Form papertrading to trading, is the risk OK?

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Roundtable Knight
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Form papertrading to trading, is the risk OK?

Post by Mats » Thu May 15, 2008 7:11 am

All experienced mechanical traders, please advice.

I have papertraded a trend-following system for a while. It is a donchian with some slight modifications in the correlation area. I trade the "all Liguid" portfolio and tested on the Blox 10 years database.

It is soon time to go from papertrading to real trading but i think it is real hard to determine my risk per trade? Take a look at he table below.

Code: Select all

Risk per trade             CAGR%        Max Tot. eq DD       90% Monte Carlo Conf. DD
0.5%                       28.7%        22.3%                35.4% 
0.6%                       33.5%        26.8%                42.0%
0.7%                       38.7%        30.9%                47.9%
0.8%                       44.1%        34.7%                52.9%
0.9%                       48.9%        38.4%                58.0%
1.0%                       53.6%        42.0%                62.5%    

Greed and fear is my problems as (maybe) always.

What scares me is what the Monte Carlo 90% confidence drawdown level is 62.5% at risk per trade = 1%. I have papertraded at this level and the system performed as i had expected.

Maybe i should start trading at a lower risk, mayber 0.6% risk per trade?

How accurate and real is the the Monte Carlo simulation confidence levels i the real life, do any experienced mechanical trader here have any advice on this item and the different levels of risk per trade?

Alla advices are welcome! Thanks!

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Post by sluggo » Thu May 15, 2008 7:37 am

If you haven't read these threads yet, I think you will find value in them:

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Post by nodoodahs » Thu May 15, 2008 7:40 am

How much money does your system require, at a minimum, in order to trade it as tested? Don't tell me! Just think about that number. Now think about how you'd FEEL if you started trading it today, and by the end of 2008 you had LOST 2/3 OF IT! Would that stop you from continuing to trade the system? Now the other extreme, imagine losing only about 1/3 of it. Would THAT stop you from continuing to trade the system?

Trading is not an arena where you should be concerned with how you think others view you, or to be deluded about how you view yourself. It's not "manly" or commendable to try to trade a system that's beyond your own gut-level risk tolerance; the courageous and smart thing is to know what you can tolerate, and what you cannot tolerate.

The answer to what you should do is inside you.

Other notes:

1) it might be interesting to see the MC simulation's "risk of ruin," i.e. what are the odds of getting a trading-ending margin call at various different R levels. Even if you can tolerate a lot of drawdown, if there are significant odds of going bust, that's something to consider.

2) MC is only as accurate as the input data - it's stringing trades or segments of equity into random orders. There could be, in the next ten years, some event that occurs naturally but just wasn't in your test data, that blows your system past those parameters. That event could be good for you, or bad for you. Accept the inaccuracy of all backtested results and data derived from them as part and parcel of viewing only a SAMPLE of all potential price action.

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Post by 7432 » Thu May 15, 2008 10:08 am

consider also the length of the drawdown you think you can handle.
at your .6% risk level a quick one month hit of 27% might not be too hard to handle.
but what about a 27% drawdown that lasts 7 months? just day after day, week after week of losing trades.
very tough to deal with.

make sure your simulation resembles real life by taking out taxes and expenses.
and resembles real trading by adjusting the max percent volume per trade.
if you leave this number at the 15% level for a ten year test you could be assuming a trade unit size of 10,000 lots of gold. lowering it to 1% will reduce CAGR, but maybe give you a more realistic unit size per trade and reduce your Max DD(but maybe lengthen your DD).

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