Fixed percent risk position sizing?

[howardbandy]

Greetings all --

About tight stops.

I strongly encourage everyone to test the effect stops have on their favorite trading system. The system has logic to enter the trade and logic to exit the trade. No matter what time frame is being used and no matter what trading system is being used, there will be adverse price movements between the time of entry and the time of exit. A system that has a tight stop will be stopped out by normal price fluctuations. No matter how those trades would have turned out, they will not have an opportunity to become profitable. The tighter the stop, the more often the stop will cause an exit and the trade will be a loss. If I increase losing trades due to stops being hit, I reduce the proportion of winning trades to losing trades, and I increase the number of consecutive losing trades that will occur. In order to have an overall profitable system, my winning trades will have to be much more profitable, which is much more difficult to achieve.

One of the methods of determining whether a system is broken or not is based on observation of the number of consecutive losing trades. If I have a system that wins 70% of its trades, a string of 4 consecutive losing trades will be rare, and will cause me to watch the system very closely, or even take it off line. If I have a system that wins 30% of its trades, it will have strings of 10 or more losing trades, still be within its parameters, and I will not have reason to take it off line.

When we do the mathematics to evaluate the characteristics of safe, profitable trading systems that generate high rates of return with low risk, several things appear.

Have a positive expectancy.
Trade frequently.
Hold a short period of time.
Have a high percentage of winning trades.
Limit losses on losing trades.

Simply based on the normal, random fluctuations in financial prices, adverse price movement increases in proportion to the square root of the time the position is held. Which means that the probability of a stop being hit due to normal price fluctuations increases in proportion to the square root of the time the position is held.

There is a formula that will give you a statistic measuring the likelihood that a system will trade profitably:

t = (mean / standard deviation) * squareroot of (number of trades).

where mean and standard deviation are the percentage return of each closed trade, taken from either actual trades or out-of-sample validation runs. Do not use in-sample results -- you will certainly go bankrupt.

When t is greater than about 2, the probability of going bankrupt is small.

Please, do not accept the traditional wisdom regarding placement of stops without testing it on your own systems. Tight stops hurt the performance of every trading system I have ever tested them on.

Thanks for listening,
Howard

 

[weird]

Howard, if I have a negative year trading, does that mean my system is broken ?

Show a history of trades to a mod, to validate your trading, try not to edit it, then I won't be a naysayer so much.

Notice you missed position sizing from your course, really how hard is it too code ? Btw everything else you are covering ... gee ... I guess u r working with the ...

 

[howardbandy]

Hi Weird --

Are you asking if we will be discussing position sizing in the workshops? Yes, we will.

And your last sentence. Who am I working with? Myself -- no one else and no other organization. Or is there something I don't understand.

Thanks,
Howard

 

[weird]

Hi Weird --

Are you asking if we will be discussing position sizing in the workshops? Yes, we will.

And your last sentence. Who am I working with? Myself -- no one else and no other organization. Or is there something I don't understand.

Thanks,
Howard

Howard, I trade, I don't teach, do you mind sending your 10 yrs, 5 yrs, or even 1 yr account to a mod or even Joe ?

Btw, AB is simple, how expensive can it be to teach the basics, which includes loops and pyramiding ... I don't mind some one in there prime getting a ride but don't do it on others ... we are abit smarter here in Oz.

 

[wayneL]

Howard, I trade, I don't teach, do you mind sending your 10 yrs, 5 yrs, or even 1 yr account to a mod or even Joe ?

Weird,

As far as I can see, Howard is showing people how to build their own system using Amibroker. Again, as far as I can see, he hasn't made any specific performance claims.

Unless I've missed something, I don't understand why he should supply brokers statements. He's not selling "a system".

 

[Wysiwyg]

Btw, AB is simple, how expensive can it be to teach the basics

The $850 introductory course would suit me because at the moment all I can do is run pre-programmed explorations which I might add exposed instant profitable trades.
My next goal is to create a "fully" mechanical system which can be automated to trade. Not this exploration/scan stuff. Right now the coding obstacle is giving me a headache. I will have to pay.

I read about people that have back/forward tested their trading strategy but you know they speak le crapola. I reckon most people haven`t got any idea how to "fully" code a trading system but they come on and say yeah, yeah I backtested and it is profitable. Yeah yeah sure mate.

 

[Wysiwyg]

My next goal is to create a "fully" mechanical system which can be automated to trade. Not this exploration/scan stuff. Right now the coding obstacle is giving me a headache. I will have to pay.

Problem with forking out for computer programmer to code a strategy is that if it doesn`t work then it is wasted money, though in a sense not wasted because you learn what doesn`t work. Funny that really.

 

[howardbandy]

Howard, I trade, I don't teach, do you mind sending your 10 yrs, 5 yrs, or even 1 yr account to a mod or even Joe ?

Btw, AB is simple, how expensive can it be to teach the basics, which includes loops and pyramiding ... I don't mind some one in there prime getting a ride but don't do it on others ... we are abit smarter here in Oz.

Hi Weird --

I do trade. I am doing fine with my own trading. But I am not touting a trading system or an advisory service, so my trading results are not the issue. If and when (probably never, but just for discussion) I begin to offer specific advice or trading systems, there will be adequate and convincing documentation.

I do teach. My books, lectures, speeches, workshops, and consulting are to teach people sound modeling and simulation techniques. I do provide details of my academic credentials and professional experience, and refer to other quality materials that support the statements and suggestions I make. Implicit or explicit in every comment I make is the following:

If you have a method that you have confidence in and that works for you, do not change a thing. But if you are uncertain about the probability that your trading system will be profitable in the future, then here are the accepted professional simulation methods and statistical analysis methods that might help show what your system might do in the future. There are no guarantees -- the best we can hope for is knowledge of the probabilities.

So -- If your methods work for you, great -- don't change a thing. As I meet groups of traders, there are people who are completely confident in their systems. But the great majority have had varying degrees of trading success and are uncertain about how to develop sound systems, how to measure the robustness of their systems, how to estimate the future performance of their systems. I am not selling snake oil. Quite the opposite, I am explaining techniques for identifying snake oil. Notice how often the statement "try it" or "test it for yourself" is part of my posting. That never appears in snake oil commercials.

The reason I mention AmiBroker so regularly is that, in my opinion, it is the very best trading system development platform available to retail-level traders. (And it is superior to some platforms I have used at companies that manage quite a lot of other people's money.) I have no ties to the AmiBroker organization. I get no compensation from them. I do not act as their agent in any way. I pay full retail price for my AmiBroker license. If I knew of a better development platform, I would consider switching.

There is so many statements of conventional wisdom and so many rules of thumb about trading systems that are worse than wrong, and so very little high quality information about designing, testing, and validating trading systems, that I think my contributions are positive. Some others think so as well and have said that they benefit from my materials. I have not heard from anyone who understood what I was saying and told me that my ideas were detrimental. If you do not like me, then ignore me. If you have different views than mine regarding modeling, simulation, experimental design, and statistical analysis as applied to trading systems, then we can have a meaningful discussion.

Best wishes,
thanks for listening,
Howard

 

[Sean K]

Howard, thank you for your patience and time in responding to these questions. Those concerned would be much appreciative. Cheers, kennas

 

[Wysiwyg]

This way as I raise stop losses with winning positions the funds available for trading also rise yet a loss scenario is locked in (fixed).

Best correct my error here. Funds available for trading is wrong and should be "total reduced equity". Obviously the funds would only be available for trading when the position(s) are closed.

After reassessing my risk tolerance I would be more comfortable with .5% to 1%. A string of 10 losses would not be comfortable at 2% of TRE.

Question : What is more "successful" ... example $50k account

A) Using total equity to calculate % risk in dollars (50k)
or
B) Using the trade equity to calculate % risk in dollars. (i.e. only10k)

Obviously 1% of total equity is more than 1% of amount invested per trade so I can only see position size reduction as a matter of consequence in B.

I think I`m confusing myself here a bit.

 

[weird]

Hi Weird --

I do trade. I am doing fine with my own trading. But I am not touting a trading system or an advisory service, so my trading results are not the issue. If and when (probably never, but just for discussion) I begin to offer specific advice or trading systems, there will be adequate and convincing documentation.

I do teach. My books, lectures, speeches, workshops, and consulting are to teach people sound modeling and simulation techniques. I do provide details of my academic credentials and professional experience, and refer to other quality materials that support the statements and suggestions I make. Implicit or explicit in every comment I make is the following:

If you have a method that you have confidence in and that works for you, do not change a thing. But if you are uncertain about the probability that your trading system will be profitable in the future, then here are the accepted professional simulation methods and statistical analysis methods that might help show what your system might do in the future. There are no guarantees -- the best we can hope for is knowledge of the probabilities.

So -- If your methods work for you, great -- don't change a thing. As I meet groups of traders, there are people who are completely confident in their systems. But the great majority have had varying degrees of trading success and are uncertain about how to develop sound systems, how to measure the robustness of their systems, how to estimate the future performance of their systems. I am not selling snake oil. Quite the opposite, I am explaining techniques for identifying snake oil. Notice how often the statement "try it" or "test it for yourself" is part of my posting. That never appears in snake oil commercials.

The reason I mention AmiBroker so regularly is that, in my opinion, it is the very best trading system development platform available to retail-level traders. (And it is superior to some platforms I have used at companies that manage quite a lot of other people's money.) I have no ties to the AmiBroker organization. I get no compensation from them. I do not act as their agent in any way. I pay full retail price for my AmiBroker license. If I knew of a better development platform, I would consider switching.

There is so many statements of conventional wisdom and so many rules of thumb about trading systems that are worse than wrong, and so very little high quality information about designing, testing, and validating trading systems, that I think my contributions are positive. Some others think so as well and have said that they benefit from my materials. I have not heard from anyone who understood what I was saying and told me that my ideas were detrimental. If you do not like me, then ignore me. If you have different views than mine regarding modeling, simulation, experimental design, and statistical analysis as applied to trading systems, then we can have a meaningful discussion.

Best wishes,
thanks for listening,
Howard

HB, do believe you have plenty to offer.

But 100 bucks an hour for a basic course, not sure, but I guess the marketing folk and you have agreed that this is what folk maybe be willing to pay ?

I still don't understand your description of Monte Carlo, I come from a school which more follows this,

http://www.compuvision.com.au/

Believe you can download for 30 days trial free, and examples on the Amibroker yahoo site on how to integrate.

Also worth reading the free manual.

Also not sure why you use, the close, in most system examples.

Anyway HB, don't wish to be a prude, I know you have plenty to offer, so not raising any flag in any direction personally towards you ... just have some questions.

 

[howardbandy]

Hi Dave --

About the price of the workshops --

The workshops I am presenting are priced in line with those of Ernie Chan, Van Tharp, John Bollinger, generic TradeStation workshops and so forth. I have presented them before. Most people find them good value. I rarely get complaints at the end of the workshop -- just sticker shock before. I do not tout or teach trading systems, but rather trading system development. Unless I am very surprised, people who attend the workshops in Melbourne in October will be very satisfied. Number three will include a lot of unique material that translates directly into actionable trading system development with very high rates of return at very low risk.

I think one of the problems is that Tomasz has AmiBroker priced too low. I have spoken with him several times about pricing and recommend to him that he at very least add a zero to the end of his price. The price is now US$279. AmiBroker is clearly a peer of MetaStock, TradeStation, and others in that category and should be priced accordingly. US$3599 sounds about right. If AmiBroker was priced near $3000, fewer people would think there was a disconnect between the price of the software and the price of the workshops. And Tomasz' market share might actually rise -- many people equate price with value.

About Monte Carlo Simulators --

I have visited the CompuVision / TradeSim site and I have read the manual and the other materials on the site. There is a lot of good information there. I have exchanged emails with their support staff, who were very helpful. I have no doubt that TradeSim is an excellent product for performing the simulations of the tasks described in its documentation. But as it implemented now, it solves a problem that is different than the one I need solved.

In developing trading systems, there are many ways Monte Carlo Simulation can be helpful. That is, there are a lot of different problems that need to be solved. I have looked at many Monte Carlo Simulators, and have not found one that does what I want done. I have one that I am using that I wrote in Excel VBA. I'll keep looking, and perhaps find one I can use in demonstrations, use myself, and recommend to clients. Or perhaps I will develop the one I wrote into a product that can be distributed. When I get some spare time.

About using the close --

Are you referring to why the examples I use generate signals at the close of bar and then take the trade at that same time? If so, it is because, using daily data, if my signal is correct, the change in price that takes place overnight on the first night is often the biggest part of the move. If that wasn't what you meant, please explain.

Thanks,
Howard

 

[weird]

Howard, thanks for the in depth reply. Cheers.