to good MM
practices, are not the only thing that encompass MM. They are only one small
part of the whole picture. The biggest part of MM is the objective methods that
can be designed to enable you to determine how much to invest per trade. Inone
of my posts, I asked you to define what you meant by MM, but you never did.I'd
really like to know exactly what YOU mean by MM. Without a firm definition
of terms, it is difficult to have an intelligent discussion of a concept. Now,
let me respond to some of your conclusions:
1. "The need for MM increases with the amount of leveraging you use." This
may well be true with respect to stoplosses, but the need for MM applies atall
levels of leverage. MM controls your risk of ruin, your drawdowns, your
profitability, lots of things. Neither I nor anyone else on this forum have
scratched the surface with all the ways you can improve profitability using
innovative MM techniques. Here is but one simple example. If you are risking 1%
of equity on each trade, and you begin making money to the point that your
equity has risen, say, 20%, you can begin, if you so choose, to start playing
with the market's money. So, if your equity were, say, $100 K and you are
risking $1 K per trade and suddenly you find your equity has grown to $120 K,
you can elect to still risk 1% of YOUR money (now $1200 per trade) plus, say, 5%
of the market's money (the extra $20 K you have just made). So, now, instead of
risking $1200 per trade, you risk $1200 plus 5% of $20 K or $1 K more, or
$2200). Now, your profitability is much higher than before. Why? Because you are
taking a bigger position but still only risking 1% of your equity (plus 5% of
the market's equity). You can increase this even further if you want. At some
point in the future, after you have attained, say, $150 K of equity, you can
call this YOUR equity and return back to 1% max risk. You then repeat the
process as equity grows again. This is but one small way one can increase one's
profit potential with his system. There are many other ways. Another is to use
pyramiding. All of this and more is explained in Tharp's $80 Money Management
Manual, and it is all part of MM. So, you see, MM is not simply use of
stops.
2. "MM will suck the life out of any high performance system." I strongly
disagree with this. All you have to do is follow the huge success of peoplelike
John Henry, Bill Dunn, the market wizards in Schwager's book, any of the Turtles
and their successors, etc., all of whom have used MM techniques successfully for
many years. Reaching such a dire conclusion based solely on what you read and
heard from us on the AB site is unfair and unscientific. Don't take this
personally, Herman. It's just an observation.
3. "Don't believe that if you have a marginal trading system MM will make
you rich." No one that I recall ever said this. In fact, I myself admonished
that no amount of MM will make a negative expectancy system profitable. YouHAVE
to have a positive expectancy system first, then allow MM to enhance your
profitability. Simply comparing a backtest without stoplosses with another
backtest that used stoplosses is not an objective, scientific way to evaluate
MM. In fact, I'm not even sure you can program and backtest the innovative ways
to use MM. Perhaps when TJ comes up with pyramiding, one will be able to begin
such testing. One thing you must keep in mind: expectancy is expressed per
dollar risked, so MM has no effect on expectancy since it only determines how
much to trade. A 2:1 expectancy does not change if the bet size increases. MM
determines bet size.
4. "Probability of profits and risks should be factored into trading
systems." Absolutely true. No question about it. Risk management is part of
MM!!
5. "Most of the protection provided by MM can be duplicated through good
system design and common sense portfolio management, and so without the
disastrous effect on profits due to the application of universal statistical
rules." Again, it appears you are equating MM with stops. That's only one small
part of MM. And, you appear to denegrate statistical rules, yet most of the
systems discussed on this and many other boards use statistical rules for their
system parameters. So, when do you suggest using statistical rules and when
not?
6. "I still do not know how to apply MM to groups or stocks or to TTM
systems." Do you mean groups OF stocks? What are TTM systems? You apply MM to
each trade the same way, and the amount you risk will vary with your equity.
Like I said before, I'm not sure if it is possible to backtest MM techniques
even with AB. I use AB to help me develop my system. When I trade, I will use MM
techniques after I have developed confidence in the system with real trades.
7. "Many MM examples use simplistic conditions to exaggerate the effects of
MM." Can you elaborate here? I'd like to know what you mean so I can respond
intelligently.
Herman, you said you will be reading Tharp's book in a couple of weeks.
Perhaps your views will change after you have given yourself enough of a chance
to truly understand what MM is all about. The discussion on this board, although
excellent, doesn't do justice to the concept in my estimation. You posted some
links on MM, and I have read most of the 10 lessons link. That link consisted
mostly of emails from traders, but there was a lot of excellent discussion of MM
that is valuable. Did you read and study all of it? You should. It is worththe
read. MM is indeed not outdated, as you explicitly stated. I'm convinced (as
strongly as you are not convinced) that MM can and does improve your
profitability.
Again, thanks for the provocative discussion on MM. I really feel you have
not given it anywhere near a complete or scholarly enough consideration to
enable you to reach a proper conclusion or even to support your current
conclusions. Good luck with your readings.
Al Venosa
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Herman vanden
Bergen
To: <A title=amibroker@xxxxxxxxxx
href="">Amibroker@xxxx Com
Sent: Friday, October 25, 2002 12:04
PM
Subject: [amibroker] Money Management
(MM) - Thread Summary
<SPAN
>A
personal review by Herman van den Bergen.
<SPAN
>October
– 2002
A sincere thank
you to all who participated!
This thread took place on <SPAN
>17 October, 2002 <SPAN
class=890574215-25102002>and started with my post “<SPAN
>Once again: Money Management”. I
collected all the posts in a word file (27 pages!) and read it several times.
Some of the examples were very convincing however in the end they<SPAN
class=890574215-25102002>, except for some "personalized versions<SPAN
class=890574215-25102002>", lacked practical substance<SPAN
class=890574215-25102002>. Most were based on or were similar tovan
Tharp’s examples. I have not read van Tharp’s books and reports (but will in a
few weeks) so consider my words in that context.
Whenever
somebody tells me this or that works fantastic I turn skeptical, so it went
with MM. If you want limited risk: go with it! If you have developed a high
performance trading system, don’t use it: find a better way! Van Tharp’s style
of MM has great appeal to traders because it promises limited risk. Many
readers are excited that van Tharp can make a random system profitable –
personally I think he wishes he had never voiced that example.
For van
Tharp, Ralph Vince and others to perform experiments with basically
market-naïve people is deceiving.
Nobody on this list (I hope) is suggesting that you trade without planning,
without research, and without many hours of system development. If you doso
you will loose money, no doubt about it.
I have
been investigating MM only for a couple of weeks and while I agree it mayhave
lots of merit when trading margin or futures I am still not convinced that van
Tharp’s style of money management is the way to go for high performance
mechanical trading systems. I don’t think his style of MM was designed for
those systems, we are in a new era
of system design, his ways are the old ways. Markets and technology
change.
I am saddened by the fact that quite a few system
developers are satisfied with low performance systems; perhaps they are more
traders than system designers. I am not looking for the HG and I am not
chasing a mirage; however two years of testing have convinced me that it is
possible to design many different styles of high performance trading systems –
if you work hard at it.
Let me share with you what I learned/concluded from the
thread:
<LI class=MsoNormal
>Even if one doesn’t
strictly adhere to MM one should know about it.
<LI class=MsoNormal
>The need for MM
increases with the amount of leveraging you use.
<LI class=MsoNormal
>MM Will suck the life
out of any high performance mechanical trading system
<LI class=MsoNormal
>Don’t believe that if
you have a marginal trading system using MM will make you rich.
<LI class=MsoNormal
>Probability of
profits and risks should be factored
into trading systems.
<LI class=MsoNormal
>Most of the
protection provided by MM can be duplicated through good system design and
common sense portfolio management, and
so without the disastrous effect on profits due to the application of
universal statistical rules.
<LI class=MsoNormal
>The greatest risk to
traders is emotional trading, use a mechanical trading system if you can,
invest small amounts you can afford to loose, <SPAN
class=890574215-25102002>trade multiple systems, perhaps use AT
or have somebody else trade for you.
<LI class=MsoNormal
>Nobody has embedded
MM into a mechanical trading system, <SPAN
class=890574215-25102002>however it should.
<LI class=MsoNormal
><SPAN
class=890574215-25102002>I still do not know how to apply MM to groups or
stocks or to TTM systems
<LI class=MsoNormal
>Do not use MM to
compensate for weak system design
<LI class=MsoNormal
>Even when using MM
profits will increase when system performance goes up, <SPAN
class=890574215-25102002>do not use MM as an excuse to stop work on your
trading systems
<LI class=MsoNormal
><SPAN
class=890574215-25102002>I still know of no way to evaluate or
backtest MM techniques
<LI class=MsoNormal
>Many MM examples use
simplistic conditions to exaggerate the effects of MM.
<LI class=MsoNormal
>Parameters like
Expectancy may have a place in stock and system screens
<LI class=MsoNormal
>One can Optimize
trading systems for probability based parameters, like probability of
profits, winners/losers, DDs, etc<SPAN
class=890574215-25102002>.
Here are some of the URLs and other sources of information
that were mentioned:
<DIV class=MsoNormal
>Van Tharp’s book
“Trade Your Way to
Financial Freedom”
<DIV class=MsoNormal
>Van Tharp’s “<SPAN
>Money Management
Report”<SPAN
>
<DIV class=MsoNormal
><SPAN
><SPAN
> <SPAN
><A
href=""><SPAN
>http://www.turtletrader.com/money.html
for a good discussion on MM<SPAN
><FONT
size=3><SPAN
class=890574215-25102002>.<SPAN
><A
href="">http://www.turtletrader.com/money5.html
<SPAN
>another
good MM article
<DIV class=MsoNormal
><SPAN
><A
href="">http://keplerweb.oeh.uni-linz.ac.at/trading/moneyMan.htm
10 Free MM lessons
<DIV class=MsoNormal
><SPAN
><A
href="">http://www.streetstories.com/vt_futures96.html
Interview With Van Tharp:
<DIV class=MsoNormal
><SPAN
><A
href="">www.iitm.com <SPAN
>to learn more about
MM
<DIV class=MsoNormal
><SPAN
><A
href="">http://www.travismorien.com/FAQ/gfallacy.htm<SPAN
> On the gambler's
fallacy
<DIV class=MsoNormal
><SPAN
>Fundamentals of Money Management Part
I<A
href=""><SPAN
>http://www.tsresearchgroup.com/print.php?lang=en&page=public&article=public_20020402010830
<DIV class=MsoNormal
><SPAN
>Fundamentals of Money Management Part
II<A
href=""><SPAN
>http://www.tsresearchgroup.com/print.php?lang=en&page=public&article=public_20020402010739
<DIV class=MsoNormal
><SPAN
>Fundamentals of Money Management Part
III<A
href=""><SPAN
>http://www.tsresearchgroup.com/print.php?lang=en&page=public&article=public_20020402010706
There were many excellent posts, I have a Word file if you
would like a copy send me an email with “Please email MMSummary.doc” and I’ll
send you a copy.
<SPAN
class=890574215-25102002>Thank you all for you marvelous
participation!<SPAN
class=890574215-25102002>Best regards,<FONT face=Arial
size=2>HermanPost
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