Pre-emptive money management
Posted: Wed Nov 22, 2006 3:57 am
ok, for the record, i am a true beliver in following the trend and sticking to my system rules(ie no cherry picking or screwing around based on hunches etc.). I also do not trade off the back of any fundamental info etc.
now that is off my chest, here comes the Heresy:
systems never take into account scheduled events ahead of the fact. this has impacts depending on the time frame you trade in relation to the scale of the scheduled event. so the following will mean more to short term traders than pure LTTF.
e.g.trading bonds, lets say you employ a volatility based sizing approach on entry. mkt is quiet, you have no position. but Fed is releasing a rate announcement and all the pundits are split 50/50 on how big and which way(i.e. it is a complete unknown and the release could be way out of line either way).
if you stick to the system you could be putting on a large sized position on the back of a triggered signal, that then tears you a new arse. yes, it could go your way, but if it doesn't...you are overleveraged perhaps in relation to standard size.
i guess it is like the old historical vs implied volatility thing.
anyway, to cut a long story short, in a large percentage of backtests on my systems, if i looked closely into the sequence of trades that made up the 2-3 largest drawdowns in the backtest history, i found that they inevitably included a "go large into massive adverse volatility trade" ..or 3.
i also looked at some DDs that were 4/5 as deep as the worst, and found that some of these contained a couple of "large size into volatility" entries, that happened to go my way- but if they didn't , and went the opposite way, then these drawdowns would have exceeded the max drawdown of the backtest.
To sum up:
by cutting size ahead of an expected volatilty surge(i.e a known event that meets a systematically defined criteria, not a just hunch that it is "quiet, too quiet"), i have been able to outperform the historical backtest of my current system. I should add that i replace the size within a short time, if still in the position. Even though it might raise the open trade risk when the market goes your way and you have to renter the size further onside, it is a small price to pay for the advantage of having a small postion on when the storm hits.
Also i have noticed anecdotal evidence that suggests, the biggest spikes occur AGAINST my existing positions- if i am aligned with the rest of the market, then we all have to react if an event goes against the grain(i.e. buy the rumour , sell the fact). So cutting trend following positions ahead of major figures may actually have a positive expectancy, and not just a risk control benefit, in the short term after the figure(though given enough time, the trend often reasserts itself, but by then i usually have the full position on again, or the small temporary position is stopped out, and i am taking new entries again).
over to you guys.
now that is off my chest, here comes the Heresy:
systems never take into account scheduled events ahead of the fact. this has impacts depending on the time frame you trade in relation to the scale of the scheduled event. so the following will mean more to short term traders than pure LTTF.
e.g.trading bonds, lets say you employ a volatility based sizing approach on entry. mkt is quiet, you have no position. but Fed is releasing a rate announcement and all the pundits are split 50/50 on how big and which way(i.e. it is a complete unknown and the release could be way out of line either way).
if you stick to the system you could be putting on a large sized position on the back of a triggered signal, that then tears you a new arse. yes, it could go your way, but if it doesn't...you are overleveraged perhaps in relation to standard size.
i guess it is like the old historical vs implied volatility thing.
anyway, to cut a long story short, in a large percentage of backtests on my systems, if i looked closely into the sequence of trades that made up the 2-3 largest drawdowns in the backtest history, i found that they inevitably included a "go large into massive adverse volatility trade" ..or 3.
i also looked at some DDs that were 4/5 as deep as the worst, and found that some of these contained a couple of "large size into volatility" entries, that happened to go my way- but if they didn't , and went the opposite way, then these drawdowns would have exceeded the max drawdown of the backtest.
To sum up:
by cutting size ahead of an expected volatilty surge(i.e a known event that meets a systematically defined criteria, not a just hunch that it is "quiet, too quiet"), i have been able to outperform the historical backtest of my current system. I should add that i replace the size within a short time, if still in the position. Even though it might raise the open trade risk when the market goes your way and you have to renter the size further onside, it is a small price to pay for the advantage of having a small postion on when the storm hits.
Also i have noticed anecdotal evidence that suggests, the biggest spikes occur AGAINST my existing positions- if i am aligned with the rest of the market, then we all have to react if an event goes against the grain(i.e. buy the rumour , sell the fact). So cutting trend following positions ahead of major figures may actually have a positive expectancy, and not just a risk control benefit, in the short term after the figure(though given enough time, the trend often reasserts itself, but by then i usually have the full position on again, or the small temporary position is stopped out, and i am taking new entries again).
over to you guys.