Piecewise % per trade based on equity

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Eric Winchell
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Piecewise % per trade based on equity

Post by Eric Winchell » Fri Jun 13, 2008 8:32 pm

Hidden genius in Mark Johnson's old PGO system:

Bet a variable percentage of equity on every trade

Make the variable percentage equal to 2.0%, times "A" where "A" is an "aggressiveness" factor. When the account is small, we will be aggressive. When the account is big, we will be unaggressive.

Calculate A as a function of total account equity, using these piecewise linear equations:

if (equity < 100K) or (equity > 1.3M) then A=1.0

if (100K < equity < 180K) then A = 1.0 + ((equity - 100K)/80K)

if (180K < equity < 600K) then A = 2.0 - (0.6 * (equity - 180K)/420K)

if (600K < equity < 1.3M) then A = 1.4 - (0.4 * (equity - 600K)/700K)

Mark Johnson
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Post by Mark Johnson » Fri Jun 13, 2008 9:13 pm

If you plot "A" versus account equity, you will see that it peaks at A = 2.0 when equity = 180K.

Aggressiveness = A = 2.0. Think about that! It means you are betting double size at this particular value of equity. If you happen to go into a drawdown at a moment when you are trading with A=2.0, it will disembowel your account twice as fast as normal. Do you think you could handle it?

There are many criticisms of the "bet bigger when your account is small" idea, here on this website. AFJ Garner, Kiwi, and others have all cautioned against it quite strongly. The first half of Ryan Jones's Fixed Ratio trading method (the half he calls "Rate of Increase") does pretty much the same thing: bet bigger when your account is small. Many more people have weighed in against Jones on this idea, here and elsewhere. They call it a prescription for disaster and much worse.

So: beware. Don't do it if you can't handle a double size drawdown when your account is small. Many would say, don't do it at all.

Eric Winchell
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Post by Eric Winchell » Sat Jun 14, 2008 3:53 pm

Risk percentages aside, the principal of it seems natural. Take more risk now, less risk later. It's considerate of the idea that the system's worst case might be just ahead.

If it's useful in the first place, the most useful way to trade the equity curve might be day one. Start with higher risk during a DD and then use the piecewise bet sizing.

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