Simple MM rule - Anybody tested this

Discussions about Money Management and Risk Control.
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Jacob10
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Simple MM rule - Anybody tested this

Post by Jacob10 » Sun Oct 15, 2006 5:38 am

Hello,

I use this simple MM rule that if I make 50k over a period of time on a 250k account, I take 25k of the table, and reduce positions by 1/3. It's no rule of thumb, but I do this each time and it works for me. Any new signals are taken again fully. However I have never backtested if this improves my performance yes or no. I will not fully benefit from compunded returns but I believe that on average you only make certain runs in the market, and that by doing this you will greatly reduce your max drawdowns overall, and make it easier to live by the system. I see my equity curve as a plastic string that only can get stressed out so far before it pulls back (in your face!) Maybe an idea to add this MM rule to TB. I think you would be surprised of the result.
It's probably not that easy (at least not for me) to implement because it will have impact on your positions as well, and several other things. Anyway, just a thought.
Btw; I trade for more then 16 years. half system/half tape reading/gutfeel. Not a techie.

Does anyone know of any software that can implement this rule?

Best
Jacob

dave3076
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Post by dave3076 » Sun Oct 15, 2006 11:59 am

Ralph Vince highlighted this approach many years before Van tharpe began to market it!. Basically it confronts all the advocates of designing money management around its largest drawdown. Now i dont want to start world war 3 with the old and bold on this site, but i do want to challenge the logic behind that approach. If your worst drawdown is 50% and it happens once in 20 years of testing, with the remainder of those 20 years having had a regular and worst drawdown of 30%, is it sensible to design a whole money management approach around that one occurence of 50% drawdown. YES it is.......if you 1. design systems that are designed to trade forever, even though we only live for an average of 70 years! 2. Live in the world of mathematical perfection as opposed to reality. 3. Want to assign all of your account to the same level of risk/return. 4. Wish to leave huge chunks of money unnecassarily on the table!. I totally agree that if you assign a sum of money to a trading system in the traditional approach, you have got to base the position sizing around your expected drawdowns. HOWEVER, you should analyse your drawdowns carefully. I mean really look into them with great attention. Study them. Because within them lays lots and lots of very very powerful information for you to base position sizing strategies around. If you have a system that does indeed have 19 years of 30% drawdowns with one occurence of 50%, and you assign your entire trading capital to a fixed percentage approach and design your position sizing around those figures you would be severely impeding your cagr unnecassarily. There should certainly be a portion of your capital exposed to higher risk to take advantage of the percentage of occurences of lower than maximum dd. The ways in which you can exploit those 19 years are infinite. One example would be to take 10% of overall account size and apportion it to double your normal position sizing, and every year scrape off what profit you`ve made. In testing that may have looked like this......19 years of 60-65% drawdown, one year of 100% drawdown. You capped out once! And what???? who cares????? for 19 years you made superb gains and raked them off and apportioned them to your larger more conservative account percentage. if you cap out the first year, assign 10% once you make it off the conservative account. There are millions of ways to exploit the analysis of drawdowns......just use a little imagination combined with sound and robust testing.

BARLI
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Post by BARLI » Sun Oct 15, 2006 12:34 pm

thats usually destibilizing losing all the profits you've been working for, so Jacob's MM is very sound, he trades for a living and sees the fruits of his work when takes half of what he made, its what Livermore used to do and what he taught to do. I suppose that the feeling of greed comes into the game when we have profits on P/L and think this way:
"I'll have more buying power so I can take more profits outta market", the sad thing is when we go into losing those profits we're sorry we didnt cash in. Looks to me that its very personal for everyone to determine how much profits he's willing to trasnfer to his bank account and how much left capital he wants to continue working with

Jacob10
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Post by Jacob10 » Sun Oct 15, 2006 5:04 pm

Thanks for your answers. Yes, I trade for a living and maybe that's why (and also by experience) I start to take money of the table when i'm on a streak. I would say that 20/30% of a year trading is profitable, 50% whipsaws, and the remainer loosing periods. Meaning that on average I make my money within 2 to 3 months. I don't know which months, or what months, so therefore I have to trade all year. But if i'm up 80% over a couple of months I just know it's time to come back down again to reality. And yes, I will sometimes miss bigger moves with a full position but then I simply say; Hey, you can't have it all jackie boy.
Thanks for the scripts, but as said i'm not a techie so i would need someone to implement this in TB. I will however give it a go and if i can't work it out then i start looking for someone which i'm sure i can find on this forum.

Again, many thanks for your replys.

Best
Jacob

BARLI
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Post by BARLI » Sun Oct 15, 2006 5:12 pm

whats your trading style Jacob?

Jacob10
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Post by Jacob10 » Sun Oct 15, 2006 6:53 pm

Diversified! ....I don't believe there is one trading style or system that will beat the market over and over again. Trend Following is a good way to approach the market especially the money management bit, but it's no holy grail and by the look of things it's becoming a hype. I hear TF everywhere around me as being the next holy grail. It's not.
I swing trade when there are swing trading markets, and that normally means fast markets (stock markets early this year where perfect for me)
or recently the oil market. I follow trends in markets that have been proven to be good trend following markets such as Eurodollar 3 month Interest, or currencies to name a few.
I believe the succes and the discipline lies in the fact to be patience when either of those market circumstances show up on the radar screen. For people that want to trade all day and every day trading systems are the perfect solution. It's as they have created an excuus to trade. For some reason trading seems also to have this macho image and being an active trader is very macho.
Don't get me wrong. I know every day what markets are doing, and what they have done in the past. It's my passion, but a controlled passion.


Best
Jacob

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