Heat

Discussions about Money Management and Risk Control.
alerionsailor
Contributing Member
Contributing Member
Posts: 9
Joined: Wed Jan 05, 2005 8:20 pm

Heat

Post by alerionsailor » Thu Aug 24, 2006 5:16 pm

In much of what I read I gather that most do not bet more than 1- 3 % per trade. In my testing of a particular system I notice that return rises sharply with incresed betsize without and equal but opposite rise in total equity drawdown.

In my tests I am using 5% with simulated DD's in the mid 30's%. DD numbers don't beging to get much larger until betting surpases the 7% mark.

Does anyone here bet in the 5% range? Are 200 trades taken in 10 year simulation enough, in the opinion of anyone who wishes to respond, to constitute an viable test?

Thanks to all the contributors to this board. The generosity here astounds me.

RedRock
Roundtable Knight
Roundtable Knight
Posts: 939
Joined: Fri Jan 30, 2004 3:54 pm
Location: Chicago

Post by RedRock » Thu Aug 24, 2006 5:30 pm

Trust this fact... The future does not = the past exactly. Your perfect world 30%dd may well end up being a 50% drawdown at 2%. Now, at 5%, you're broke. :o

Not saying you shouldnt "go for the ring". But he who survives, lives to trade another day.

Turtle40
Roundtable Knight
Roundtable Knight
Posts: 201
Joined: Wed Oct 19, 2005 1:53 pm
Location: Guernsey, Channel Islands

Post by Turtle40 » Thu Aug 24, 2006 6:35 pm

I would second what RedRock says. I only risk 1%/trade, and that is with an "historical" drawdown of around 30%. At present I am in a drawdown period that is as bad as the historical drawdown, due to the lack of any real sustained trends in the markets I follow. Keeping a 1% limit is psychologically OK for me, if it were any higher, I would be feeling a little uneasy by now. Interestingly John Henry, the well known trend follower expresses similar "problems" with returns for their programes in the latest monthly market commentary (www.jwh.com).

I would also disagree with your assertion that greater risk/trade has little effect on drawdown. From my testing, using MAR as the main measure, I achieve a MAR of 2.08 with 1%. Once the risk is doubled to 2% the MAR decreases to 2.05. That may not sound much, but is the difference between a drawdown of 25.9% and 41.6%.

When you have half a dozen open positions go against you at the same time, the equity swing can be huge, even at 1%.

Having said all that, many other factors have to be considered, account size being an important one. You must decide what you feel comfortable with, in terms of risk v reward.

-Turtle40

LongShot
Senior Member
Senior Member
Posts: 32
Joined: Thu Dec 01, 2005 11:23 pm

Post by LongShot » Thu Aug 24, 2006 8:16 pm

Alerion, RedRock, Turtle40

What´s your average % risk per trade? What type of order are you using for entering trades?

RedRock
Roundtable Knight
Roundtable Knight
Posts: 939
Joined: Fri Jan 30, 2004 3:54 pm
Location: Chicago

Post by RedRock » Thu Aug 24, 2006 9:06 pm

LongShot wrote:Alerion, RedRock, Turtle40

What´s your average % risk per trade? What type of order are you using for entering trades?
:roll:



.

Stephen
Senior Member
Senior Member
Posts: 41
Joined: Tue Jul 18, 2006 12:17 am
Location: Jakarta, Indonesia

Post by Stephen » Thu Aug 24, 2006 11:29 pm

Alerion,

Thanks for your post. What you said resonates with where I am at the moment with Trading Blox Pro and my first two weeks of exploring the built in systems. I have been fighting hard the urge to relax my self imposed DD% limit and 'go for it'. The zone between 30-40% drawdown seems to have a magical effect on CAGR. When you allow the DD% to creep up toward 40% the CAGR zooms. And with every test run, the millions of dollars at the end of the rainbow just looks better and better!

So the sober responses to your post have helped bring me back to the ground, and the importance of my performance goals. If I stick to my goals, my risk per trade nearly always comes out at under 1% for decent returns.

But there's always that little voice :twisted: , "You can push it just a little bit - it won't hurt."

Steve

Stephen
Senior Member
Senior Member
Posts: 41
Joined: Tue Jul 18, 2006 12:17 am
Location: Jakarta, Indonesia

Post by Stephen » Thu Aug 24, 2006 11:41 pm

Alerion,

Another thought: consider testing with 20 years data or more.

I was testing with 10 years data in the Modus course. Then with TB Pro I moved to a 20 year data set. The difference is profound. There is some kind of major shift in momentum (in NA liquid futures) that starts around 1998 which I have yet to understand. The earlier period, 1986 to 1998, does not climb in the same way. Note that I am drawing conclusions from initial testing of built in systems only. Also note that my long term DMAC does not exhibit this as strong as the other systems.

Steve

LongShot
Senior Member
Senior Member
Posts: 32
Joined: Thu Dec 01, 2005 11:23 pm

Post by LongShot » Fri Aug 25, 2006 12:28 am

RedRock wrote:
LongShot wrote:Alerion, RedRock, Turtle40

What´s your average % risk per trade? What type of order are you using for entering trades?
:roll:



.
I didn´t ask what are your betsize parameters, after all, you made pretty clear that you don´t exceed 2% per trade. That is extremely obvious.... What I asked you is what is your average risk % per trade, which is very different. TBB calculates your average risk per trade based on your entry fill, not on your theoretical entry price. Depending on your method for entering orders, the average risk % per trade can vary very much. For example, if you use stop orders, overall, your average risk % will be greater than your betsize, because of the effects of slippage. On the other hand, if you employ limit orders, with a limit 1 ATR above the market, your average risk % will be much smaller than your betsize, as you will always be filled below your limit. This way, the limit actually delimits your maximum risk per trade.

I have tested systems which bet around 3% to 3.5% per trade. However, when tested with limit orders, theirs average risk % per trade drops to around 2.2%. This means that overall, I´m betting 2% per trade, with a maximum risk of 3%. Therefore, a system using limit orders will likely display less drawdown than the exact same system with the same betsize configuration using stop orders. This might be relevant to the thread originator, since we don´t know the specifics of his system, specifics which may affect how much he will eventually bet.

RedRock
Roundtable Knight
Roundtable Knight
Posts: 939
Joined: Fri Jan 30, 2004 3:54 pm
Location: Chicago

Post by RedRock » Fri Aug 25, 2006 12:44 am

We've all heard the saw... If you're winning your position is always "too small". :?

If loosing, way too big... :x

No rules here. Except your own. :)

BARLI
Roundtable Knight
Roundtable Knight
Posts: 650
Joined: Sat Jan 17, 2004 6:01 pm
Location: USA

Post by BARLI » Fri Aug 25, 2006 2:42 am

Does anyone here maximize his size when being on a winning streak?

AFJ Garner
Roundtable Knight
Roundtable Knight
Posts: 2040
Joined: Fri Apr 25, 2003 3:33 pm
Location: London
Contact:

Post by AFJ Garner » Fri Aug 25, 2006 4:32 am

Alerionsailor
Much depends on what length of trend you are attempting to follow. You do not mention how many counters are in your portfolio but with only 200 trades in 10 years on a reasonably diversified portfolio, you must be going for very long term trends.

If you are shooting for very long term trends you may find the best overall metrics are produced when using very wide stops. 10 ATR on a 400/100 dual MA for instance, or 2 Std Dev on a 400 day MA on a Bollinger Band Breakout.

If you are using very wide stops, then in order to get the system up and running in the early years you will notice that you either have to assume a fairly large account size (if you want to employ conservative bet sizing) or if you are starting with a small account you will need to assume higher than the usually recommended betsizing. And don't forget that overall portfolio heat is of enormous importance: a 25 future portfolio using 2% betsizing will have much lower portfolio heat than a 50 future portfolio using 2%.

On a very long term system on a portfolio of 50 futures, you may very well come to the conclusion that the optimal account size is north of $1m if you are to use a 0.75% or 1% bet size. And that the more ususal starter account would need to use 2% or even 3% to crank up such a system in a reasonable amount of time without having to miss numerous trades. The danger of missing trades (on account of betsizing considerations) is that your portfolio may have less than optimal balance in the early days.

Somewhere or other on this excellent forum you will find a post by Mark Johnson or possibly Sluggo, which you may find of great help. It sets out the code for the concept of trading bigger when your account size is small and then scaling down to more conservative betsizing when your account size has grown.

On a very long term system using a starting account of say $250,000 you may want to experiment with a bet size of say 2% to 3% for the first 18 months or two years or until the account reaches $500,000 or 1,000,000 or whatever. If you are taking new signals only, you will find that a very long term system can take up to one to two years to reach full capacity. So overall portfolio heat won't get too high during this period; although inevitably you will notice some unbalance in the portfolio, some lack of ideal diversification until full capacity is reached.

Once you reach a predetermined level or levels in account size, start scaling down the betsize to more reasonable levels.

You will probably find that 0.75% or 1% give you an adequate return once the account goes north of the $5m level and will help to keep max DD at reasonable levels.

As to levels of 3 to 7%............er, don't underestimate the much talked about pyschological barriers and drawbacks. Don't under any circumstances rely on backtesting to tell you that at 7% the Max DD is going to be bearable or survivable. Just don't. Play sensibly and cautiously...........and survive while you build your account.

Turtle40
Roundtable Knight
Roundtable Knight
Posts: 201
Joined: Wed Oct 19, 2005 1:53 pm
Location: Guernsey, Channel Islands

Post by Turtle40 » Fri Aug 25, 2006 6:43 am

Longshot, I enter with buy or sell stops. My average risk/trade over 22 years and 2024 trades is 0.8%

Alerionsailor, I put a 7% risk/trade into my system to see what would happen. The system went bust after just 3 years, with a whopping -131% year.

Just don't underestimate drawdown. If you think a 40% drawdown is OK think how you would feel if your hard earned money depletes by half, after a run of losses. Could you in all honesty carry on with the next trade etc?

The more I trade the more I am convinced that mastering the "mental side" is the most important factor. Losing periods can be very de-stabilising, you have to limit risk to be able to catch the elusive trends that eventually come along.

-Turtle40

LongShot
Senior Member
Senior Member
Posts: 32
Joined: Thu Dec 01, 2005 11:23 pm

Post by LongShot » Fri Aug 25, 2006 10:10 am

Thank you for the feedback Turtle40.

Just out of curiosity, the figures you mentioned, are they the result of real-time trading or of a simulation? If the they are the results of a simulation, would you mind divulging your real-time figures? Even better, are your real-time results in line with your simulations?

I ask this because stop orders most of the time come along with slippage, which ends up increasing your risk per trade beyond your betsize. How do you manage to use stop orders and actually have a smaller average risk / trade? Stop-limits?

On another note, do you veterans trade full time? Does your income depend solely on your trading or do you have another income source? I ask this because I wonder if someone´s income doesn´t depend on trading, then perhaps he can take higher levels of volatility more confortably. What are your thoughts on that?

Thanks in advance.
Regards,
LongShot

AFJ Garner
Roundtable Knight
Roundtable Knight
Posts: 2040
Joined: Fri Apr 25, 2003 3:33 pm
Location: London
Contact:

Post by AFJ Garner » Fri Aug 25, 2006 10:12 am

"The mental side".

I could not agree more that this is enormously difficult. 20 years is but the blink of an eye in a backtest: so is that 40% drawdown, so is that 24 month period between equity highs.

When you are living through it, you always have that nagging doubt, however often you have lived through such patches before..........Relying on trading to live (as a few of us seem to do on this site) is not without its stresses. It is a patchy, a lumpy way to earn a living.

My IPO trading has been dismal this year - quite a few deals, but lousy premiums for the most part, in the US and elsewhere. Investments have been unexciting.

And my LTTF had a good run for a few months then a very tough run recently.

And then there is often a misplaced sense of guilt when you are not busy because the markets are quiet. I find I have to be very careful to fill those times with some interesting project: improving my knowledge of the various exchanges and trading instruments perhaps, working on my laughably light coding skills and so forth.

LongShot
Senior Member
Senior Member
Posts: 32
Joined: Thu Dec 01, 2005 11:23 pm

Post by LongShot » Fri Aug 25, 2006 10:22 am

BARLI,

If you haven´t seen this yet, it might interest you:

http://www.elitetrader.com/vb/showthrea ... post384111

alerionsailor
Contributing Member
Contributing Member
Posts: 9
Joined: Wed Jan 05, 2005 8:20 pm

Post by alerionsailor » Fri Aug 25, 2006 12:12 pm

Thanks for the responses and thought.

Red Rock - thank you for the reminder that the past does not equal the future.

Turtle 40; "I would also disagree with your assertion that greater risk/trade has little effect on drawdown. From my testing, using MAR as the main measure, I achieve a MAR of 2.08 with 1%. Once the risk is doubled to 2% the MAR decreases to 2.05. That may not sound much, but is the difference between a drawdown of 25.9% and 41.6%. "

I did not mean this in a general sense, but with regard to the particular parameter set I mentioned. Sorry if I was vague here. Your point of large equity swings is well taken and what I wrestle with. Not the theoretical DD's of X%, but the day to day swings are what I consider.

Steve, you and I seem to be in similar places. Again, I seek a balance between maximum return and how much pain I think I can endure. Managing OPM is not really a goal at this point so a trading a rule set that is palatable by investors is not a priority.

AFJ - I always enjoy reading your posts and your demeanor. I have tinkered with (not tested) the idea of varying bet size in the inital stages and have yet to reach any conclusions with regard to a) taking only new signals with fixed fraction or b) entering positions that would already exists with a reduced fraction. The psycological barriers are almost all I think about. As I said before, my goal is to trade close to, but below, what I think is my pain threshhold. I am still working on that to see if that is my actual goal and not a ruse for some deep seeded desire to get crushed. The mentioned system is indeed long term as I believe that is compatible with my own psychology.

Also yet untested is a pyrimiding scheme with this rule set.

The responses to my original question are all top notch. I guess I also hoped that the thread would take a turn more to the mental side of things since this is what I think about. How much pain can I take? How closely will theoretical and actual results resemble each other? Has anyone here struck a balance between total return and discomfort?

[/quote]

Turtle40
Roundtable Knight
Roundtable Knight
Posts: 201
Joined: Wed Oct 19, 2005 1:53 pm
Location: Guernsey, Channel Islands

Post by Turtle40 » Fri Aug 25, 2006 2:23 pm

Hi LongShot,

I don't think I qualify as a veteran trader just yet..not old enough :D

Thankfully I don't rely on my trading for income, I have a full time job, but have allocated "risk" capital which I am prepared to lose. With the current lack of sustained trends I am doing a good job of losing it at the moment!

As far as stop orders are concerned, it doesn't worry me if I get slippage. I expect it, and quite often a worse fill can mean a market can run further than if you just get filled followed by an immediate reversal.

To keep the risk/trade at 1%, if I get slippage that is significant, I sometimes move my stoploss to compensate, keeping the open risk at my required level.

The figures I quoted are all from my system tests. In real life I have kept my drawdown significantly less by making some discretionary decisions.

These include moving a stoploss to breakeven if a "reasonable" profit has been attained. Cutting losing trades before the stoploss is hit. I have found from observing the charts, that a trade that goes 3 days against my entry has a higher chance of failing, so cutting it is usually the right thing to do.

At present with the computer model down 30% or so, I am reducing risk/trade to 0.5% or less, just until things start to pick up. Hopefully as is often commented, after major drawdown periods, good trends will emerge. We will see....

-Turtle40

RedRock
Roundtable Knight
Roundtable Knight
Posts: 939
Joined: Fri Jan 30, 2004 3:54 pm
Location: Chicago

Post by RedRock » Fri Aug 25, 2006 7:23 pm

The 'hidden risk' of reducing in drawdown is that by definition, you will be at your smallest size when profitable trades emerge. Many consequences.

BARLI
Roundtable Knight
Roundtable Knight
Posts: 650
Joined: Sat Jan 17, 2004 6:01 pm
Location: USA

Post by BARLI » Fri Aug 25, 2006 7:30 pm

LongShot, thanks for the link, I have same principles of money management acrary was talking about. I found Trout's money management veru useful - when down 4% of entire equity exit all positions. If down 10% for the month quit trading this month

Turtle40
Roundtable Knight
Roundtable Knight
Posts: 201
Joined: Wed Oct 19, 2005 1:53 pm
Location: Guernsey, Channel Islands

Post by Turtle40 » Sat Aug 26, 2006 8:23 am

RedRock,

I absolutely agree. Reducing risk may not be the best plan, and backtesting supports your comment. However, I think there is a big difference in having a drawdown from a profit situation, versus a drawdown from the starting balance. It is much easier to cope with accumulated profits disappearing than losing capital from the start. That is why I have made some discretionary reductions.

-Turtle40

Post Reply