R-Multiple Graphs Feature / Reposted
Posted: Wed Mar 19, 2008 1:22 pm
The following post was originally put in the " Trading Blox Support" forum but I realized that not everyone has access to that.
MOD: Link to original posting: viewtopic.php?t=5076
So I am reposting it here for broader access.
Original Post follows:
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I’ve come across an interesting feature of the R-Multiple Distribution & Profit Contribution Graphs.
It wasn’t obvious to me at first and I thought it might be helpful to point it out.
The feature became apparent to me in simulations where there were high R trades that were trimmed in size many times by risk management as they continued to increase in value.
The feature is that each trim ‘created’ a new trade (OK, no surprise). And each ‘trim’ trade added one observation to the R-Multiple Distribution graph with the trim trade’s R value going into the R-Multiple Profit Contribution graph.
So if you have high R trades and lots of trims to manage risk, then your R graphs may ‘look’ much better than a very similar system without trimming.
***
Here’s an (extreme) example to illustrate:
Case 1: System has one trade: one entry and one exit that is high R and no risk management via reduce positions. R graphs have one bar each. See ‘Case 1’ image.
Case 2: Same system, same entry date & size but add risk management by reducing positions. This time we have 29 small trims to manage risk plus the final sale. See ‘Case 2’ image.
The CAGR and final equity of Case 1 & Case 2 (not shown) are fairly close so I would consider the two similar in many respects.
***
Here’s why I’m bringing this up:
Let’s say you have a much larger simulation with many more securities and it has mediocre results.
If you add Case 1’s single trade to this system’s R graphs, you probably won’t think there is a lot of change. Nice to add that one high R trade but probably nothing earth-shaking.
But … if you sprinkle Case 2’s 29 high R trims and final sale into the mediocre system’s R graphs, they could easily make it look like a great system.
MOD: Link to original posting: viewtopic.php?t=5076
So I am reposting it here for broader access.
Original Post follows:
//////////////////////////////
I’ve come across an interesting feature of the R-Multiple Distribution & Profit Contribution Graphs.
It wasn’t obvious to me at first and I thought it might be helpful to point it out.
The feature became apparent to me in simulations where there were high R trades that were trimmed in size many times by risk management as they continued to increase in value.
The feature is that each trim ‘created’ a new trade (OK, no surprise). And each ‘trim’ trade added one observation to the R-Multiple Distribution graph with the trim trade’s R value going into the R-Multiple Profit Contribution graph.
So if you have high R trades and lots of trims to manage risk, then your R graphs may ‘look’ much better than a very similar system without trimming.
***
Here’s an (extreme) example to illustrate:
Case 1: System has one trade: one entry and one exit that is high R and no risk management via reduce positions. R graphs have one bar each. See ‘Case 1’ image.
Case 2: Same system, same entry date & size but add risk management by reducing positions. This time we have 29 small trims to manage risk plus the final sale. See ‘Case 2’ image.
The CAGR and final equity of Case 1 & Case 2 (not shown) are fairly close so I would consider the two similar in many respects.
***
Here’s why I’m bringing this up:
Let’s say you have a much larger simulation with many more securities and it has mediocre results.
If you add Case 1’s single trade to this system’s R graphs, you probably won’t think there is a lot of change. Nice to add that one high R trade but probably nothing earth-shaking.
But … if you sprinkle Case 2’s 29 high R trims and final sale into the mediocre system’s R graphs, they could easily make it look like a great system.