When To Start Your System?

Discussions about Money Management and Risk Control.
SimJimons
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Post by SimJimons » Wed Sep 28, 2011 3:53 am

If you are a really savvy asset manager you will start one share class today, hoping it turns out well, and another one in a couple of months if it doesn't :) When no one is looking you will kill the former share class, and whops you have an excellent entry to build your track-record on. Running things in the dark, like this, is widely practiced among large asset managers/banks (while perhaps not on such a cunning level as decribed above).

jpsubguy2
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Post by jpsubguy2 » Wed Sep 28, 2011 6:08 am

Thanks guys for all your comments. Lots to think about.

To be clear, I'm not a fund manager; this is my own hard earned cash and perhaps thats why I'm adding extra weight to this decision. True, I'm in for the long run but one never know when the cash is needed...

I like several comments - Sluggo's "Remorse/Delight" matrix is a good way to quantify the emotion behind the decision. And I really like fjpenny's idea to invest over time. We are, after all, systematic traders. By being sytematic about my entry like fjpenny suggests, I may not get as emotional about the outcome. I'm leaning toward this approach.

Really good stuff, guys, and much appreciated!

JP

Eventhorizon
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Post by Eventhorizon » Wed Sep 28, 2011 12:03 pm

I'll just throw in my 2c ...

I used Winton Diversified Fund's monthly returns to explore the effect of buying in all at once, vs buying in 2 through 12 tranches, each purchase a month apart. I looked at how much equity you would have at the end of the first 12 months. So, going all in, the equity has experienced 12 months of returns. Going in using 12 tranches, the first month has seen 12 months of returns, the last month only one.

Furthermore, I experiments with different levels of leverage (0.5, 1, 2, 3, 4) to get an idea of how these approaches would vary depending upon the heat of the system. As an aside, the unconstrained optimum leverage for this system using LSPM is a little over 4 - hence the range I chose.

Finally, I explored using Winton's first 8 or so years vs their most recent 5yrs 8 months as their performance data clearly shows a change in their risk-control policies between those periods.

To create my twelve months of returns I randomly selected from Winton's monthly return series with replacement. I repeated the test 100,000 times for each scenario and finding the mean and standard deviation of each combination of tranche and leverage.

What I found, not surprisingly really, is a monotonically decreasing performance in returns with more tranches (bear in mind this ignores the obvious transaction-cost and administrative overhead of entering in steps), but a concommitant reduction in variability.

For example, at a leverage of 1, using Winton's recent data, the estimated return after 12 months entering in one go is 13 +- 12% vs 7% +/- 7% entering in 12 tranches. Using Winton's earlier data at a leverage of 1 all in one go delivers 23% +- 26%, while 12 tranches delivers 12% +- 15%.

Similar patterns emerged for all levels of leverage.

My interpretation of this first blush analysis is you are just as likely to end the year with zero return whether you enter all in one go or in stages. The upside is much better entering all in one go. Entering in 12 tranches is probably a fairly good proxy for entering new trades only.

RedRock
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Post by RedRock » Wed Sep 28, 2011 12:27 pm

Eventhorizon wrote:I'll just throw in my 2c ...

Entering in 12 tranches is probably a fairly good proxy for entering new trades only.
A VLT long only system may have been in gold as example, for quite some time. The stop level may be 500.-1000 handles away. Would I really want to enter that trade now... Me, no. Ill forsake the upside on that pony. A shorter term system is easier... New trades coming in the next days or weeks. Enter or wait, the risk is probably more absorbable. The question should be answered on an individual basis.

sluggo
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Post by sluggo » Wed Sep 28, 2011 12:53 pm

It may be difficult to schmeer out your investment across a period of time, if you're trading instruments like futures whose risk per mimimum-tradeable-quantum is very large. If your full-account position size in Natural Gas futures is 2 contracts, it will be difficult to put on that position in twelve equal size pieces.

Spend 15 minutes doing this little experiment, it might make your eyes pop out of your head.
  • In your Blox code, edit the Money Manager script called UnitSize
  • Right after your order.SetQuantity( some_expression ) statement, install a PRINT statement
  • Print out the date, the symbol of the instrument, and (test.totalEquity / your_order_quantity_expression)
  • Notice that the ratio you just printed is the Equity Dollars Required To Trade One Contract
  • Run the system and examine the PrintLog.csv results
I think you may be astonished at just how much money your trading system (occasionally) requires, to trade a single futures contract.

If you plan to gradually dribble money into your trading system, schmeered over N equal tranches, is your account big enough so that every position is at least N contracts?

With stocks, CFDs, spreadbets, and (mini) Forex this isn't nearly as significant.

jpsubguy2
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Post by jpsubguy2 » Thu Sep 29, 2011 10:47 am

Thanks, Sluggo, but this system is a plain vanilla Stocks/ETF system taken from the long side. In the parlance of this forum, it's a "small" account - too small to trade futures. Hope to stock the piggy bank and get into futures down the road.

Been testing and paper trading for months now. Pretty pumped up to get going but admittedly nervous at the same time.

JP

mgdpublic
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Post by mgdpublic » Thu Mar 15, 2012 12:38 pm

For those talking about going all in from the get go, how are you managing stops? That is, if what is typically a 1 ATR initial stop is now 10 ATR's away, do you take the 10 ATR risk or just use a 1 ATR stop from where you enter?

sluggo
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Post by sluggo » Thu Mar 15, 2012 1:08 pm

  • Suppose someone else had started trading your exact system(s) and your exact portfolio(s), three years ago. Also suppose they had started with a small amount of capital and, after three years of trading, had grown it nicely. Further suppose their total account equity today is exactly equal to the amount of money you will use to start trading.

    An interesting question to ask is: After three years and a large number of trades, what positions and what stops does this person have TODAY? They've got the same amount of money as you, they're trading the same systems as you, they're trading the same markets as you. Maybe you should immediately put yourself into their shoes and immediately enter the exact same positions at the exact same sizes using the exact same stops?

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Johnedoe
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Post by Johnedoe » Thu May 31, 2012 10:46 am

I found this to be an interesting article, it may shed some light on your question of when to start..... http://www.automated-trading-system.com ... ew-system/

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