Look at the equity curve at post 28.
If he blew up does he lose 30k or 90k?
To stop this going round in circles what I’m digging at is
What return is attributable to the system and what return is attributable to the leverage.
You shouldn’t confuse the two.
Actually this is a very interesting discussion and dare I say it gets to the underlying dreaded argument, one that I never want to really get involved in but here goes. TA vs FA!!
System traders use leverage, or can use leverage, with simple portfolio management. Thats why we use stops and cannot for the life of use understand hanging onto something thats the market is pushing against us.
I bet I regret this post.............
Would it be fair to say a system, unlevered, will return below average returns because it is designed (from a risk perspective) to be levered?
No, not necessarily. In fact most system design and testing that I've done with my own systems and the flipper were unleveraged. No leverage at all was taken into account. The results are compounded, that's all.
CanOz
Actually this is a very interesting discussion and dare I say it gets to the underlying dreaded argument, one that I never want to really get involved in but here goes. TA vs FA!!
System traders use leverage, or can use leverage, with simple portfolio management. Thats why we use stops and cannot for the life of use understand hanging onto something thats the market is pushing against us.
I bet I regret this post.............
Would it be fair to say a system, unlevered, will return below average returns because it is designed (from a risk perspective) to be levered?
FA is also a system.
It could also be leveraged and I’m sure some do.
Portfolio management is just as relevant to FA.
I would be the first to admit that volatility is higher for many successful FA systems and this in turn would be a reason to keep gearing levels more conservative then for a smooth technical system equity curves.
But no matter how smooth the equity curve the higher you leverage the more at risk to an outlier you are, so leverage and its risk/return needs to be analysed separate to the underlying system return.
You shouldn't regret your post - I see no difference in the most important aspects between the two.
Returns do matter, the whole point of investing/trading is to achieve excess returns. Everybody who visits ASF is trying to achieve excess returns (and protect principal). My bullsh!t detector starts ringing when I see anybody claiming a CAGR>15% over timeframe of 5 years or more.
Craft,
When I used to pair trades CFDs I might be, say, holding $20k long and $20k short. The margin required to support the trade is probably $8k maximum. But with my own risk management in mind dealing with lots of pairs over a long time, the trading account size would be ~$100k.
So if I made $500 on that trade, I measured my return in two different ways:
1. Return on position size which was $500/$20k = 2.5%
2. Return on account size which was $500/$100k = 0.5%
But when I consider my annual return and CAGR etc, it's simply how much cash is in the account over how much I've put in. If I had $150k at the end, it's 50% return. It doesn't matter that at some stage during the year I held $400k long and $400k short.
Leverage has a different risk profile to system return and I want to know what’s responsible for what return before I can evaluate the risk/reward.
Is it a simple matter of picking some sort of risk metric? Or how do you actually evaluate the risk of a two or more vastly different system?
Craft yeah I agree. Its a good result not spectacular but its still a long way from what most traders manage - even in bull markets. Sad but seriously true!!
By the way they are not designed to work in sideways markets. Thats why they have triggers that turn them on and off.
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