Traders' Roundtable

Trend is up.

A trader well know to everyone in this small corner of the investment universe is invariably assumed to be a purely mechanical trader. A conversation with said trader and a CTA close to said trader a while ago revealed that although the trader has spent many years coding and back testing and ...

I find the attached analysis from David Harding of Winton Capital to be a good summary of the limitations of using drawdown as a statistical measure of the quality of an investment or trading system.

It seems that you have run the starting equity from $8m to $100m in increments of $1m. How many trades are there at the $8m level ? If the number is less than 28145 then this means that you would have had insufficient equity in your account to take all entry signals at the $8m level.

The fact that ...

According to the Kelly formula, your optimal risk for the scenario you demonstrated is:

Kelly = Win % - ((1 - Win %) / (Avg Win/Avg Loss))
= .5 - (( 1 - .5) /(1.02/1.00))
= 0.0098 or 0.98%

Your example bet more than twice the optimal bet size (2%), hence the negative overall result.

It might ...

Thought I would run a quick correlation analysis of the annual returns posted by AFJ to inflation data.

Correlation Results below:

1970-1989: 0.45
1990-2008: 0.09

We often hear that the markets are harder these days, with more money in trend following programs, and greater volatility, but maybe ...

If I were creating a trading system to stand the test of time, I would want to create one which had the most substantial edge, or positive expectation possible. This would be my best bet against a system eroding to the point of break even, or worse.

When you review trend following trading systems ...

Eight years ago I knew a thing or two about the markets, but had no ability to translate that knowledge into profit. The two key factors in my transformation from knowledgeable to profitable trader were:

1) Market Wizards, and

2) Trading Blox

Market Wizards, and in particular the interviews with ...

of far more interest to me than the rule and its discussion...
...is the fact that sluggo got the out of the box turtle system to generate a MAR of over 2 !!!

even with highish leverage/risk i can't get anywhere near that with that system!

Take note of the number of trades, and Sluggo's ...

By definition, any system which has stood the test of time, and is currently (or recently) making new equity highs, will appear to be an attractive candidate for timing the start of your trading the system, or adding new funds, at the time of historic drawdowns. But what about all those other ...

Very similar analogy to poker. Losing players who willingly take the worst of the odds will occasionally bust you, and frustrate you with their illogical thinking, but over the long term, they are the source of your winnings.

Asamat

I don't see anyone advocating trading with position sizes equal to the results driven by the use of the Kelly formula. But to dismiss the Kelly formula as irrelevant to money management is to miss the point entirely.

Lets look at an example:

System A has the following trade characteristics ...

Like many areas of trading, traders often hold many different, and sometimes conflicting opinions on optimal money management methods. I, for example, disagree with the author of the quote you provided.

In my opinion, too much emphasis is placed on estimating the consecutive number of losses a ...

Leveraged ETFs/ETNs which compound daily certainly underperform over the longer term against the index they are intended to track, and as such are generally only geared towards short term traders. There are however, a number of ETFs/ETNs, including quite a few issued by Deutsche Bank, which compound ...

You can use the drawdown reduction threshold to do one of two things: 1) increase your position size as a drawdown emerges (like doubling your bets when you lose), or 2) you can trade smaller to avoid an even larger drawdown.

The first scenario significantly increases your risk of ruin, while the ...

You pose an interesting theoretical problem on robustness and data sufficiency, likely to be answered more by personal preference and gut feel than any proven scientific method.

Before providing my answers to the above questions, I would first want to clarify the definition of robust. Dictionary ...

The difficulty with being a trend follower is that you will never be the "genius" who picked the bottom of the bear market, or the top of the bull market. Only the weaker get traders will get to make that claim (on their fifth, tenth or twentieth attempt). Those same weaker traders will then ask you ...

Cograts on being able to predict the future ?
Another scenario you may wish to consider
Trend following has actually been awful / ish for the last 10 years ? Look at the performances of funds like Dunn and JWH over the last 5 years compared to their early years ?>
Perhaps we are on the verge of a ...

Also attached below is a sensitivity analysis on the slippage factor. Even at 100% slippage, the MAR holds on quite well.

Sluggo

The two systems are indeed the same, with different position sizes as you correctly assessed.

Regarding the round turns per million, the figure is misleading, as the system is backtested over futures and stocks, which distorts the figures.

It is a very long term trend following system ...