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I tried that with stocks and got burned badly. You are dollar cost averaging
up. You can turn a series of winning trades into major losers. I much more
prefer "Run and Gun", where you just keep moving to your next initial buy
signal. That way you are always buying in at a presumed bottom. The profits
realized or leverage via unrealized, are reinvested into the next signal
without dollar cost averaging up.
Granted, there are some instruments like crude that have had a long run.
That's also why I use a more sensitive system that trades more frequently. I
would try a system that gives more buys and sells along the way thus
controlling risk. The worst alternative would be a system that has many add
on trades and then goes flat "after" a major retrace. This will kill you if
you are highly leveraged. (Been there, done that)
I do use fixed ratio on one of my least profitable systems ie. many short
lived trades, and this keeps the losses down. The inefficiency of the system
is more than made up by the leverage.
Would you rather have a system that tweaks a few more points out with add-on
trades, or a system that gets fewer points, but leverages up the points you
do earn.
I'll take the latter system any day - my preference.
You are certainly getting to the heart of the matter when you talk about
combinations of trading systems and leverage. Only extensive system testing
combined with money management will answer your question fully.
I would guess that the first trade is likely to risk the least drawdown,
thus the fixed ratio method would have you bet the most. The second trade,
likely to have a bigger drawdown risk, thus less capital would be bet. Bet
size is related to estimated loss/drawdown. So the bet size in relation to
add-on trades would be related to, for example, delta=1/2 drawdown for each
add-on trade based upon the drawdown character of each add-on trade. I
really believe that each add-on trade should be treated as a separate trading
system, including money management for each. I believe Ralph Vince also
takes that approach for optimal f. BTW, his books are worth reading even if
you stay with fixed ratio money management.
Happy Testing
Kevin Campbell
In a message dated 12/7/99 12:50:17 PM Central Standard Time,
polar@xxxxxxxxxx writes:
> I have been playing around with some Ryan Jones fixed ratio method. I
> was wondering how one would go about implementing this strategy with
> systems that allow pyramidding. For example, your buy condition is met
> and you buy 1 contract. The next day your buy condition is no longer
> true but your sell condition is also not true so remain long 1. The
> third day the buy condition becomes true again so a 2nd contract is
> bought. The easiest way (but also most time consuming way) is to treat
> each pyramid signal as an independent system. But this leaves valuable
> capital on the sideline and it also assumes that the maximum number of
> pyramid contracts in the past will not be exceeded. Any ideas?
>
> Brian
>
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