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资金管理(英语连载)

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发表于 2004-8-30 21:43 | 显示全部楼层

资金管理(英语连载)

来自:MACD论坛(bbs.macd.cn) 作者:缩水基金 浏览:16644 回复:52

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Money Management   

In a chapter entitled "The Secrets of Successful Trading" in Street Smarts, Fernando Diaz concluded:

"Successful traders have a larger edge and better money management than unsuccessful traders. Unlike popular
belief however, this study shows that the smaller edge of successful traders is not the cause of their failure.
Traders' failures can be explained almost exclusively by their poor money management practices."

When trading stocks or commodities the importance of Money Management is underestimated by a lot of traders. It is of much more importance than entry and exit decisions (=timing decisions) will ever be.
Very few indicators are better than a coin toss, and if they are, the edge is eaten up by slippage and commission.

Money Management is also sometimes called asset allocation, position sizing, portfolio heat, portfolio allocation, cash flow management, trade management, capital management, position management, size management, bet size selection, lot size selection, or even risk control, equity control, and damage control.

Money Management is managing the position size while Risk Management is about managing losses and open profits (unrealized trading returns).

Actually I don't like the term 'Money Management' as it also has a very general meaning (it's also used describing the "process" of saving, these "learn valuable skills" pages, talking about piggy banks and how to teach kids about paycheques).
But 'Money Management' tells a trader that (s-)he should concentrate his research on how to optimize capital usage and to view his/her portfolio(-)s as a whole.

Actually there are (at least) 2 steps to implement proper Money Management:

1) Bet sizing is the determination of what (fixed or non-fixed) fraction of a portfolio's total (or again fixed or non-fixed fraction) equity to risk on each trade expressed in Dollar-, Euro-, Yen-, or Swiss Franc-denominated currency values.

2) Position sizing, on the other hand, is the calculation of how many contracts I should hold in my position, once a trade entry is signaled which basically is a function of the BigPointValue (the number of dollars that a 1-point price move represents) and a rounding algorithm as the number of contracts/stocks can't be traded in fractions and must be cut down to a whole integer.


On my desk there are 5 statistics related books and just 2 on trading. So according to the books next to me my focus on statistics is at least 70% :-). A sound knowledge of statistics is a good start into the Money Management arena.

Here a 10 Money Management lessons, including strategies, hints & tips, source code, etc.
They are copied together indiscriminately from several sources from the Internet, from Trading Software, and Trading Literature.

These lessons won't automatically build wealth, but will bring a wealth of experience and knowledge, which will prove invaluable to you if both understood and applied properly. It will steer the course for your success in the global financial marketplace.

I hope you will find and pick what your trading system is desperately looking for.

If you are too lazy to dig deep to both find and understand these lessons I would advise to either refrain from trading or if you are really willing to learn nothing else, then learn this:

Be bright, give up being right, and
   emphaSIZE on Position SIZE !!!

[ Last edited by 缩水基金 on 2004-8-30 at 22:02 ]
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 楼主| 发表于 2004-8-30 21:45 | 显示全部楼层
Money Management 1

The underlying concept is, that, if we cannot accurately predict our own performance, and as we cannot influence how the markets will behave, we should at least exercise control over those variables that we have actually control of. And that is the risk that we as traders take when entering a position.

--------------------------------------------------------------------------------

Few, if any, have the ability to view their portfolios as a whole and even fewer are able to optimize capital usage. Traders and investors must move from a defensive or reactive view of risk in which they measure risk to avoid losses, to an offensive or proactive posture in which risks are actively managed for a more efficient use of capital.

NO set of indicator rules will ever make money in futures trading. So forget about fractals, alligator, turtles, waves, cycles, etc.
The best these and ALL other indicators, including Moving averages and Breakouts, will do is make you break-even and at worst blow your account.

The KEY is in your Risk and Money Management.
Combined with sound risk and money management I could even reverse the above statement: "ANY set of indicators rules will make money in futures trading."
Choose a CLEAR, TREND following indicator. One that an 8 year old could tell you whether it is long or short. ONLY trend following indicators will work. If you have to think for more than 1 second whether it is long or short, it isn't clear enough.
Stick to 1 indicator in 1 time frame. NEVER pay any money for other people's systems. They will NOT work.

ENTRY: Decide on whether you want to use Reversals or retracements. I recommend reversals.

RISK Management:
Trading only 1 contract at a time will cause you to FAIL !!!
Make sure you are well capitalized. This is not a game for those who are not.

The only way to win at futures trading is for you to be larger (have more positions) when you are right and less positions when you are wrong.

THIS IS THE KEY TO TRADING.
Maintaining the same number of contracts for each trade will cause you to FAIL.
Varying contract size is the MOST important thing you must do, if you want to be successful.

Buying and Selling using the same number of contracts will at best, lead you no where and at worst, wipe you out in the long run. You can vary your positions with the following:
1) Stagger  out of your trades when wrong (Phantom of the Pits points out that you should let the market prove you correct instead of letting it prove you wrong by hitting your stop loss).
The market goes against your entry (!!!). BUT hold on to all your positions when right.
2) Make sure your profit goal is larger than your stop loss point.

MONEY Management:
Never let a winner become a loser. Adjust your stops as the market moves with you. TREND: Use trend following indicators only. I recommend Moving average 2 lines and Break outs.
-----> Pick the shortest time frame with the longest trend indicator.

Principles of Money Management:
While Risk management dealt mainly with maximizing profits using contract size, Money management deals mainly with minimizing losses using stops, as well as showing you
when to take profits. They are both very closely intertwined with each other. You cannot have all risk rules but no money management rules, and vice versa.
I gave you Rule #1 which says to stagger your stop losses, and here is ONE very important principle that you have to learn in Money management:

80% of your Profits will come from 20% of your trades (Pareto Principle).
What do I mean by that? Let's say we are playing the game of 50/50. So 50% of our trades will be losers. There is no way avoiding it and we will attempt to keep those losses small by staggering our stops with multiple contracts.

The other 50% are NOT all going to be big winners. Out of that 50%, roughly half will be where you really make your money and the rest will pay for your losses. It is similar to running a business. 80% of your clients will pay your costs for running the business and 20% will be the reason you are in business.

Why is that? You will have trades where you are right initially but they will come back and become only small winners. This is okay, you will never be able to predict the exact perfect exit for a trade, but you can see where the problem is. If you don't capitalize on that 20% of trades where the price just keeps on going in your direction, you will end up just covering your losses and you will not get anywhere.

Here is an example:

100 trades

50 trades are immediate losers but kept small using stops

30 trades are moderate winners

20 trades are big winners


50 losing trades x average of 4 points = 200 points

30 winning trades x average of 8 points = 240 points

20 winning trades x average of 20 points = 400 points

Net Result: 440 points

So if we did not hold out for those 20 points on each of those winning trades, we would probably just break even after paying commissions, and we are definitely not going through all this hardship to make the broker rich, right?

So while rule #1 dealt with cutting losses, rule #2 will deal with when to Exit ... with a PROFIT! This is usually the most difficult of the rules to quantify. Getting into a position is elementary. Exiting for a loss, expected. But when do you take your profits?

For a trader this can be very difficult. You have entered your position, sat there while the market was ticking back and forth, and now finally it is showing a small profit.

The natural tendency will be to take it. Will you be right? Sure, sometimes you will catch the top before it retraces, but when you get into a habit of doing that, you will miss the big trenders and you will curse and stomp around and there is nothing you can do except pray it stops and do you know what? It won't and you will miss it all. Truly a sad tale, but luckily there are many more trends where they came from, so don't worry.

Alright, let's get back to our example. The market is ticking, and is now showing a small profit. Here is where the true test of your nerve will be played out. Where all those other traders are going to try to scare you out of your position, so they can get in. Will you know when? No, of course not. No one knows how long a position will go in one direction.

This is where position size again plays a crucial role. What will happen if you enter with only one position? Well, when you exit, that's it. You will now have to wait for another trade.
And if you try to hold out for the big trade, you will have a lot more losers or break-even trades.

With multiple contracts, you have many more options. First, have a profit objective that is larger than your stop loss points. It is important that it is larger. You can see why in the example above.

This is where you will exit some of your positions for profit. Now with the use of trailing stops, you are going to sit back and try to go catch a big move. You will never know when it will happen, but it is critical that you are there when it happens.

So before we continue, here is Rule #2.

RULE #2

STAY with ALL your positions until they meet the minimum profit objective.

Exit a portion of your trade at the minimum profit objective. Hold the rest using a trailing stop to take advantage of huge trenders.

Use a breakeven stop to never let a winner become a loser.


The markets are going to try to scare you out of your positions. DON'T LET THEM!! This is when you are right and you CAN'T AFFORD to not capitalize on this. If you get out early, even if you made a small profit, IT IS A LOSS!!!

Fear and greed are emotions felt when you don't have specific rules in place. Follow your rules, and the only way to have confidence in them is to test them.

So let us break down all the Money Management principles from the point of entry:

STOP LOSS
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 楼主| 发表于 2004-8-30 21:45 | 显示全部楼层
You have entered a trade with 4 contracts (green arrow). You immediately enter your stop loss orders (red lines) IN the market. We do that because the market will go to where it will go, with or without you. Keeping the stops in your head will not help you if the market starts racing against you.

We have followed rule #1 and staggered our stops as you can see with the red lines, now we wait....

[ Last edited by 缩水基金 on 2004-8-30 at 21:50 ]

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 楼主| 发表于 2004-8-30 21:52 | 显示全部楼层
Oh well, the market went against you and took out some or all of your stops. If it took out all your stops, as it did in this example, forget about it and wait for the next trade. If it took out only a couple and then went in your favour then great, continue the lesson

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 楼主| 发表于 2004-8-30 21:54 | 显示全部楼层
BREAK EVEN STOPS (Scenario #2)

Ok, the market has gone up in our favour, though not quite at our profit objective (blue line). You will get the urge to exit here, but don't. That is your fear talking, saying that the position will reverse.

What we will do now however, is remove all the STOP LOSS orders and place a STOP that will give us a break even situation if the market comes back. We will calculate that to be our entry plus 1, and is shown by the red line.

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 楼主| 发表于 2004-8-30 21:56 | 显示全部楼层
Well you can't win them all. The market retraced and took out your break even stops. If the market is very volatile and you really want to get back into this position then fine, re-enter. I recommend that you wait for your next entry, however

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 楼主| 发表于 2004-8-31 17:05 | 显示全部楼层
PROFIT OBJECTIVE
Hmmm...what do you know? We have a winner on our hands. The market has reached our profit objective. We will exit 2 of our 4 contracts, here.
There is no specific rule as to how many you should
exit at this point. Some may exit more to cover previous losses. Some may exit less to try to capitalize greater. Use your experience and judgement based on the previous trades. For example, if there hasn't been a trend in a long time, then you might want to hold onto 3 contracts, because eventually one will happen. This is as opposed to a situation that just finished with a huge trend. This is a guideline only. I have seen major trending days go on for weeks, so use your best judgement.

Also, I recommend that you have your profit stop in the market, waiting for the objective to get hit. This way it forces you to stick to your plan and is more likely to get executed.

Also, it would a smart idea to move that break even stop on those 2 contracts, higher. If the market retraces, you will still make good money on those contracts. In this case I put it just above where the market was stalling as it found some resistance.

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 楼主| 发表于 2004-8-31 17:06 | 显示全部楼层
Now you are still holding 2 contracts, but the market has run out of steam and retraced and has taken out your break even stops. No problem. You still made some money and you didn't lose on your winners.

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 楼主| 发表于 2004-8-31 17:08 | 显示全部楼层
TRAILING STOPS

Time to come to papa! The remaining 2 stops are now showing some serious profit, and we will have our trailing stop (as seen in blue) right there to catch it in case the market reverses.

Where to place that trailing stop? Here are some ideas:
The first should be put just above your 1st  profit objective. Then the market may reverse slightly. If it continues in your favour, put the stop just below that retracement. Any retracement that holds is a good place.


Now if based on your research, you have seen that huge moves like this are usually x ticks, and we have now made that size move, there is nothing wrong with taking profits here, before the market retraces. In fact I would recommend it, but just don't jump the gun at any move. You can also remove 1 more contract here and hold out the last on the trailing stop or wait for the close.

There are countless possibilities and no "perfect" way. The main goal is if it is going your way, do everything you can to be part of the action.

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 楼主| 发表于 2004-8-31 17:09 | 显示全部楼层
Many successful money managers trade systems that do take the same trades without trying to measure 'market environment'. The size of the trade is determined by the money management parameters which again are systemized rules. They do not change from trade to trade. One could also build rules to react differently to different 'market environments'. That would be part of the system. System or mechanical trading is not limited to anything but a set of rules that govern each and every trading decision. These rules are decided before hand.
This example also assumes that one has a system that provides a market edge. This also assumes that the trader has the ability to correctly follow the system. Both of these are large assumptions.
A system will have winning trades and losing trades, but the winning trades either from their number or their size, will make up for the losers and leave a profit. From this scenario the trader MUST trade the exact same way for every trade/environment. He/she has an edge. If the edge is used the same way every time over a large enough set, a profit will be made. The trader acts as the HOUSE in a casino. The edge works for him. You apply the edge the same way over and over. While you know certain market action will produce losing trades, you also know that the winning trades will overcome that. You do NOT want your judgment getting in the way. If someone was paying you 7-5 every time you correctly guessed heads but only 4-5 every time you correctly guessed tails, you would not sit out flips or throw in some tails guesses. You would sit and guess heads until you had all the money you wanted. IF you can correctly determine 'market environment', then you should work that into your system.
Most good systems have fewer than three parameters, filters etc. They are very simple which adds to their 'robustness'.

Scot Billington

- emotions can be managed but not controlled
- view each trade merely one in a series of probabilities
- know why you take a trade and what must happen for you to remain in it (!!!).
If it fails to happen - get out even if your stop has not been triggered.

- You cannot have one without the other. It is not the 'system' (and I despise that word when it comes to trading) that makes the trader, it is the
trader that makes the 'system'.
- important: the ability to trade WITHOUT a BIAS or OPINION as to market direction (NO EGO), and realize that there is no such thing as
overbought/oversold, and no price is too high to buy or too low to sell. You also need to learn to like your losses as they just put you one step closer to a winning Trade(s) and are nothing more than the cost of doing business.
- I take the same trades each day, but how I manage each trade is dependent upon my read of the environment (discretion). You cannot trade
the exact same size and exit the exact same way for every trade/environment. For example, a trending market requires a different approach than a range bound market. In the end it boils down to your ability to read the PRICE action and adopt your game plan to the current conditions - AND THEN EXECUTE. And all you 1-lot traders out there better re-think your approach as trading 1-lots is a fool's game (***!!!***). You are far better off trading 3 ES/NQ than you are trading 1 SP/ND. I'll make the same challenge to the 1-lot traders that my mentor made to me when I was a 1-lot trader - I'll trade 3 NQ/ES to your 1 ND/SP and we'll see who wins. I took him up on that and he cleaned my clock... I have not traded 1-lots since and never will again.
Trading is all about management - yourself, your money, your attitude and your position. It is NOT
about predictions, forecasts or OPINIONS. You cannot learn how to drive a car without being behind the wheel - and you can't learn
how to trade by just reading a book, attending a class or buying a 'system'.

Bob Heisler bheisler@swbell.net http://www.rjhtrading.com

System trading is only good if the computer automatically enters the orders, the stops and the exits. If not, if the individual decides to not take a trade the system is flawed. I only know of one person that is set up this way. He uses a break out system and it produces approximately 37% winning trades. His profit picture is about a 22% annualized return. I did not see his sheets or look at his numbers. But the computers do put in all the trades.
Any system where an individual trader puts in the order is discretionary to a degree. The party that says he is trading totally system may be using the system as a crutch to blame for the losing trades.
The system I use is 80% mechanical and 20% discretionary. If I lose it is my mistake, the system has a 20% losing factor, but I have to look at it as my error. I am not blaming myself for the lose, I am saying that the lose is part of the system. I developed the system, therefore the lose is mine. If I did everything the system said to do, and took every trade the system gave me, then I could blame the system if my percentage of winners to losers changes. If my profit per trade goes down, or if the graph of my profits has lower highs and lower lows, I look for a problem, not in the system, but in me.
If you did what the system said and you lost money, it was still a good trade. It is good only because you had the discipline to follow the system. Did you bother to analyze the trade after the close to see why the trade lost? Was there something that you didn't see? Was it something that you over looked? With me, I usually find that I got lazy and didn't do my homework. I assumed that because I was successful that I was bullet proof. Not so. No one is bullet proof. Self, ego, and the psychological need to be right are the discretionary traders worst nightmare. The other problem is ones belief system.
Taking everything into consideration, I still believe that the human brain is the best computer ever developed. The thing that people forget is that the brain sees in pictures and not in numbers. The first thing most traders want to know is to were do I get in and how much will I make. This is overbought or oversold. Volume is up or volume is down. They start seeing numbers and figuring. They start back testing, they start using indicators that they don't understand. They look at the past rather then the future. Wrong, look at the picture and it will tell you the whole story. Like a road map.
A good trader can take almost any system, astro, volume, eliot, Gann, even some of Larry Williams stuff and make a good living. He does it because outside of the system he is looking at the chart and that picture is what triggers his final decision. Like everything in life, you have to visualize what you want to accomplish before you can get there. Trading is a business. You need a plan for everyday that will take care of the contingencies that might arise. With the proper planning there are very few surprises. You won't get rich over night, but you will be able to get there. Many have done it. Ira.


Learn to trade the leading edge of the market, by following the price action. Furthermore, it means only using the very liquid markets with a daily range and movement that is consistent with their ability to withstand drawdowns that their account will allow. Not easy!
Now, clever people with sophisticated computer programs and all the other factors necessary to trade a system, with all its implications, have to have a bank account or other people's money of sufficient size to trade. Most on this list are individual traders who don't have the money or systems. If they cannot trade with discretion, they cannot trade at all.
Therefore, it follows that effective means of day trading is for the little guy and systems, indicators et al, are for those who, shall we say, live to play, rather than play to live.

Bill Eykyn www.t-bondtrader.com
______________________________________________________________________________________________________________

- Which money management strategy best fits your risk profile?
In general terms, the more stable your equity curve, the more aggressive you can be in your money management strategy. It should come as no surprise to those who have studied Optimal f, that it can be aggressive in its position size. Therefore, to properly implement this strategy it should be applied to systems with very stable trading results. Systems with Sharp Ratios above 2, Return Retracement Ratios above 8 and K-ratios above 2.5, will (in general terms) satisfy our stable trading condition. Now in real world trading it is very rare that systems will generate these results. To help focus on the appropriate money management strategies that will fit most trading systems, consider the least aggressive strategy before moving onto the most aggressive strategy. In general terms begin with the Fixed Fractional and Secure f strategies before moving onto Diluted f and the ultra aggressive Optimal f money management strategy. This will save you a great deal of time and effort when testing some of the more popular money management strategies.

______________________________________________________________________________________________________________


Trading Metaphor:
Trading is like driving. Where you want to go etc., the "how much do you want to make" metaphor, depends on me. How fast do I want to go? Well, how much risk do I want to take, e.g., tickets, accidents, etc., or in trading, how quickly do I want to achieve my goals.
How much wear on my car (me and everyone around me) do I want to incurr? I could wear my breaks and tires out by starting and stopping at every stop light - i.e., entering the market by choosing too tight of stops or exits. What if I never get where I'm going? Have I prepared a road map (trading plan) with check points.

______________________________________________________________________________________________________________


A low risk idea is an idea with a positive expectancy that is traded in such a way to allow for the worst possible conditions in the short run
so that you can achieve the long term expectancy.

Q:
Percent Risk Model (using e.g. 2.0% of you capital for position sizing):
if a trade moves in your favor you add additional contracts in different or the same markets?
A:
You might simply decide to keep a constant risk. In that case, you adjust your stop according to your system and peel off (=reduce) contracts when the risk got above the level you wanted to maintain.

Q:
Which is "better" mathematically, a 20% chance of winning a dollar or a 10% chance of winning two? In each case the expectancy is 20
cents but they are clearly not the same. - Why are they not the same?

A:
Question including full background:
In an interview in Stocks & Commodities you described a simple position size game (60% win, 40% loss and expectancy 1.2).
The expectancy is 0.6*1 - 0.4*1 = 0.2 or 20 cents per dollar risked.
I immediately started trying to derive the optimal bet size. In consultation with my colleagues we broke the problem up a little, derived
some intermediate goals and came away with a few results:
1. The first problem was to define "optimal".
We decided that optimal meant "highest risk / reward ratio". Well "reward" was obvious but...
2. So the second problem was "define risk". Do you define risk as the probability that a certain outcome will occur or do you define
risk as the variance of possible outcomes aka standard deviation or do you use something different again?
We found this problem intractable and decided to approach from a different angle.
3. There must be some kind of function which will define optimal betsize - but what are the independent variables? We assumed that the system would have to work regardless of how much money was involved so the betsize couldn't be fixed, it had to be some sort of percentage. Secondly it couldn't only be based on the expectancy of the underlying system. Consider the following two games:
A game with a 50% chance of a 3:1 win and a 50% chance of a 1:1 loss has an expectancy of 0.5*4 + 0.5*0 = 2
No, the expectancy is 0.5*3 - 0.5*1 = 1.50 or $1.50 per dollar risked.
A game with a 100% chance of a 1:1 win and 0% chance of a loss has an expectancy of 1*2 = 2
No, the expectancy is 1.0*1 - 0 = $1.0
Same expectancy but vastly different optimal betsizes.
In each of those cases the Kelly criterion defines the optimal bet size--(i.e., for maximum return only).
We were back to being stumped but at least now we could clearly state the core problem: Which is "better" mathematically, a 20% chance of winning a dollar or a 10% chance of winning two? In each case the expectancy is 20 cents but they are clearly not the same.
How would you define "better"?
Here your opportunity factor would make the key difference. If you only had one chance, I'd want the 20% opportunity. If you have unlimited chances and there was no cost to playing, it wouldn't make any difference unless you like more rewards in which case you'd still want the 20% opportunity.
We are currently refining some software that will answer the question of optimal bet size for you and help you determine what optimal means for you. It will be included with a new money management report that we are planning to offer soon.

Q:
Suppose you have a $10,000 account and wish to trade using volatility. Using an example similar to Van's book, say you want to purchase a $50 stock with an ATR of $4. You elect to set a stop at 3x volatility and you will risk 2% or $200.00. If I understand your logic, this means you could only purchase 200/12 or 16 shares and stay within the guidelines.
Now here is my real question. If you set the stop at 3x volatility, but find statistically that Van is correct, and on average you stop out at 1.5x volatility, then could you increase your risk to 4% and achieve the same results. Somehow this seems mathematically equivalent, but logically I think the overall risk increases.
A:
Volatility has nothing to do with the stop. If the ATR is $4 and your 2% allocation is $200, then you would purchase $50 shares. If you are using a 2% risk allocation (i.e., $200), and your stop is a three times volatility stop, then you would purchase 16 shares. Risk and volatility are not the same thing for position sizing allocations. Since that is the case, your logic is wrong. You would probably only use a volatility allocation when you were using a very tight stop like a dollar. In that case, you would by 200 shares, so a 2% volatility allocation of $50 is safer.
In a nutshell, volatility position sizing is totally independent of your stop. You keep you same stop, you just size your positions based upon volatility.
If you are using stock data, then I wouldn't recommend a volatility stop. I'd trail a 45 day moving average.

You have stated that a good money management plan should involve risking a percentage of total equity and that the volatility should also be
a percentage of total equity. How would one measure volatility so that it is a percentage of total equity?
Answer:
You would measure volatility according to a 10 day exponential moving average of the ATR. Let's say that's $3.00 Thus, for 100 shares of stock it is $300. If you have $100,000 and wanted to trade a 1% volatility algorithm, you could expose $1000 to volatility. Since volatility is $300 per hundred shares, you could have 333 shares.
---------
80% - 90% of traders lose - 10%-20% are consistent winners.
----------
Van Tharp:
3 MM algorithms (Minimum will be taken):
1) 1% of core capital:
a) (core capital - Total outstanding risk)*0,01 = x
b) x / $ value of initial stop = Nr. Contracts I
2) new risk limited (total risk <=25% of equity): before execution: equity * 25% - total risk= y
if y >0, y / $ value of initial stop = Nr. Contracts II
3) ongoing volatility (10 day M.A. of ATR): max 2% of equity
----------
My initial stop I place very close sometimes to close but statistically it works and I always limit my losses to very small amounts when I am wrong. My initial stop is placed 1 tick below the previous days low. As the stock goes up I move my stops up to continually protect my profit.
I will loosen my stops some as the stock moves so as not to get stopped out by general fluctuations, but I generally keep stops with in 10 - 15% of where the stock closes.
----------

!!! Use expectancy + know what it means to be wrong ten times in a row in a good system !!!

Trading Program/Software is difficult because most vendors cater to the model of predicting the market and they give people what they want.

------------------------------------------------------------------------------------------------------------------------------------------------

Market Wizard System -- here's a candidate

Mark Johnson
mjohnson@netcom17.netcom.com
1997/04/21
misc.invest.futures

Here's my test results of a Market Wizard System. It is profitable,
averaging a compound growth rate of 65% per year for twelve years
(net gain 420X in 12 years). It traded an initial stake of $100K
and ran the equity up to $42 million after twelve years.

The system is found on page 60 of LeBeau and Lucas's book,
_Computer_Analysis_of_the_Futures_Market_. Unfortunately that means
the system is unacceptable to Andrew St. John Goodwin, the originator
of this news thread. Ah well, he no doubt has accumulated better
systems anyway. Still, this one might perhaps be useful for
"diversication across a number of different systems," which itself
is a Market Wizard principle.


A few details about my tests:
* I used commissions = $50 per contract per round trip
* I used slippage = 4 ticks per contract per round trip
(for example in the Deutschemark, 1 tick = $12.50 so the
commissions+slippage in DM is $100.00/contract)
* I tested from 01 January 1985 to 18 April 1997 (last Friday)
* I tested the system on the 25 markets that I myself happen
to trade in my own real-money futures account. These
are the markets for which I always have continuous,
up-to-date data files ready for testing:
BP C CD CL CT DM DX ED FY
HG HO HU JO JY KC LB MB MP
NG SB SF TB TU TY US
* I used a Market Wizard "money management" rule: always risk
exactly 2.6% of total (closed + open) account equity on
every trade.
* I used the software package "Trading Recipes" by RW Systems
to perform the tests
* I started the historical test account at $100K. You may
dispute whether this is too much (or too little) to
start simultaneously trading 25 futures markets. But
that's what I did.


File: LEBEAU.GO
Date: 21 Apr 97

----------------------------- Performance Summary ---------------------------

Net Win Loss 42,053,156 Capital Required 36,143
Percent Wins 41.6% Date of Requirement 850404
Trades, Trades Rejected 1427 0
Wins 594 153.3M Total Slpg + Commssn 24,733,183
Losses 833 111.2M Start Up Capital 100,000
Long Wins 346 94,867,737 Margin Calls, Max 0 0
Long Losses 427 52,638,274 Max Items Held 13,617 970404
Short Wins 248 58,478,932 Days Winning, Losing 1630 1424
Short Losses 406 58,655,237 Expectation, Kelly 22.1% 11.4%
Max Consecutive Wins 8 15,950 Comp. Anul. ROI, ROI 65.0% 42053.2%
Max Consecutive Losses 14 9,202,127
Largest Winning Trade 5,325,899 Start Date, End Date 850326 970418
Largest Losing Trade 1,183,200 Total Items Traded 217623
Average Winning Trade 258,159 MAR Ratio 1.38
Average Losing Trade 133,606 New Highs, Percent 269 8.8%
Avg $Win to Avg $Loss 1.93
Max Drawdown by %, $ 46.95% $15.76M % on 891101 $ on 960304
Longest Drawdown 1.39 years 950707 to 961125


Here's the "equity curve". For brevity I've only included 6 equity
readings per year; this keeps the message length manageably small.
There's nothing sinister here; I'm just "saving bandwidth" as the
Usenet expression goes.

850201 100000.00
850401 97830.15
850603 114061.95
850801 128820.94
851001 138293.08
851202 169813.23
860203 216806.97
860401 288582.59
860602 285737.25
860801 254516.64
861001 230563.89
861201 243111.95
870202 327757.22
870401 328005.34
870601 416479.59
870701 400805.09
870803 471144.72
871001 498039.31
871201 678973.75
880201 755799.69
880401 714359.19
880601 688729.88
880801 1067212.50
881003 1039365.00
881201 1201548.50
890201 1363686.00
890403 1484712.38
890601 1684390.50
890801 1887812.75
891002 1256556.75
891201 1103038.00
900201 1820179.38
900402 1966021.63
900601 1868241.38
900801 2269144.75
901001 3050966.25
901203 3390288.25
910201 2887254.25
910401 2751789.75
910603 2450820.50
910801 2247085.50
911001 3246755.00
911202 4257608.50
920203 6582033.00
920401 5058539.50
920601 5094387.50
920803 8523964.00
921001 10232035.00
921201 8946255.00
930201 8634425.00
930401 10871372.00
930601 10686823.00
930802 11951045.00
931001 11933584.00
931201 10493555.00
940201 10365359.00
940401 11514206.00
940601 12596234.00
940801 17350238.00
941003 14743892.00
941201 17446028.00
950201 15582884.00
950403 24957432.00
950601 30482370.00
950801 28926444.00
951002 23099142.00
951201 25886892.00
960201 27243478.00
960401 27255586.00
960603 31130510.00
960801 29642532.00
961001 27338004.00
961202 37941076.00
970203 36292488.00
970401 43538832.00
970418 42153156.00


In article <19970421040600.AAA21992@ladder01.news.aol.com> ubchi2@aol.com (UBCHI2) writes:
> I am a professional hedge fund trader looking for some new
> technical systems. If you know the rules of a Wizard system,
> email a description and statistical summary of results. If it
> checks out, I will make you a cash offer on it. If you need
> privacy, just leave a phone number or email for mine.
> Publicly available systems not acceptable.
> --Please no day of week, volatility expansion, channel breakout,
> oscillator, bar chart pattern or other common methodologies.
> Only a totally mechanical method will be purchased.
> Andrew St. John Goodwin


------------------------------------------------------------------------------------------------------------------------------------------------

Re: Turtle Trading Seminars
Mark Johnson
mjohnson@netcom17.netcom.com
1995/08/09
misc.invest.futures

In article <4096gf$60h@everest.pinn.net> kskaggs@pinn.net (Ken Skaggs) writes:
# I just received a direct mail peice telling me that
# for $2500 I can learn from one of the Turtles, Russell
# Sands. With all the usual caveats, like why is a successful
# Tutle going public, does anyone know anything about
# this seminar?

> Subject: Simulation of the Turtle system (Re: What's the best system?)
> Date: Fri, 14 Apr 1995 18:12:14 GMT
> Here's a copy of an email I placed on the omega mailing list
> in November 1994.
> Despite Dave Chamness's provocative subject line
> "What's the best system", I don't mean to state, imply, or
> suggest that the Turtle system is in any way "best". It's
> a system, a long term trend following system. That's all.
> >
> > A while back I used Omega Research's System Writer Plus
> > (abbreviated SWP) to analyze the Turtle System as
> > propounded and sold by Russell Sands, one of the original
> > "Turtles" trained by R. Dennis and W. Eckhardt. See
> > the book _Market_Wizards_ by Schwager for more of the
> > Turtle story if you're interested in the history.
> > Anyway, because of limitations in the System Writer
> > Plus software, I deviated from Russell's teaching in two
> > ways that _might_ be important.
> > 1. Russell adds more contracts onto trades that show
> > a profit, under control of a table of what-to-do
> > contingency instructions created by Richard Dennis.
> > (Adding more contracts onto existing positions
> > is called "pyramiding".) SWP doesn't do
> > pyramiding, so I left it out. In Russell's terms,
> > I always traded "single, 1N units".
> >
> > 2. Russell provides a specific formula for determining
> > how many contracts to trade (one aspect of "money
> > management") which is a function of the equity level
> > in your account on the day you initiate the trade.
> > I didn't do that. I made constant-size bets
> > throughout the year, and I only adjusted my betsize
> > once per year, on December 31, based on the equity
> > in the account on that day. I found it a whole lot
> > easier to program SWP this way; it's difficult to
> > continuously compute the total equity in an account
> > that's trading multiple commodities simultaneously.
> > Difficult in SWP, that is.
> >
> > With those two deviations, I programmed up the Turtle
> > System in SWP. I used system parameters found
> > on the diskette that Russell provides (Initiation
> > parameter = 40, Liquidation parameter = 15). I ran a
> > SWP historical simulation of ten years of trading, from
> > 3/31/84 to 3/31/94. (I was using Omega's "20 year"
> > historical data package, which stops at 3/31/94. They
> > promise an update Real Soon Now :-)
> >
> > I charged myself an outrageously high $125 per round
> > trip trade, PER CONTRACT, for commission and slippage.
> > Even at full commission brokerage houses, commission
> > per contract drops quite low when you trade more than
> > one contract at a time. Still, I felt that if the
> > system could show a profit under these difficult testing
> > conditions, it would be a very good sign.
> >
> > I ran the simulation on eight commodity markets.
> > Russell's data indicates the Turtle System is weak
> > in the grains and the meats, so I left them out.
> > The markets I used were
> > Crude Oil
> > Japanese Yen
> > Coffee (Note that the monster coffee
> > Deutsche Mark trend of 1994 took place AFTER
> > Orange Juice 3/31/94 and so was not included
> > Swiss Franc in the simulated trading)
> > 30 Year T Bonds
> > British Pound
> >
> > I staked myself to 100 grand and started the historical
> > simulation of trading. What were the results? Here's
> > the yearly equity statement:
> >
> > DATE TOTAL EQUITY OPEN TRADES CLOSED TRADES
> >
> > 03/31/84 100000.00 0.00 100000.00
> > 12/31/84 151390.00 25990.00 125400.00
> > 12/31/85 414672.50 200176.25 214496.25
> > 12/31/86 542322.50 143495.00 450117.50
> > 12/31/87 1320185.00 422156.25 898028.75
> > 12/30/88 1882528.75 202292.50 1680236.25
> > 12/29/89 2608198.75 646685.00 1961513.75
> > 12/31/90 5127685.00 -35650.00 5163335.00
> > 12/31/91 8101231.25 2370407.50 5730823.75
> > 12/31/92 10941421.25 166010.00 10775411.25
> > 12/31/93 14214740.00 1428970.00 12785770.00
> > 03/31/94 12901833.75 0.00 12901833.75
> >
> > The worst drawdown period in percentage terms was December
> > 1990 through August 1991, when total equity dropped from
> > $5,712,182.50 to $3,953,901.25. (A decline of 31%).
> > There was also a decline of 24% from July 1993 to February
> > 1994. In the ten year period I simulated, the system made
> > a total of 500 trades. (6 trades per year in each
> > market). The winning percentage was 40%: 198 winning
> > trades, 302 losing. Overall, I was pretty pleased with
> > the results.
> >
> In what is probably a futile attempt, I will _try_ to answer the
> two most commonly asked questions here, in the naive hope it
> may reduce the number of repeated replies/followups:
>
>Q1. Tell me the trading rules of the Turtle system.
>A1. Buy them from the vendor. He advertises in Futures
>magazine and Technical Analysis of Stocks and Commodities
>magazine.
>
>Q2. Why didn't you compute Statistic X? If you had a brain
>you would know that Statistic X is vitally crucial for
>a proper scientific evaluation of a trading system.
>Your failure to include Statistic X means either that
>you're hiding something, or you're a nitwit, or both.
>
>A2. I typed in what System Writer Plus prints out; there's
>no intent to deceive or mislead. I'll be glad to email
>you the sequence of trades and the equity stream from
>the SWP simulation so that YOU can compute Statistic X.
>Best regards, Mark Johnson

------------------------------------------------------------------------------------------------------------------------------------------------

HERE IS: Source code for Option Pricing, binomial model

Mark Johnson
mjohnson@netcom17.netcom.com
1995/05/20
misc.invest.technical, misc.invest.futures

Here's the Binomial model, used to compute options
prices for both American and European style expirations.
You can test and cross-check the answers by comparing the
program's prices for European options, with a Black-Scholes
subroutine.

You get what you pay for. You paid zero for this code.
Think about it.

--------BEGIN--------BEGIN--------BEGIN--------BEGIN--------BEGIN--------
#include
#include


void option_val(x, k, r, v, dx, days, n, european, cval, pval, cd, pd)
double x ; /* current index price */
double k ; /* option strike price */
double r ; /* annual T-bill interest rate */
/* NOTE: r<1.0 is an UNcompounded rate */
double v ; /* annual volatility; 0 double dx ; /* dividends (fraction); 0 int days ; /* how many days to expiration */
int n ; /* how many iterations of the algorithm */
int european ; /* if 1 then European, otherwise American */
double *cval, *pval ; /* call value, put value */
double *cd, *pd ; /* call delta, put delta */
{
double s[200] ;
double c[200] ;
double p[200] ;

double doubl_n ;
double nd ;
double time, tn ;
double divt, div ;
double v0, r0 ;
double u, d, du, ur, a ;
double q1, q2 ;
double rkm, pdm ;
double y, t0 ;

int i ;

if(x <= 0.0) fprintf(stderr, "Hey bozo, index price must be >0, not %.4f\n", x);
if(k <= 0.0) fprintf(stderr, "Hey bozo, strike price must be >0, not %.4f\n", k);
if((r <= 0.0) || (r >= 0.25))
fprintf(stderr, "suspicious interest rate %.4f\n", r);
if((v <= 0.0) || (v >= 0.5))
fprintf(stderr, "suspicious volatility %.4f\n", v);
if((dx < 0.0) || (dx >= 0.3))
fprintf(stderr, "suspicious fractional dividend %.4f\n", dx);
if(days <= 0) fprintf(stderr, "Hey bozo, days must be >0, not %4d\n", days);
if((n <= 0) || (n>195))
fprintf(stderr, "suspicious number of iterations %4d\n", n);


doubl_n = (double) n ;
nd = (double) days ;
time = nd / 365.00 ;
tn = time / doubl_n ;
divt = 1.0 - (dx * time) ;
div = 1.0 / pow(divt, (1.0/doubl_n)) ;
v0 = v * sqrt(tn) ;
r0 = 1.0 + (tn * log(1.0 + r)) ;
u = exp( (r0 - 1.0) + v0 );
d = exp( (r0 - 1.0) - v0 );
du = d / u ;
ur = 1.0 / u ;
a = (r0 - d) / (u - d) ;
q1 = a / r0 ;
q2 = (1.0 - a) / r0 ;

/* set expiration values for index, call, and put */
s[n] = x * pow(u, doubl_n) * divt ;
for(i=n; i>=0; i--)
{
a = s - k ;
c = 0.0 ;
if(c < a) c = a ;
p = 0.0 ;
if(p < (0.0 - a)) p = 0.0 - a ;
if(i > 0) s[i-1] = s * du ;
}

/* initialize values for present value of dividend */
y = dx / time ;
t0 = 0.0 ;
rkm = 1.0 ;
pdm = 1.0 ;

/* do n iterations of the model */
while(n >= 1)
{
if((dx = 0.0) || (european == 1)) goto do_iteration;
/* adjust for dividend payment */
for(i=0; i<=n; i++)
{
s = s * div ;
a = s - k ;
if(c < a) c = a ;
a = (k * rkm) - (s * pdm) ;
if(p < a) p = a ;
}
/* compute new present value of dividend */
t0 = t0 + tn ;
rkm = 1.0 - pow((1.0 + r), t0) ;
pdm = 1.0 - (y * t0);

do_iteration:
for(i=0; i<=(n-1); i++)
{
c = (q1 * c[i+1]) + (q2 * c) ;
p = (q1 * p[i+1]) + (q2 * p) ;
s = s[i+1] * ur ;
if(european != 1)
{
a = s - k ;
if(c < a) c = a ;
a = (k * rkm) - (s * pdm) ;
if(p < a) p = a;
}
}
/* if n=2, use values to compute deltas */
if(n == 2) {
a = x * (u - d);
*cd = (c[1] - c[0])/a ;
*pd = (p[1] - p[0])/a ;
}
n--;
} /* next n */

*cval = c[0] ;
*pval = p[0] ;

}




/* a little stub to test out the options valuation subroutine */
main()
{
int n, number_of_iterations ;
double number_of_days ;
int days ;
double dx, dividend_dollars_through_expiration ;
double v, index_annual_percent_volatility ;
double x, current_index_price ;
double r, interest_rate ;
double k, option_strike_price ;
int european ;
double cd, pd, cval, pval ;


number_of_iterations = 50 ;
number_of_days = 95.0 ;
current_index_price = 351.25 ;
index_annual_percent_volatility = 0.16 ;
dividend_dollars_through_expiration = 3.00 ;
interest_rate = 0.075 ;
option_strike_price = 345.00 ;
european = 0;


n = number_of_iterations ;
days = (int) number_of_days ; /* (expiration_date - today) */
dx = dividend_dollars_through_expiration / current_index_price ;
v = index_annual_percent_volatility ;
x = current_index_price ;
r = interest_rate ;
k = option_strike_price ;

option_val(x, k, r, v, dx, days, n, european, &cval, &pval, &cd, &pd) ;

printf(" Call Value %11.4f Call Delta %11.4f\n", cval, cd);
printf(" Put Value %11.4f Put Delta %11.4f\n", pval, pd);

}
------END------END------END------END------END------END------END------
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 楼主| 发表于 2004-9-1 18:56 | 显示全部楼层
Money Management 2
Ray Barros:

THE ROLE OF MONEY MANAGEMENT


Introduction

I have noticed that in newsgroups and trading magazines, the emphasis is on trading systems and/or
approaches. On the other hand, theoretical works tend to emphasize the primacy of money management.

For example, in a chapter entitled "The Secrets of Successful Trading" in Street Smarts, Fernando Diaz
concluded:

"Successful traders have a larger edge and better money management than unsuccessful traders. Unlike popular
belief however, this study shows that the smaller edge of successful traders is not the cause of their failure.
Traders' failures can be explained almost exclusively by their poor money management practices."

While I agree with this statement in principle, I am certain a trader's plan must give him an edge. Good money
management will not save a plan without an edge; all it will result in is slower ruin. In "Anatomy of a Trade", I
indicated the elements I believe are essential to giving a trader his edge.

In this article, I want to outline the best money management approach I have encountered.

W Gallagher's method set out in "Winner Take All".

Gallagher's Money Management

This section will be divided into three parts:

1) disagreement over % stops

2) the pillars of the approach

3) a spreadsheet formula for the approach

Fixed % Stops

Gallagher argues that "risk to trading equity cannot be reduced by reducing the amount risked on each trade".

Let's illustrate this by way of an example Gallagher uses in his book.

Traders A and B both have $20,000.00 and both want to take a trade in Soybeans that may net them
$4,000.00 per contract. Both decide to trade 1 contract.

Trader A decides to risk $5,000.00 and Trader B $400.00. Trader A thinks his trade has a risk reward ratio of
1:4; trader B, 1:10.

Gallagher argues that the risk /reward for both traders is exactly the same because "the strategy risking
$400.00 can be expected to be stopped out two and one-half times as often as the strategy risking $1,00.00".

To quote Gallagher:

"You can drive from Toronto to Miami in one day, or you can spread the drive over three days; it still takes the
same amount of gas to get there. The small amounts risked with very tight stops will be balanced by the high
frequency of occurrence of losing trades."

For me this is true only if you believe the market is random and/or your stop placement is a money stop rather
than a technical stop. On the other hand, if you believe, like I do, that the market has a structure, then stops can
be placed at levels which if hit indicate the trend has changed.

As an example, in "Anatomy of a Trade", I set a stop for the A$ at 7782 because if the market got to that level,
the trend would change from up to down in my time frame.

If my belief is right , you first determine your stop and then see if the dollar value from entry is within your risks
parameters. If not, you skip the trade. Given my trading results, I am happy to risk 2% to 5% of capital. Each
trader has to set his boundaries. These boundaries are determined by a trader's profitability profile, ie

* his historical run of outs,

* percentage of wins: percentage of losses,

* average $ win: average $ loss etc,

and his psychological tolerance to loss. Here I'll mention one factor. I have had the opportunity to observe many
traders over the years. On average I would say that at the 20% drawdown mark, most traders start to lose it - their
discipline starts to go, they start to look for new methods etc. So as a general rule, set your boundaries for a
maximum loss of 20% and you won't go too far wrong.

To conclude this section.

Unlike Gallagher, I believe a maximum % loss has a part to play in keeping a trader from blowing out.

Having said that, maximum % loss is not the only criteria. There will be times when the unusual event will occur
(and in trading, it seems to happen all too often!)

To protect against the rare occurrence, the key element is exposure. And it is here that Gallagher comes into his
own.


The Pillars of the Approach

By exposure Gallagher means the dollar amount needed to cover each open position.

Risk to equity increases with exposure and with time. To adopt Gallagher's approach a trader has to decide for
how long he wants to trade and the maximum draw down he would expect to experience in the period. Gallagher
postulated as a result of his trading experience, a 25 % probability of a 50% draw down in ten years.

The next step is to calculate objectively the largest equity drop (LEED).

"Once LEED is ..... determined, the trader can then make a logical decision on how he wishes to finance this
LEED. He can be aggressive, or he can be conservative - as long as he is aware of the risks he is running."

To work out the LEED, first work out the average daily range (rather average true range) over the period of the results under consideration;
then work out the $ value of your trading results in terms of the daily range. This gives you a result in units.
(example: let's say the average range of D-Mark is 40 points and you make 120. The win result is 3).

Once this is done, you can calculate two things:

1) a probability distribution of your method (ie your edge quantitatively determined) and

2) the LEED

Let's look at an example for the LEED

Trade Gain/loss (in units) Cumulative Equity LEED

1 -1 -1 1

2 -1 -2 2

3 0 -2 2

4 2 0 2

5 3 3 2

6 -1 2 2

7 6 8 2

8 -5 3 5

You get the idea.

Gallagher takes the view that most methods with a 10% edge need 40 units to finance one contract of anything.
Gallagher calls this the "R" factor.

He also found that LEED is a function of the square root of the trading time and therefore a function of the
square root of the number of the independent positions being taken.

Once you have worked out the "R" factor you can work out the dollar value of any contract.

As an example, at the time of Gallagher was writing, the US Bonds had an average daily range of 24 points for a
dollar value of $750.00

If we assume Gallagher's desire not to exceed 50% draw down over 10 years of trading and a 10% edge, we will
have a 40R requirement.

To finance the US Bonds:

Number of Positions Amount Required

1 $ 30,000.00

2 $ 21,000.00

3 $15,000.00

Note that as the number

The Formula




Col A: The instrument you are trading.

Col B: The probability of drawdown over your trading life . I have adopted Gallagher 's 25%.

Col C: The number of independent positions.

Col D: Col B/Col C

Col E: The dollar value of daily mean range

Col F: The "R" value. Notice that Gallagher worked out that for his method he needed 40R, I require
20R. You may require more or less "R"s.

Col G: Square Root of Col D x Col F

Col H: 1st line ; in the example above Row 8 , original capital / Col 6;

thereafter Col J in previous row / Col G; in the above example, J8/G9.

Col I: The actual number of positions taken.

Col J: 1st line: original capital minus (Col I x Col G)

thereafter previous Col J minus (Col I x Col G).

Note in the example above the amount required if the A$ is part of two other independent positions is
A$16,500.00; whereas if it is traded alone, the amount required is A$28,500.00.

Conclusion

In this article, I have suggested that risk to equity can managed by two factors:

a) technical stops that do not exceed a fixed percentage of the trader's equity and

b) the Gallagher formula for exposure.

Both depend on the trader's personality, profitability profile and the volatility of the market.

Dated 1st day of July 1996

R Barros

---------------------------------------------------------------------------------------

ANATOMY OF A TRADE

My aim here article is to give an example of the
principles I outlined previously. I shall be considering
the a$/US as at July 3rd 1996.

Trend Analysis

In any trading plan, the first requirement some means of
identifying of trend of the timeframe we are trading (I call
this, a "trader's timeframe"). For reasons outlined
previously, this implies:

a) we have some means of identifying moves of similar
magnitude, and

b) we have some means of identifying changes in the
trend of trader's timeframe.

I would also add that the trader's timeframe's trend may
be influenced by the trend of the next higher timeframe.

To determine trends, I use swing charts and a wave
theory of my own (R-Wave). The latter is based on
categorising corrective waves to define moves of similar
magnitude,

On July 3rd 1996, the quarterly trend had just given a
confirmed change in trend to the upside (no chart
shown). As long as the a$ did not accept below 7795
before breaking above 8045, I was happy that the
quarterly uptrend was intact.

Chart 1 shows that the monthly swing chart had just
given a confirmed breakout to the upside. As with the
quarterly, I wanted to see a lack of acceptance below
7705.



Chart 2 shows that wave (1) had completed and wave
(2) should terminate between 7890-7920 with the mean
at 7807 being the most probable termination point,



At the end of the trend analysis, I had come to the
following conclusions:

1) The trader's timeframe (monthly) was up. Acceptance
below 7705 would change this view.

2) A preliminary support zone for wave (2) termination
was 7694 - 7920, with the mean retracement at 7807.

Given what I said in (1) above about 7705, the range for
(2) was 7705 - 7920.

Once we have determined the trend, we have our
strategy. We now need a low risk entry.

Low Risk Entry

The next step in the trading plan is to identify a low risk
entry zone. I look at three factors.

1) Some area which is likely to mark the end of the
corrective move. The tools I use here are Dynamic Gann
Levels and Steidlmayer Distribution zones.

For DGL's, level 2 support came in at 7807, the same
number as the R- Wave mean. The Distribution buy zone
came in at 7841 - 7812 (See Chart 3).



2) Once a zone is determined, you need something (a chart pattern or principle) to tell
you that the zone has held - what I call a setup.

In this case, the bar of July 3rd was a Wyckoff "spring" - also known in Distribution
terms as a 313 outside - The market dipped below the previous low at 7812 and was
unable to go on with the down move.

These patterns were examples of the principle of "effort vs. result". The strong move
down of on the July 2nd should have led to some further losses. None were
forthcoming as at the close of trading on July 3rd 1996.

3) After a setup, I need an entry technique. For me that came on July 4th when the
90 mins chart (not shown) produced a confirmed change in trend.

Stops were below 7782 and made up as follows:

7806 - (8045 - 7806)* 10% = 7782

Once in the market, we have to manage the trade. Let's look at that now.

Trade Management

Normally I would wait for the market to enter the 8045 - 8014 zone before taking 1/3
or 1/2 my positions out, However on Friday July 5th (see chart 4), we had a range of
1048 points!

The mean daily range for the a$ at present is 45 points with a standard deviation of
15. That means that the 145 point range had less than a 1% chance of occuring.
Even allowing for statistical error, Friday's range was excessive.

Given that range, I pulled 1/2 my positions out once the 90 mins showed that the up
move had stalled. The point is, I am not sure if Friday's move is a sign of strength or if
like a rubber band stretched too far, there is a strong down move to come.

As it stands, I can now bring up the stops on the remaining position to

7788 made up as follows:

7806 - (7980 - 7806)* 10% = 7788.

This gives me a "free run" for this trade ie even if stopped out, I make a few dollars.

If the market, moves into the 8045 - 8014 zone, partial positions would be liquidated
and stops moved up.

So there we have it an anatomy of a trade.

A Final Comment

I have come across many traders who "just want the secret" to make money.

In a sense there is no "secret". Traders who make money do so because they have a
trading plan with an edge that incorporates effective money management. They then
have the discipline to execute it relatively flawlessly and the self esteem to accept the
money the market gives them.

Then again may be that is the "secret".

Happy and profitable trading!

---------------------------------------------------------------------------------------

Sigma of mean return declines over time
Sigma of total return rises over time

[ Last edited by 缩水基金 on 2004-9-1 at 18:59 ]
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 楼主| 发表于 2004-9-1 19:00 | 显示全部楼层
I realize if I had started trading in March last year I would have
been blown out, so will only increase position size when I can limit risk
to 2% per trade.

...ask is touched on a buy stop or when the bid is touched on a sell stop.

often exit positions long before I am stopped out !!!

I executed long trades at 1,785.
Target for my second third was 1,891 - 1,866
First resistance was at 1,843 - 1,832
I exited the first third at the low 1,830's. Not only did that zone
represent resistance, it was also the area that allowed me to break even on
the remaining 2/3s if stopped out.
I was wrong about this week's direction and took out the second third in the
high 1,800's. If I was wrong about the week's direction, it was probable I
was wrong about the mkt getting to the 18910 zone.
The stop on the remaining 1/3 has been raised so that if I am stopped out,
I should lose no more than 50 points (allowing for slippage) on the last 3rd.

Preservation of capital and consistent profitability is most important.
As Steidlmayer used to say "trading is 10 months of grind and 2 months
of gravy. If you can stay ahead in the 10 months of grind (or least lose
very little), the 2 months of gravy will make you a very successful trader".

With any system, you can "over filter" either it is by adding seasonal
considerations or just too many filters. The trick is when adding filters
one must be sure that the filters do not contradict each other. When this
happens you have created your own version of chaos.


ATR D-Mark its about 40 ticks

Set a stop at 3 ATRs under the entry, reversing when it hits the stop.
Then adding an additional contract to when the stop is moved up another ATR.
This assumes that you can get out reliably with simple stop orders. Thats not
always the case, especially when multiple contracts are pyramided up.
The money management step, adding on the contracts with each movement of the
stop and then adding positions with "the markets money" is what makes the
money. The real money is not made with the usual 1 to 3 strike moves in this
system. Its in the pyramiding that can take place after a position becomes
riskless. If it goes on past the 3 or 4 strikes and another similar position
is added, it then only takes a 2 strike move to become riskless again.
You have twice as many positions working. Then another pair of futures and
options are then added, using the equity from the previous positions requiring
only a 1 strike move to become riskless. It doesn't take much of a trend to
gather 64 or 128 contracts/options to become "ballistic" and still not have
any additional risk to your account using "the markets money" to pay the way.
It just takes getting over trying to be "right" all of the time and letting
the market take you where it wants to go. When the move is over, you just
start over again in the opposite direction with the 3% risk again - hopefully.


chi squared test: indicate that the improvements are unlikely to be random.

Look at the momentum of what is happening. If volatility and momentum go to
a certain level and get way out of line, I'm looking for a reaction in the
other direction and then I put on a trade.
search via e-mail?

-------------------------------------
Ray Barros:

You are right. Money Management attempts to answer these questions:

* how much to allocate as initial deposit
* how much to risk per trade
* how to allocate among competing opportunities.
* number of contracts to be traded.

> I tried to increase postition size according to the %return on
> margin (the higher it grows the higher the number of contracts), when
> %return on margin calms down, I decrease postition size, but the results
> are not very satisfactory.
> I also tried to increase/decrease postition size according to the
> dependency among the last x trading days of a trade. When there is a
> Win-Lose-Win-Lose pattern I increase-decrease-increase-decrease, when
> there is a Win-Win-Win-Win pattern I increase continuosly (e.g. every 5th
> day). Also not very satisfactory. Am I on the right track but on the wrong branch?

****************************************************************************
I am not a believer in increasing/decreasing the size of my capital a matter
of course (=selbstverst&auml;ndlich). My reasoning is thus:
"If a have a 65% probability of winning on a trade, the probability does
change because you have had a run of outs or wins."

I have simple rules about increasing the size of my capital. Whenever I
achieve a 30% increase, my capital base increase by 15%.

Example: I start out with $100,000.00. When I have made $30,000.00,
my capital base increases to $115,000.00. When I have made $35,000, (a
rounded 30% of $115,000.00) my capital base increases to $132,000.
You will note that I round up for the requirement of 30% increase and round
down for the capital base increase.

If I increase my bank by 15% and I suffer loses gives back all of the 15%,
I return to the original bank.
Example: I increase by %15,000 to $115,000.00 and losses of $16,000.00
accrue, my bank drops to $100,000.00 for money management purposes.

****************************************************************************

The best books I have come across on the subject in increasing order of
importance on my ideas on Money Management:

* Gallacher "Winner Take All". There is a chapter on MM which is better
than any book.

I take issue with (anderer Meinung sein) Gallacher's attitude to 2% on a technical and psychological
issue rather than mathematical. However that is because I am a discretionary
trader - his argument is directed to the mechanical trader.
If you read his book and want to take the discussion further, please write.

* Balsara'a "Money Management Strategies for Futures Traders". Poses good
questions but the answers are inadequate.

* Gehm's "Commodity Market Money Management". Good book for introducing the
probability issue. That title is probably out of print. However Gehm did have
a re-write 2/3yrs ago with a new title but I cannot recall its name.

regards

ray
---------------------------------------------------------------------------------------
RANKING OF TRENDS

In "Anatomy of a Trade", I said that identifying the trend of the timeframe you are
trading is important because it sets up the strategy for your trade. In other words, in
an uptrend, you buy dips or upside breakouts, in a downtrend, you sell rallies and
downside breakouts and in a sideways trend, sell the top end of the range and buy
the bottom end.

It is almost a cliche that "trends are where traders make their money". However, I
believe that you need to go beyond merely identifying a trending market. To maximise
my profits, I would rank the type of trending market I am in.

For the purposes of these notes, I am assuming a monthly uptrend. The
monthly is therefore the "trader's timeframe trend".

Moves in the direction of the trend (ie up moves), I shall be calling "impulse moves" or
"impulsive" and moves in a direction opposite to the trend (ie down moves), I shall be
calling "corrective moves" or "corrections".

This article will suggest four categories. They are ranked from "0" to "3", with "0" being
the most difficult to make money and "3" being the easiest provided you can identify
it.

The key to the categories is the relationship between the impulse and corrective
waves by the amount that one overlaps the other.

Ranking "0"



Characteristics

1 Corrections of the impulse move tend to be between > 67% to < 87.5%.

2 Breakouts are followed by a correction between > 67% to < 87.5% and a deep
re-entry (ie greater than 50%) into the previous correction.

eg After the breakout at "3", the market retraces between > 67% to < 87.5% of "2" to
"3" and greater than 50% of "1" to "2".

3 At either Point 5 or point 7, the trend or trend type will change. In other words, the
market will either change from an uptrend to a downtrend or at Point 5 or point 7
change to a Ranking of 1 or 2 or 3

Profit Potential

Unless you identify it, it is difficult to make money in this type of trend.

Breakout traders have to wear the pain of the retracement. Most will place their stops
below the 50% or 67% retracement areas and will continually get stopped out.

Responsive buyers

ie buyers on dips

will probably not get set.

Responsive sellers at the top end of the ranges will make some money if they take
partial stops or use some form of trade management. Otherwise, they also will be
stopped out continually.

Ranking "1"



Characteristics

1 Corrections of the impulse move tend to be between > 33% to < 67%.

2 Breakouts are followed by a correction between > 33% to < 67.% and a shallow
re-entry (ie 50% or less) into the previous correction.

eg After the breakout at "3", the market retraces between > 33% to < 67.% of "2" to
"3" and 50% or less of "1" to "2".

Profit Potential

Profit potential is reasonable.

The danger points are the correction following the breakout when re-entry occurs
below the point of breakout. Good trade management is necessary.

Ranking "2"



Characteristics

1 Corrections of the impulse move tend to be between > 33% to 50%.

2 Breakouts are followed by a correction between > 33% to 50% and no re-entry
into the previous correction.

eg After the breakout at "3", the market retraces between > 33% to 50% of "2" to "3"
and above "1".


Profit Potential

Profit potential is excellent as this is the most orderly of all the trends. When the
market retraces into the previous correction's range, you will KNOW that a CIT is
imminent.

Ranking "3"



Characteristics

1 Strong (in terms or price and time) directional move after a confirmed CIT on
breakout above "1".

2 No corrective moves.

Profit Potential

Profit potential is poor unless identified early or you have developed special rules to
deal with it. This type of trend can prove very frustrating for the responsive trader as
the market steams ahead without any corrections.

Breakout traders can make excellent money as the market quickly turns poor trade
location into fine ones.

Novice traders learn extremely dangerous habits as they "learn" that the market will
get them out of trouble as long as they trade with the trend and "isn't easy to identify
a trend that will go on forever" (??!!)

There you have a method of ranking trends. In my next article, I shall look at some
examples.

Happy trading 27/08/96

---------------------------------------------------------------------------------------

RANKING OF TRENDS

PART II

In the first part of this article, I outlined the concept of "ranking of trends".

Here I shall look at a practical application reviewing the current US/Jy picture. The trader's
timeframe is the monthly trend.



In the above chart, the monthly trend has been up with a ranking of "0". In the previous article I
said,

"3 At either Point 5 or point 7, the trend or trend type will change. In other words, the
market will either change from an uptrend to a downtrend or at Point 5 or point 7
change to a Ranking of 1 or 2 or 3."

The question now is:

"Will the US dollar accelerate its uptrend or will we see a deep correction to at least 10335 and
probably below?"



The quarterly trend shows the US/JY still in a downtrend and currently in a sell zone. Even if we are
to have a change in the quarterly trend from down to up, we can expect to have a test of the low at
8010. Generally the market will retrace to the 50% level around 9700 - 8965.

Given the quarterly picture, the probability is the monthly trend will break to the downside.

Identifying the actual setup and entry is beyond the scope of this example - the point of which was
to illustrate the use of "ranking of trends".

October 7, 1996

---------------------------------------------------------------------------------------

Wyckoff, Steidlmayer and my own observations on how markets behave.


Let me introduce myself. My name is Ramon Barros. I have been a professional trader since 1980.
I trade the forex markets, and interest rate futures, Australian Ten Year Bonds, US 30 Years, the
Gilts and Bunds.

What follows are the basis of my trading approach.

My approach to the markets is a combination of Wyckoff, Steidlmayer and my own observations
on how markets behave.

Here I would like to set out the principles that govern my trading so that you have a basis to follow
my line of thought in future articles.

Wyckoff:

He was the first that I know of that drew the distinction between mechanical TA and subjective TA.

The grandfather of the former is Schabacher. He studied charts looking for patterns that led to the
same result. In modern lexicon, the Edwards and Mcgee formations, head and shoulders etc. Here
the approach is observations of models and then finding as many carbon copies as possible.

With subjective TA, we begin with a set of principles. The observation is aimed at finding these
principles at work and responding to them in the appropriate manner.

"At this point there may be the inclination to say,

"What is the difference"?

There is a very basic difference. A formation is a constant. If the stock does not fit one of the
molds.....it is eliminated.

A principle ....... is more than a constant. It is an absolute. In the case of the market, it is a statement
of condition that is unequivocally true. Given a certain set of conditions, the result will always be the
same. These conditions may not and usually do not, produce carbon copy formations."

Introduction to the Wyckoff Method of Stock Market
Analysis

Wyckoff articulated three laws:

The Law of Supply and Demand:

Market go up when demand exceeds supply and vice versa. He also identified that "in between the
excess of supply and demand, or demand over supply, is a state in which the two are in equilibrium"

COMMENTS: All of the above should be self evident. However many trading systems/approaches
recognise only two trends:

up or down

It’s the reason you get such huge drawdowns in non trending markets.


The Law of Cause and Effect

The effect realised by a cause will be in direct proportion to that cause. To get an important move
(effect), there must be an important cause ie these moves take time to develop.


The Law of Effort and Result

What is important is not only price but also the character of the volume. When volume and price are
in harmony, the trend is likely to continue. When they are out of sync, positions are in danger and
defensive measures need to be taken.

For example, in the US Bonds. We have had a down move which began on or about February 13th
1996. From the 11th April lows onwards we see the market make new lows only to retrace back
into the previous congestion area.

On June 12th, we see a beak of the closing low of the past six weeks.

The volume was above its mean (in fact it was close to its mean plus 1 Standard Deviation); the
range was below its mean and the net change was a mere thirteen ticks.

Given the disharmony, I would tighten stops on long term shorts and liquidate any fresh positions
taken on the break of the six week closing low.

Wyckoff did develop a model for identifying how markets moved, terminated its trends and the
appropriate trading strategies. However, the model was secondary to the principles and a way of
illustrating their use.


Before we leave Wyckoff, I need to mention one other item.

Wyckoff believed that markets moved in waves as a trend progressed. The magnitude of the action
in time and price determined the nature of the underlying trend.

Given the above, it is critical to his approach we determine the trend of the timeframe we are
trading. The tool he used was a trend channel. What is important is not the tool but the manner in
which it is constructed.


"(In an uptrend)...The next step is to construct a justifiable trend channel (emphasis added)....The
important word here is justifiable.

An uptrend channel is formed from a support line and an overbought line....To define a support line
requires two points.... they are to be low points of two consecutive reactions of similar importance
(emphasis added)..."

Introduction to the Wyckoff Method of Stock Market
Analysis


The idea here is to measure moves of similar magnitude. I shall have more to say later on this
subject later on.

For now I would like to leave Wyckoff and turn to Steidlmayer.


Steidlmayer

Peter J Steidlmayer , floor trader and former director of the CBOT is known of his work on the
Market Profile and its subsequent evolution, the Steidlmayer Distribution.

Much of Wyckoff’s ideas are found in his work. As Steidlmayer has never acknowledged
Wyckoff’s influence, I would say that he made his observations independently of Wyckoff. I make
this point to stress that two traders, centuries apart, have made similar observations about market
behaviour.

Like Wyckoff, Steidlmayer believes that principles rather than models are the key to trading
success. His key message is that trading is no different to any other business endeavour and that the
common management techniques used in other business endeavours are applicable to trading and
investing.


My Own Work

Most of my own research lies in identifying what constitutes moves of similar importance. I believe
that one of the key failures of modern technical analysis is a failure to answer this question. To
determine the nature of the current trend, we first have to determine, the magnitude of that trend by
some relatively objective means. One of the problems with the Elliot Wave is subjective nature of
the various wave classes.

For me, there are two ways of measuring moves similar moves - by time or price.

In the case of time, swing charts are easy to apply. In my own trading I use the 12 week to
determine the quarterly trend, the 18 - 20 day to determine the monthly, the 5 day to determine the
weekly and an intra day swing chart to determine the daily.

In the case of price - what was important to me was the magnitude of the corrective move. For this
reason I classified all the corrective moves for each market and worked out the mean and standard
deviation for each. In this way, I know when one category ends and another begins.

Well that’s it. In the future, we’ll look at the specifics and their implementation.
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 楼主| 发表于 2004-9-3 06:35 | 显示全部楼层
Money Management 3

================================================================================
On Fri, 13 Dec 1996 04:04:17 -0500 (EST) Carl wrote:
> I WANT and NEED 'HELP' in my trading decisions!!!
>
>I've "BEEN THERE and DONE THAT" but always,my way-NO DISCIPLINE!!! , seat
>of the pants kind of stuff-------what a rush,a 30,000 + day,and then watch
>the 'screen' in >a sort of trance for a 90,000 ---(minus) day! .....
(of course,day >trade,NO stops, >until my order taker asked for it)
===================================================================================
Hi Carl,
Here are some suggestions and hope they can at least point you in the right direction.

I believe the transition from "mug trader" to "consistent profitability" needs the
learning of three lessons.

1 thinking in terms of probabilities. Ultimately, this needs the development
of a trading plan (including a money management plan).
2 executing that plan as flawlessly as possible and
3 accepting the profits the markets gives a trader as a reward for his
efforts.

The first lesson is firstly technical ie acquisition of the relevant knowledge
and secondly psychological ie application of the knowledge. The other two lessons
are mainly psychological.

Generally I have found that most novice traders fail to have a plan; in other words
they fail at the first gate. To have discipline means to "execute your plan flawlessly";
if you don't have a plan, then how can you expect to have discipline?

So what must a trading plan contain?

* Identification of the timeframe you are trading:

This means you have some means of measuring moves of a like magnitude and identifying
the trend of that timeframe:
up, down or sideways.
It also means you have some means of identifying changes in trend.
Once you have identified the trend and answered the question "continuation or
change", you have established your strategy.

in uptrends: buy
in down: sell
in congestion: buy the bottom end of congestion and sell the top end or
just stand aside until a trend resumes.

Once you have your strategy, then you need to establish

* low risk entry

++ To do this, you need to have some means of establishing support or resistance areas
where the market is likely to stall eg

- you're in an uptrend, a correction is in place, you need to
establish an area where there is a high probability the correction
will end

- you're in an uptrend and given the structure of the market,
you are looking for a change in trend. You need to
establish an area where there is a high probability the trend will
will end.

DGL's are great for this.

++ You then need to define a series of high probability setups. I define
this idea as indications that the support/resistance area are
likely to be effective.

There are three groups of setups. These (with examples) are:

time: Delta, Gann dates, Fibo dates, cycles, etc

volume/price: Wyckoff, Arms etc

price: Candelsticks, 5VBT etc

You can of course mix setups from each group.

++ Finally you need to establish an entry technique and initial stop.

eg the ATR posted here recently.

The principle here is you need some means of identifying rejection away
from the zone.

* trade management

Once you are in a trade, you need to manage it.

++ at its most basic, this involves a trailing stop.

++ however, I have found that the "rule of three" allows you to take
some profits early while retaining the possibility of taking part
in large trending moves - the best of both worlds. I posted
this idea before. If you missed it, e-mail me and I'll resend it.

When the trading plan is in place, you need to establish a money
management approach. This has two purposes:

a how much capital is needed to fund each contract,
b the stop loss for each position

Both questions are determined by four factors:

a financial capacity to lose ie your capital base
b psychological capacity for loss
c the profitability profile of your methodology
d the volatility of the markets you are trading

I won't go into this here - this post is getting too long as it is.
However I did write an article on this topic on the Realtraders
Website, http://www.realtraders.com/.
Go to "trading secrets" and to my "shelf".

regards
ray
-------------------------------------
Name: ray barros
Tel : 61 2 9267 3470
Fax : 61 2 9267 3478
101/25 Market Street
Sydney NSW 2000
Australia
E-mail: ramon@world.net
Date: 12/14/96
Time: 11:24:06
-------------------------------------

In any given market, the sum total of all traders's perceptions is one
collective perception which, at any given moment, creates the price and
hence the reality of the marketplace. Every trader's account is credited
or debited based on this.
If that perception is not in harmony with the collective perception of the
market, that trader will be punished by losing money.
These are not my personal beliefs anymore than the law of gravity
belongs to Newton. This is the way of the market. But, perhaps this is
all wrong given that it is coming from someone who you claim has a 70
IQ. On that last point, I think you may be on to something. Every since
graduating from my third rate alma matar college, I have been working
hard at dumbing down so I could become a better trader. Since arriving
on the CBOE trading floor in 1975, I came to the conclusion that trading
genius lies in the brain of a 4 or 5 year old child. More recently, I had
the opportunity to test this hypothesis and was pleasantly surprised when
my then 4 1/2 year old son produced some extrordinary trading results, i.e.
62% winning trades with a 2.41 to 1 win/loss ratio, and more than $7,000
in profit in about ten trading days. Please keep in mind that for the
purpose of this experiment I provided little or no instruction to him on
the markets. I merely ask him to look at some charts and indicate up, down,
sideways, or that he didn't know. I then took the markets for which he had
an up or down opinion and did a paper trade based on the close price of that
day, i.e. bought if he said up or sold if he said down.
So if IQ measures one's intelligence in relation to one's age, I can see how
it would be helpful for me to perhaps reduce my IQ to about 25 in order to
become a more succesful trader. I thank you for your assessment of me being
at an 70 IQ, as this shows that I have been making steady progress in reducing
my IQ.
Norman nwinski@naples.infi.net



--------------------------------------------------------------------------------

What makes you think that determining market direction and chosing indicators
are relevant in making money trading? If you look for these, you become an
analyst, not a trader.
Joe Ross: "TRADE WHAT I SEE, NOT WHAT I THINK!"

You can fool all of the people some of the time and some of the people all of the time.

The best time to buy is when blood is running in the streets, even if it is
your own.

Neal T. Weintraub in "Tricks of the Floor Trader" said: You will run out of
money before a guru runs out of indicators...

Subject: Re: Poll: Pick your favourite three indicators
In order of priority:
1. Price
2. Price
3. Price


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The problem is, the tighter the stop, the more likely noise will stop
you out with a loss even if your entry was good and the trade will show
a profit if you stay in. Therefore the best stops are not stops in the
traditional sense but rather short and long exit signals based on careful
system design and with due respect to the reasons why the system
got you into the trade. Do the justifications for entry still exist?
Bottom line is that exiting a position requires as much thought in
system development as entries do. The better the system, the less often
you will wish you had a stop loss that was not already part of the system
itself. These days, many system writers are looking to volatility as part
of the criteria for entry and exit, but other factors involve partial vs.
complete profit taking, looking at multiple time frames. etc.
James Charles money4u@erols.com

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Try looking at a 3/9/15 Exponential Moving Averages and trade multiple
contracts (2 or more). When the 3 crosses the 9 sell one. If the 3 crosses
the fifteen sell the rest. If the 3 doesn't cross the fifteen you will
still have a contract or two on. This can reduce the number of whipssaws.
It will also increase the dollars of profit per trade and decrease the
dollars of loss per trade. POINT IN THOUGHT: has anyone considered in
which time frame you use your moving average? If you trade 5 min charts,
what about putting the MA on the next longer time frame( 20 min)? Comments
or ideas welcomed.
Richard Chehovin GalacticFXInternational@worldnet.att.net

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Should you desire to increase this stop loss (1% of cap.), you should reduce
accordingly the size of the position or exposure you have in that market and
at that method at that particular time.
=> adjust stop loss and profit-taking levels
as the profit in a position increases, you should reduce the position size to
maintain a maximum portfolio exposure and, ideally, in effect you will be
investing only the profits generated in the trade (!).

1. I trade a basket of commodities having certain margin requirements.
2. I fund my account at least 2 times margin. I can thus withstand a
drawdown of up to 40% emotionally...
3. I increase my units of trading when I have enough money to cover taxes
and another 2 times margin.
It is simplistic but it works for me. Rumery and Lehman also offer a system.

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If you know the approximate drawdown (who really knows???)...you must then
fund your account according to your temperament..., i.e. it sounds as if you
are uncomfortable with the % drawdown....deleverage by having a larger account
size...thus a lower % drawdown... If that is not possible, try to deleverage
by switching to the DJH8 or ESH8...thus accomplishing the same effect.
Tom Stein comfut@msn.com

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I use threshold levels to increase my trading size. My formula is:
2x max historical drawdown + margin = equity needed to trade 1 S&P contract.
So a 50% drawdown to me means a real 25% drop in equity.
By drawdown I'm talking about my total net running drawdown. I always
use stops on my individual trades which keeps my max. daily net loss around
3% to 5% depending how many systems trade that day (I use 3 systems). The
recent volatility in the S&P's has forced me to almost double my stops over
the last 6 months which has made the drawdowns deeper.
Bob RRedman144@aol.com

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Maximizing use of Margin:
Margin for British Pound is $1552 while Swiss Franc is $1721, both had almost
the same amount of margin requirement to trade one contract. But BP offers
the most bang for the buck in which its average EOD close is at around 100+
points compared to SF which is 50+ points.
BP tick size is $6.25, SF point value is $12.50.
=> Both point values are NOT 12.50. The Pound is 6.25 per point. Both are 12.50
per TICK, but the minimum tick in the Pound is 2 points. So the margin in this
case does accurately represent the "bang for your buck" since the average daily
move in both is $625 per contract.
The tick in the BP is $6.25 per contract but the minimum tick is two
so you are back to $12.50 per contract.

trading plan has three rules:
1) When to get into the market
2) When to get out with a profit
3) When to get out with a loss


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If I flip a coin N times, then the odds that I will never flip a head
are 1/(2^N). This is true no matter how high a value I give for N. So it
seems plausible that, if I flip a coin a countably infinite number of times,
then the odds that I will never flip a head are 1/(2^countable infinity)--in
other words, one over an uncountable infinity. This result seems reasonable,
since the problem can also be looked at as "If I somehow picked a random
infinite string of coin flips from the set of all possible infinite strings of
coin flips, what would be the odds that I would pick the set with all tails?"
There are an uncountably infinite number of infinite strings of coin flips, and
I'm looking for exactly one; so, assuming that I'm really picking randomly (so
I'm no more or less likely to pick one string than another), the odds of
picking the all-tails string should be 1 over that uncountable infinity.
Now, _if_ I'm restricting myself to the real numbers, I then proceed to
say "Well, any finite number over any infinity must be zero"--so I say that
the probability is zero. If I'm allowing myself to use infinitesimals, then
finite numbers _don't_ get zeroed out by infinities in this way, so I simply
leave the result as it is--1 over an uncountable infinity. That's not a valid
real number, but it's a valid infinitesimal.
Yes, this is counterintuitive; but then, so is infinity itself. And
think about this: If we exclude infinitesimals, then the odds that an infinite
string of coin flips will contain at least one head are "1-but-just-maybe-it-
won't-happen." The odds that an infinite string of coin flips will contain
at least ten coin flips are "1-and-I-really-really-mean-it-this-time." We're
using the exact same probability figure--1--to describe one event that's
certain to happen, and another event that's not. Doesn't that defeat the whole
purpose of probability figures? Doesn't that suggest that, in problems like
this, we're making an error by restricting probability figures to real numbers?


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Risk Trailing Stop:
maximum profit is calculated from the point of entry using the highest high if long, or the lowest low if short.
The dollar amount of profit per contract or per position you are willing to risk is then subtracted and the trailing
stop is placed at that point.

Multiple Entries:
Average all entry prices (factoring in any profit for any entry) and divide by the number of contracts.
This average, minus a market move that represents an additional $500 loss, is the stop price, a level where once the
position is exited you would lose $500.

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Let's look over the shoulder of an experienced gambler (you will learn much more on Money Management on Gamblers' websites than on Trading websites!!!):
Here is what a lifelong gambler told me.

You buy in for $100 at blackjack.
Maximum bet is $2 until you start winning.Then you increase your bet size.
Increase your bet 50% on a win. Go back to $2 on a loss.
If you lose the $100 you walk!
If you get to $175, YOU PUT $150 in your pocket,never to see daylight again!
Now you play the $25 left. You lose it, you walk.
You are now betting $2 again. Increase your bet 50% as you are winning.
When you lose back to $2.
If your chips total on the table $50, you put $25 again in your pocket
never to see daylight again !!!
This goes on until you lose the $25 stake once and then you walk!!!
No drinking and you must be disciplined.
You must follow basic strategy perfectly or use the card.
Sit at third base. Only shoe games. Never take insurance.
Once in a while put out $1 for them, especially when you have a big bet out there. You have to be comfortable. If there are
obnoxious players, cigarets or cigars or dealers that bother you, change tables. If you are tired and up money, do not play anymore.
Never play at a casino that does not let you double down after splitting.
Never play at a casino that does not let you double down on any two first cards.
If you want to bet $5 minimum, you must start with $250; 50 times minimum bet!
billhere@att.net

==> You minimize the casino advantage by knowing when to split and when to double.

What I mean here is that using ONLY WINNINGS or "house money" I follow a classic
Martingale betting progression in an attempt to win MORE money, i.e. even when
I am only winning LESS than 50% of the hands I am playing. If the table is
"choppy" (win-lose-win-lose) or even if it becomes slightly dealer-biased so
that I'm only winning, say, one out of three hands, this STILL allows me to
slowly win more money than I'm losing.
IF it happens (as it does quite often) that my chasing the losses all fail and
I end up back at my starting basic buy-in money (20 units), I will then give up
on the progression and basically start over, flat betting my own money and
basically pretending that I just arrived in the casino once again.

Negative progressions tend to increase the frequency of winning small amounts
but expose you to occasional large losses. Positive progressions tend to
increase the frequency of losing small amounts but give you a shot at
occasional big wins.

First, gambling is not a continual game resting purely on chance. Individuals
can materially affect their odds by knowing what those odds are and making
choices to maximize their odds.
Second, no one gambles with unlimited funds thus stop losses and strategies
for money management are important to the game. Third, if you increase your
bets when you win but always hold a little back (never betting the entire
winnings) you will be better able to take advantage of winning streaks.
Probability operates in the long term over many trials. Most
individuals bet for short periods of time. The imbalances that occur in the
short term correspond to what people call "luck" and can be very good or
very bad without necessarily evening out for the periods people generally
play (hours or days vs. months). It is entirely possible to win in the short
term and many people do.

I plotted histograms of the actual results. There was the familiar "bell-shaped"
normal curve. For regressive betting, it had a long relatively flat tail on
the negative side (the small number of big losses) but the bulk of the curve
was on the winning side. For progressive betting, the curve was centered on
the losing side but had a long flat tail on the positive side (the small
number of big wins).
(A distribution with a significant positive skewness [the more extreme values
are greater then the mean] has a long right tail. Investors prefer returns
and positive skewness and dislike risk and negative skewness)
A measure of the (a-)symmetry of a (return) distribution. Positive skewness
would indicate a greater probability of large high returns relative to low
returns.
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 楼主| 发表于 2004-9-4 07:55 | 显示全部楼层
Money Management 4

Money Management-Keywords:
money-management, betsizing, bet sizing, position sizing, asset allocation, position sizing, bet size, bet sizing, cash flow management, trade management, position management, money management, position management, risk control, optimal exposure, betsize, betsize selection, size of a trade, portfolio heat, portfolio management, portfolio exposure, risk management, optimal betsize, optimal trade size, trade size, position size, constant size bets, adjusting betsize, betsize adjusting, number of contracts, leverage


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Martingale Method (part 1):

The proper way to use it, especially if your system has less than a 50/50 win/loss ratio, is to use your research to see what is the maximum number of losses you have ever had in a row.
Let's say it's 8. Then what you would do, is start increasing contracts, (I recommend 1 at a time), until you get a win, and then go back to your base unit.
For example:
After 8 losses in a row, trading 3 contracts each, you would then increase your contracts to 4. If it is a winner, then go back to 3. If it is a loser, you would go to 5 contracts, etc.. until you win.
This is the most conservative use of the Martingale method. More aggressive uses are:
1. Start increasing after the average number of losses in a row. So here you find out what your average losing trades in a row are.
2. Increase more than 1 contract at each time. So instead of increasing 1 contract after each ....loss, you might go 2 or more. This should not be done unless your system has a better than ....50/50 win/loss ratio.
The Martingale method, was invented for casino betting, and unfortunately, doesn't work well there, for several reasons.
- Table Limit keeps you from increasing your bet after many losses.
- Inability to remove portion of bet after start of game
- Maximum win is double bet
In futures, the situation is much different:
- No table limit, though you can reach margin limit
- You can remove positions whenever you want
- Maximum win can be many times the average loss
I personally recommend the use of this method and use it every day. Your goal when trading is to make your wins larger than your losses and there is no better way to capitalize on your wins than this.
I start increasing 1 contract after 3 losses, until I win. 80%-90% of the time I win then, and the rest of the time, the market takes me a few more rounds, and then rewards me.
Although exceeding 8 losing trades in a row while increasing has never happened to me, my current plan for that situation is to stop increasing after the 9th loss. Hopefully I will never have to write about that event, though I am always expecting it to happen.
Now since we are far from graduation, I don't want any of you using this method, unless you are 100% capitalized to take 10 losses in a row, increasing each time, plus you already have a winning system. I will be going over this strategy much more after graduation.
I do have something that all of you can start researching now and which should help a lot of new traders be successful in their trading, and you will find that in part 2 of this mini-series.

Martingale Method (part 2):

*** Only take trades after "x" losing trades in a row. ***

For example:
Let's say your research shows you that on average you suffer 3 losing trades before you get a winner. So you would be OUT of the market and would watch the market, and wait patiently waiting for 3 losers in a row. Only then would you risk capital and start trading. You should then take every trade after that until you win.

Now here you have a couple of options:
1) Start after the 3rd loser with a higher starting base of contracts than you normally would. (If normally you would only consider starting with 1 contract, think about trading 2).
2) Consider increasing contracts by 1 after each loss thereafter. So if on that 4th trade you ....lose it, then add 1 contract and take the next trade. Keep on doing so until you win.

The name of the game in trading is Win BIG and lose small. This risk management tool allows you to do that.
The reason this works well, is that the markets go into streaks of losing periods (choppy markets) and eventually take off in a big way in one direction. This method allows you to be a part of that without enduring all the losing trades.
This is NOT a miracle solution. One of the problems that you will encounter is that your wins might be very small.
For example, let's say you wait for the 3 losing trades and then get in, but that one is a loser and you lose 4 ticks. Then the next one is a loser and again you lose 4 ticks, but the following one is a winner but you only get 8 ticks out of it.
While you may have broke even you ended up losing because of commissions. On average this may happen to you 30% of the time, so be prepared for it. The rest of the time you should have nice trends.
So one last plug on working on your risk/money management tools and less on indicator selection. Ok?

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How correlated are the drawdowns of the various components of your portfolio, and what will the effect be of a worst case event on the entirety of the capital you have been entrusted with?

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Please note: A Neutral Position is a signal! Neutral means that the system is not currently in the market but is looking to enter either a long or short position.

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The 2% money stop is for accounts <$50,000.
Risk a certain percentage of money invested on the entry, then raise that percentage, as well as trailing the stops.

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Hallmrcdi@aol.com:
The chance of a coin being flipped one time landing on heads is not 50%. It is either 0% or 100%. It is either heads or it is not. The 50% chance is based on an expected average that is itself based on multiple, even 10,000 flips or more, that have nothing at all to do with the outcome of the single real flip that is happening at this moment. We make a terrible mistake and waste our money by soley relying on statistical abstractions and by applying them to a
particular casino, table, session, or hand of cards to determine what is "good" or bad."
Again, the single coin flip is either heads or tails. What has happened for all time past and all time future has nothing at all to do with the outcome of the moment. It truely is a single event. Instead, the recreational gambler's real friend is variation. While one cannot predict when variation will occur, one can predict that it will with certainty occur. The amount one bets during an extremely positive string of wins in a statistically short occurance will determine if the recreational gambler comes away a big winner, while making sure to sit at a single deck game (the factor that drives the edge lower than anything else) is nearly useless.

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Van Tharp:
3 Money-Management algorithms (min will be taken):
1) 1% of core capital:
a) (core capital - Total outstanding risk)*0,01 = x
b) x / $ value of initial stop = Nr. Contracts I

2) new risk limited (total risk <=25% of equity): before execution: equity * 25% - total risk= y
if y >0, y / $ value of initial stop = Nr. Contracts II

3) ongoing volatility (10 day M.A. of ATR): max 2% of equity

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If a share doubles in one year and halves in the next we have an arithmetic return of:
100% - 50 %/2=25% per annum
and a compound gain of 2 x 1/2 = zero.
If the right proportion of risk capital is put to that risk, a six percent geometric return can be extracted.

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Trading can be mastered if you concentrate your efforts on how you will react to price rather than desiring to predict it. Reacting is a business decision, predicting is an ego play.

Traders want to make money. Losses in the long run don't matter.
Forecasters (prophets) want to be right (ego). And that's all that they are concerned about.

Don't decide anything (ego), let the market do that job for you (business).

Like any other business you have a business plan and the financial portion of that plan is the most important.
In this business your inventory is stocks, bonds, futures or options. Like any other business you define what an acceptable loss is on an item and what is an acceptable profit for the risk undertaken. Like any other business
if the item of inventory doesn't do what you expected it to do, you put it on sale and liquidate it to raise capital to purchase inventory that will do what you want it to do. Your acceptable loss is your stop. Your money management
system tells you how much that is. Your mark up is dependent upon your trading system and trading style. It doesn't make any difference if you are a day trader or an investor. Like any business, some turn there inventory 10 times a day, some 20 times a year and some only twice a year. Your trading style and inventory volatility will tell you what your turnover rate will be. Trading is a business and if you treat it as anything else you will be a loser.

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Losing traders spend a great deal of time forecasting where the market will be tomorrow. Winning traders spend most of their time thinking about how traders will react to what the market is doing now, and they plan their strategy accordingly.

If one were to ask a successful trader where he thought a particular market was going to be tomorrow, the most likely response would be a shrug of the shoulders and a simple comment that he would follow the market wherever it wanted to go.

Winning traders acknowledge their emotions and then examine the market. If the state of the market has not changed, the emotion is ignored. If the state of the market has changed, the emotion has relevance and the trade is exited.

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Establish a trading and money management strategy to determine how much of the available funds should be used at each buying opportunity. In particular, at the start, such money must be held in reserve for future buying. Later, when some stocks have been sold at a (hoped for) profit, there may be a considerable amount of cash available for new purchases. What percentage should be deployed at the next buy signal? Is it better to build up cash reserves resulting from profitable sales in order to wait for a subsequent market decline and even better buying opportunities? Part of the money management would deal with potential "stop-loss" sales and what do to when all of the funds have been invested and there is a new buy signal. Should some stock be sold to provide funds for the buy, or should the signal be skipped?

As a simplified illustration of how hard it is to time the market, assume that you are 70% accurate calling market turns. If you are in the market, two calls are required: a sell and a subsequent buy. The probability of being correct (buying back in at a lower price than your selling price) is 70% times 70%, or 49%. That shows you have to be very good (and most people are not much better than a coin toss) to be successful at market timing.

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I have a clearly defined sell strategy, and I will sell for three reasons, all of which helps me to control risk. My belief is that capital preservation is every bit as important as making it grow.
1) I set upside price targets for all of our investments, using future estimates and premiums or discounts to the S&P 500 market multiple. As I approach 90% of our upside target, I will begin to sell. I am never afraid to take profits. Second, if a stock declines about 15% or so from where I bought it, I will sell part of the position, maybe five or ten percent, and quickly reevaluate my catalyst or my reason.
2) If at any time during my ownership period, my catalyst changes for the negative, I will sell my entire position. I do not hesitate to admit that I am wrong.
3) Finally, and the third reason to sell, is that I am very opportunistic and am always looking for better returns elsewhere. The marketplace is often inefficient and irrational, and I try to take advantage of short-term volatility and the inefficiencies of information flow amongst other mutual funds.


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Dennis Holverstott dennis@coinet.com:

risk {disaster stop} = factor_1 * volatility
#_contracts = factor_2 * account_size / volatility

So, #_contracts is proportional to account_size/risk. To find factor_2,
program the system to trade 10 contracts at peak volatility and more when
volatility is lower. Export the "volatility adjusted" P/L numbers to a
file and divide them by 10. Run a monte carlo sim (thanks dkomo) on the
results and you will have a pretty good idea of possible drawdowns
(volatility adjusted). Then, you can choose a factor_2 that matches your
risk tolerance.

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Once you have studied TA enough to realize how true this is, you will be ready to think about playing with the big boys in the futures pits.
The sooner you accept reality and purge fantasy from your brain the sooner you will be on your way to actual success in trading.

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* Good markets don't give you a good opportunity to buy. *

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If you believed the ads and could make $1000 a day on $10,000 capital, you could get 200% return every month. Compound that out and you will own the world in a few years.

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Stocks are never too high to buy and never too low to sell.

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A bull market will made us look smarter than we really are.
"A rising tide lifts all boats."

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I am a technician and will do what the market tells me.

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There is no way to provide an estimate of the absolute worst outcome (in the same sense that the tails of continuous probability distributions are unlimited).

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It's the Execution or implementation of your trading plan that is the bigger challenge.
Throw out 99% of all the crap I learned about oscillators, divergence's, Elliott Wave, cycles, timing, seasonals, Gann, pitchforks, volume, fractals, RSI, stochastics, overbought/oversold (this is a good one - the stock indexes, currencies and cotton for example everyone said were overbought and topping in February and March this year). Look what they did. Needless to say, I don't pay attention to this anymore either, etc., etc. The list goes on to infinity almost. I went back to the basics. I went back to a few simple chart patterns, (a simple moving average and trendline now and then for a visual aid).
Most people make finding the method the big challenge. That is because there is so much junk thrown at traders. They feel like a child in a candy store and have to try every doodad in the place. When they are done, they are sick and never want to see another candy store (trading gizmo) again. They could have had the plain piece of milk chocolate at the front of the store (simple method price patterns) which would have done everything they desired and fulfilled all their needs.

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The addition and removal of winning positions at key turning points in a market may hold the key.

Trade to make money, not to be "right" or satisfy some personal agenda. The key to success is to know your limitations and don't trade outside your psychological and risk comfort zones.

Then the trade you entered begins to perform well, and trends in a wave type pattern earning back not only the $1,200 previously lost on the first 3 trades, but another $3,000 on just one contract. Once this trade gets going and confirms a trend, you begin to prudently add on one more contract at a time on each new short spurting rally to the next higher level. Now you're up over $8,000 on the one trade with a trailing sell order (covered in the 3 month course) following the price up so that when the market turns down, you're out with healthy gains.

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Someone who has to be right a high percentange of the time is someone who needs constant re-inforcement that they are alright, i.e. a good person. This is all about psychology and how one feels about oneself.
But, which of the following is better: Is it better to make

A. $2, 80% of the time or
B. $6, 60% of the time or
C. $10, 40% of the time?

Assuming that the losses are the same for each profile, the answer is C. which has the lowest winning percentage because the probability times the expected value = the risk adjusted value or in this case 40% x $10 = $4 vs risk adjusted values for A. = $1.60, and B. $3.60.
People who have trouble with this concept are often victims of the educational system which teaches that the key to be successful is being right. One can see from the above example how wrong that can be. The true paradigm for trading is that IT'S OK TO BE WRONG, JUST DON'T BE WRONG FOR LONG. So, now one must make a philosophical decision as to what is more important, being right or making money. If profit is the ultimate goal and not ego then one will adapt to having a smaller percentage of winning trades in exchange for more money over time on the bottomline. To do this, for an experiment, see what happens on a minimum trade size, say a one lot, see what happens if you double your profit target, i.e. rather than going for $2, go for $4. Then keep track of both systems and see which one over several months is more profitable.

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Changing the 25 X 25 System Exit

After the last big run up in bonds we observed that the logic of the "25 X 25"Bond System exits needed some
improvement. The system was operating on the assumption that in a trending market the longer we hold a
position the greater the profit. The exit strategy was intended to more or less force us to hold positions at
least 25 days or more.

The problem we discovered was that after the recent buy signal we had a huge profit after only 12 days and
the stop was still too far away. Our original logic was flawed because we equated time in the trade with
profitability rather than simply measuring profitability directly.

Big profits need to be protected regardless of how long it takes to obtain them. As usual the fix was easy
once the problem was defined. We simply added an additional exit that moves the stop up as soon as we
have 5 Average
True Ranges of profit. This is not a curve fit for one event. There were several other times in our historical
data where this exit was needed. The logic of the exits makes much more sense now. We should have
spotted this flaw earlier because we want all of our systems to be as logical as possible. We continuously
emphasize that the logic of a system is much more important than the historical performance data.

Here is the additional line of code that will convert the previous system into version 2.0:

if c> entryprice + (5 * AvgTrueRange(45)) then exitlong lowest(low,2) stop

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Average True Range

In this Bulletin we will show some of our favorite applications of ATR as part of our entry logic.
Sample Applications of ATR as an entry tool:

Entry Setups: (Remember, entry setups tell us when a possible trade is near. Entry triggers tell us to do the trade now.)

Range contraction setup: Many technicians have observed that big moves often emerge from quiet sideways
markets. These quiet periods can be detected quite easily by comparing a short period ATR with a longer
period ATR. For example if the 10 bar ATR is only .75 or less of the 50 period ATR it would indicate that the
market has been unusually quiet lately. This can be a setup condition that tells us an important entry is near.

Range expansion setup: Many technicians believe that unusually high volatility means that a sustainable
trend is underway. Range expansion periods are just the opposite of the range contraction periods. Range
expansion periods can be measured by requiring that the 10 bar ATR be some amount greater than the 50 period ATR.
For example the 10 bar ATR must be 1.25 or more times the 50 period ATR.

If you are concerned about the apparent contradiction of these two theories we could easily combine them.
We could require that a period of low volatility be followed by a period of unusually high volatility before
looking for our entry.

Dip or rally setup: Lets assume that we want to buy a market only after a dip or sell it only after a rally. We
could tell our system to prepare for a buy entry whenever the price is 3 ATRs or more lower than it was five
days ago. Our setup to sell on a rally would be that we want to sell short only when the price is 3 ATRs or
more higher than it was five days ago. The choice of 3 ATRs and five days is simply an example and isn’t
necessarily a recommended choice of parameters. You will have to figure out the proper parameters on your
own depending on the unique requirements of your particular system.

Entry Triggers:
Volatility Breakout: This theory assumes that a sudden large move in one direction indicates that a trend in
the direction of the breakout has begun. Normally the entry rule goes something like this: Buy on a stop if the
price rises 2 ATRs from yesterday’s close. Or sell short on a stop if the price declines 2 ATRs from the
previous close. The general concept here is that on a normal day the price will only rise or fall 1 ATR or less
from the previous close. Rising or falling 2 ATRs is an unusual occurrence and indicates that something out
of the ordinary has influenced the prices to cause the breakout. The inference is that whatever caused this
breakout has major importance and a new trend is beginning.
Some volatility systems operate by measuring the breakout in points rather than units of ATR. For example
the system may require that the Yen must rise 250 points from the previous close to signal a breakout to the
upside. Systems measuring points rather than units of ATR may need frequent reoptimization to stay in tune
with current market conditions. However, breakouts measured in units of ATR should not require
reoptimization because, as we previously explained, the ATR value contracts and expands with changing
market conditions.
Change in direction trigger: Lets assume that we want to buy a dip in a rising market. We combine the dip or
rally setup described above with an entry trigger that tells us the dip or rally may be over and the primary
trend is resuming.
The series of rules might read something like this: If the close today is 2.0 ATRs greater than the 40 day
moving average (this condition establishes that the long term trend is still up) and the close today is 2 ATRs
or more below the close seven days ago (this condition establishes that we are presently in a dip within the
uptrend) then buy tomorrow if the price rises 0.8 ATRs above todays low. This entry trigger shows that we
have rallied significantly from a recent low and that the dip is probably over. As we enter the trade the prices
are again moving in the direction of the major trend.
As you can see, the ATR can be a most valuable tool for designing logical entries. In our next article we will
discuss using ATR in our exit strategies and give some interesting examples.

--------------------------------------------------------------------------------

Average True Range

Average True Range is an indespensable tool for designers of good trading systems. It is truly a workhorse
among technical indicators. Every systems trader should be familiar with ATR and its many useful functions.
It has numerous applications including use in setups, entries, stops and profit taking. It is even a valuable aid
in money management.
The following is a brief explanation of how ATR is calculated and a few simple examples of the many ways
that ATR can be used to design profitable trading systems.

How to calculate Average True Range (ATR):
Range: This is simply the difference between the high point and the low point of any bar.
True Range: This is the GREATEST of the following:
1. The distance from today's high to today's low
2. The distance from yesterday's close to today's high, or
3. The distance from yesterday's close to today's low
True range is different from range whenever there is a gap in prices from one bar to the next.
Average True Range is simply the true range averaged over a number of bars of data.
To make ATR adaptive to recent changes in volatility, use a short average (2 to 10 bars). To make the ATR
reflective of "normal" volatility use 20 to 50 bars or more.

Characteristics and benefits of ATR
ATR is a truly adaptive and universal measure of market price movement.
Here is an example that might help illustrate the importance of these characteristics:
If we were to measure the average price movement of Corn over a two day period and express this in dollars it might be a figure of about $500.00. If we were to measure the average price movement of a Yen contract it
would probably be about $2,000 or more. If we were building a system where we wanted to use the set appropriate stop losses in Corn and Yen we would be looking at two very different stop levels because of the difference in the volatility (in dollars). We might want to use a $750 stop loss in Corn and a $3,000 stop loss in Yen. If we were building one system that would be applied identically to both of these markets it would be very difficult to have one stop expressed in dollars that would be applicable to both markets. The $750 Corn stop would be too close when trading Yen and the $3,000 Yen stop would be too far away when trading Corn.
However, let's assume that, using the information in the example above, the ATR of Corn over a two day
period is $500 and the ATR of Yen over the same period is $2,000. If we were to use a stop expressed as 1.5 ATRs we could use the same formula for both markets. The Corn stop would be $750 and the Yen stop would be $3,000.
Now lets assume that the market conditions change so that Corn becomes extremely volatile and moves
$1,000 over a two day period and Yen gets very quiet and now moves only $1,000 over a two day period. If we were still using our stops as originally expressed in dollars we would still have a $750 stop in Corn (much too close now) and a $3,000 stop in Yen (much too far away now). However, our stop expressed in units of ATR would adapt to the changes and our new ATR stops of 1.5 ATRs would automatically change our stops to $1500 for Corn and $1500 for Yen. The ATR stops would automatically adjust to the changes in the market without any change in the original formula. Our new stop is 1.5 ATRs the same as always.
The value of having ATR as a universal and adaptive measure of market volatility can not be overstated.
ATR is an invaluable tool in building systems that are robust (this means they are likely to work in the future) and that can be applied to many markets without modification. Using ATR you might be able to build a system for Corn that might actually work in Yen without the slightest modification. But perhaps more importantly, you can build a system using ATR that works well in Corn over your historical data and that is also likely to work just as well in the future even if the nature of the Corn data changes dramatically.

-
In this article we will show some specific examples of how using ATR can help to make our systems more robust.
First lets look at a simple buy only system for Corn without using ATR. Here are the rules:

1. Buy Corn whenever it rises 4 cents per bushel from the opening price.
2. Take a profit whenever the profit reaches 18 cents per bushel.
3. Take a loss whenever the loss reaches 6 cents per bushel.

Now lets build the same system using ATR. (Assume that the 20 day ATR is 6 cents).

1. Buy when the price rises 0.666 ATRs from the open.
2. Take a profit when the profit reaches 3 ATRs.
3. Take a loss whenever the loss reaches 1 ATR.

We have the original system and a modified version that has substituted ATR for the important variables.
The two systems appear to be almost identical at this point. They both will enter and exit at the same prices.
Now let's assume that the market conditions change and the Corn market becomes twice as volatile so that the ATR is
now 12 cents per day instead of 6 cents. Here is a comparison of the original system and the ATR system:

1. The original entry of 4 cents per bushel from the open is now too sensitive. It will generate too many entry
signals since the daily range is now 12 cents instead of only six cents.
However, the entry expressed as 0.666 ATRs will adjust automatically and will now require the price to move
8 cents per bushel to enter. The frequency and reliability of our entries remains the same as before.

2. The original profit objective of 18 cents per bushel is much too close for a market that is now moving 12
cents per day. As a result the profits will be taken too quickly and our original system will be missing many
opportunities to make much bigger profits than usual.

However the profit target expressed as 3 ATRs has automatically expanded the profit objective per trade to
36 cents per bushel. Significantly larger profits are now being realized by the ATR system as a result of the
increased volatility.

3. The original stop loss of 6 cents per bushel will now be hit frequently in a market that is moving 12 cents
per day. If you combine these frequent stop loss exits with the overly frequent entries being generated, you
have a classic whipsaw situation and we can expect to encounter a severe string of losses. Our original
system is now failing because the market conditions have changed. We need to fix it or abandon it in a hurry.

However lets look at our ATR version of the system. The stop loss expressed as 1 ATR now sets our stop
farther away at 12 cents so it isn’t being hit any more frequently than before. We continue to have the same
percentage of winning trades only the winning trades are much larger than before thanks to an increased
profit objective. Our ATR system has a nice series of unusually large winning trades and is currently making
a new equity peak. The ATR system now looks better than ever.

In our example, the proper application of ATR has made the difference between success and failure.

--------------------------------------------------------------------------------

Here is a system that grows:

Take a look at a commodity like March Coffee KC.
Then look at the Highest High for the last 20 days and lowest low for the last 20 days I think the HIGHEST HIGH is 125 (1/5) and LOWEST LOW is 113 (12/21) so the 20 day channel is 375 big points which is the same as $4,500 dollars.

The exit is is the difference between the HIGHEST and LOWEST at the time of the trade or 125.5-113 12/21.
This is the amount that we trail upward on this trade.

You then take your bankroll:
let's say you start trading with $1,000,000
and you only want to risk 1%
1% x 1,000,000 is $10,000
$10,000 / $4,500 = 2
you then would buy 2 contracts of Mar coffee if it broke through the high or low and you would trail the stop at 125-113 = 12 big points
(12 Big Points mean you risk 12 * 375 = $4500 per contract)

This system grows with you forever and you can take any days 20-40-100 but in TradeStation, you cannot test systems that share a common bankroll among commodities.

My first approach was to find max DD and then use it or 2X it to find an amount of contracts to buy, my second approach is to use the size of the channel to determine contract size.

I think people that know C++ and other languages can also test markets sumultaneously.
I fake test this by testing each commodity one by one...lets say I start with coffee and 1 million and risk 1%...I run all of coffee and lets say I end up with 2 million, I then use the 2 million and use it in OJ, then run it, then take that value onto the next commodity...so I use a manual linear technique which is not perfect, but gives me a rough idea.
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 楼主| 发表于 2004-9-4 08:00 | 显示全部楼层
Money Management 5

Here are what I have determined to be the greatest lessons of future trading and money management

1. Break-Out systems are the best.
Moving averages and other system all work well on paper...but they have very large drawdowns and it is easy to look at drawdowns on paper...in real life, most people can't watch 45% of their money disappear. I think many of the top traders prefer channel break outs. Dennis, Seykota, Kaufman.

2. You make much of your income on BIG rare trends. I find many break out systems to trade between 40% wins and 50% wins...almost a coing flip. BUT I find the average win is 2 times the average loss. So you use the trailing stops to get out of the bad trades at 1% each time

3. Large accounts have a HUGE mathematical advantage over small bank accounts.
I tried to explain this in my earlier letter.
Remember when I talked about the March Coffee KC
and then look at the Highest High for the last 20 days and lowest low for the last 20 days

--------------------------------------------------------------------------------

Trade Plan:

Question: Example Trade:
Futures Contract Gold
Contract Month Dec
Where is support on the monthly chart? 277.5
How long ago was the market BELOW support? 1979/19yrs
Where is resistance on the monthly chart? 417.5
How long ago was the market ABOVE resistance? 1990/8yrs

What is the top price of the trend (daily chart) that is changing? 352
What is the bottom price of the trend (daily chart) that is changing? 287.2
50% retracement of these two points (Profit Target)? 320
What is your entry point? 300
What is your stop out point (Loss Target)? 295
Entry Point minus Profit Target (Potential Profit) 20
Entry Point minus Loss Target (Potential Loss) 5
Potential Reward & Potential Profit (Reward:Risk Ratio) 20/5 (4:1)

--------------------------------------------------------------------------------

1) Plan your trade. Trade your plan.

This means use the same sequence every time. If your plan is to get in when the weekly and daily trend are in the same direction, volatility is rising and a 1,2,3 is formed. Follow it.
Every time. This could also be seen as discipline which is defined as "to train or develop by instruction and exercise especially in self-control.

2) Money Management.

This means more about managing losers than winners. Greed will generally keep you in a trade long enough to "Let your winners run." But, managing your losers is the key to trading for a lifetime. Don't add to a loser. If you owned a dry cleaners that was losing money would you open another shop across town? Follow your stop you set-up in Rule 1 when emotions weren't clouding your judgment. NEVER, EVER MOVE YOUR STOP LOSS AWAY FROM THE MARKET.

3) Proper Quantity.

Don't think, even on a trade that fits your "Trade Plan", that you should load up to get back at the market. Yes, there are times when you should increase your quantity above normal, but not at the risk of placing your whole account at risk. Similar to diversification, never diversify at the risk of putting yourself in borderline trades. I love trading options in three's. When the options have doubled, take profits on one, free-trade the second and let the third one run unencumbered. With futures, never "Reverse Pyramid". A reverse pyramid is when you start at 1 contract, increase to 2, then increase to 4 and so on. This is like a pyramid on it's head (reversed), easily toppled. Instead build a strong base but never add more in quantity than what you started with.

--------------------------------------------------------------------------------

Math Question Challenge
From: "Andy Dunn"
To: omega-list@eskimo.com
Subject: Math Question Challenge

Can anyone write me a formula for the following.

I have a system and the average WIN is 2X the average LOSS
The system WINS exactly 50% of the time
Let's say I start with $1M
Each time I trade, I risk 1% of the bankroll (starts at 1M then goes up with each trade)

Can anyone write an algebraic formula that will determine the yearly Rate-Of-Return depending on HOW MANY trades this system does each year?
----------------------------------------------------------------------------
Date: Wed, 16 Dec 1998 09:33:57 -0500
From: Val Clancy
To: andy@lips.com
CC: omega-list@eskimo.com
Subject: Re: Math Question Challenge

In this specific case:
( .99^n/2 - 1 ) *100
where n = total number of trades.
Val.

----------------------------------------------------------------------------

Date: Wed, 16 Dec 1998 10:12:29 -0500
From: "Gaius Marius"
To: "Val Clancy" ,
Cc:
Subject: Re: Math Question Challenge

Val,

Can you explain the formula? Is the .99 derived from (100% - 1%) risk of the
bankroll?
Is it raised to the power of n/2? And where did the 1 come from? Where does
the 50% of the percentage of winning trades fit in the formula? And the
ratio of wins to losses?

Andy
----------------------------------------------------------------------------
Date: Wed, 16 Dec 1998 10:19:43 -0500
From: Bob Fulks
To: andy@lips.com
Cc: omega-list@eskimo.com

You don't say what the loss percentage is. Assume you lose L (as a
fraction) of your capital on each losing trade and win 2*L (as a fraction)
of your capital on each winning trade. Assume trades occur in pairs - one
win followed by a loss. Then:

End = Start*((1-L)*(1+2*L))^(n/2)

For example, if the loss on a losing trade ("L") is 0.5% of your capital (L
= 0.005)
and the number of trades in the year ("n") is 400

End = Start * ((0.995)*(1.01))^(400/2)
= Start * 2.68

So the ending value would be 2.68 times the starting value or a profit of
168% in the year.

This assumes you adjust the trade size as you capital increases/decreases.
Hope this is what you meant.

Bob Fulks
----------------------------------------------------------------------------

Date: Wed, 16 Dec 1998 10:13:36 -0500
From: Val Clancy
To: andy@lips.com
CC: omega-list@eskimo.com
Subject: Re: Math Question Challenge

win/loss trade ratio = 2
% win / loss = 50
initial accsize = 1M
losing trade ( risk ) = 1% of account size
Solve for: yearly ROA
Solution:
ROA = ( GrossProfit - GrossLoss ) / initial account size * 100;
if win/loss = 2 then GrossProfit/GrossLoss = 2 then
GrossProfit = 2*GrossLoss
ROA = ( 2GrossLoss - GrossLoss ) / initial account size * 100 or
= GrossLoss / intial account size * 100;
GrossLoss = initial accountsize* [ ( 1 - %risk )^n/2 ) - 1]
where n = total number of trades losers and winners
risk = .01 then
Gross Loss = initial accountsize ( .99^n/2 - 1 )
ROA = ( .99^n/2 - 1 ) *100
so in this case ROA depends only on number of trades you make
so at 100 total trades ROA = 39% of your account size
at 50 trades - 22%
at 2 trades - 1.99%
The general formula to use is the Compound Interest Formula:
Int = Principal [ (1 + %)^n - 1 ];
in case of trading, %risk is simply negative % so the
general formula for the total loss is:
GrossLoss = InitialAccountSize [ ( 1 - %risk )^n - 1];
general formula for the total profit is
GrossProfit = InitialAccountSize [ ( 1 + %profit )^n - 1];
Val.
Correct me if I am wrong.



--------------------------------------------------------------------------------

Portfolio Management Subject: efficient frontier
Author: John G. Nelson Date: 10/17/98 JNelson675@aol.com

I have read the original and to-date replies and feel that the "efficient frontier" concept is very important for investors and actually a rather simple concept, even though it is also profound. Harry Markowitz, in his 1952 15-page paper "Portfolio Selection", laid the ground-work for Modern Portfolio Theory, and in 1990 became a co-winner of the Nobel Prize for his work in this area. The basic equation used to calculate the EF was in my in my elementary statistics book as the equation for the expected variance for a weighted sum of correlated random variables. While a correct direct application requires an enormous table of correlations, which the small investor is not going to get, the simplified version can be very useful. If you assume a constant (mean) correlation, which will approximate the correct results in a portfolio of any reasonable size, then that part of portfolio variance (of return) which can be reduced by diversification (~50%) can be approximated as (N-1)/N. This is why Value Line suggests portfolios of 10 to 12 stocks, and empirical studies show little additional variance reduction when you hold more than 16 stocks.

--------------------------------------------------------------------------------

Date: Wed, 9 Dec 1998 09:21:31 -0500
From: "Gaius Marius"
To: omega-list@eskimo.com
Subject: Re: Money Management

:Scott, This sounds like it may be a great idea but I don't have a
:clue as to how to treat a system as a transformation of raw price. I
:sure would appreciate an example and / or clarification.

One way of using money management: If you have a smooth equity curve (see attached GIF), and you can trade multiple contracts, when you see a retracement on the equity curve, increase your positions in the original
direction of the trade. I.E., my system has historically gone against me by 10 points one third of the time before it reverses direction and goes in my favour (if it goes against me by 13 points, I know it will never reverse and
go again in my favour. So I get out).
So what I do is increase my position when it goes 10 points against me and then get out (of both positions) if it goes 13 points against me from my original entry. This reduces my average
entry price and results in another 40% ROA.

::Here's a clue for you. Treat a system as a transformation of the
::raw price series. In futures, other than equity contracts, the raw
::price series goes up and down. If your system has an edge, then the
::transformed price series should be gradually upward sloping, like a
::the long term chart of the stock market. Now treat the transformed
::price series as an asset class and mix them altogether via MPT and
::presto, your can get some great stuff like I have.
---------------------------------------------------------------------------------------------------------------------------------------
Date: Wed, 9 Dec 1998 18:43:18 -0800 (PST)
From: Jim Osborn
To: omega-list@eskimo.com
Subject: RE: Money Management

MARTIN MARTIN Bernardo responds:
>I would appreciate if you or any other member of the list could
>expand more or give me references on the following;
>1. Scaling in/out as a way of protection (not exposing to much at the
>begining of a trade) and maximizing your profits (let profits run)

My approach is pretty informal: Start with one contract, then when you have enough profit in that contract that a reasonable stop on two contracts still leaves you with a satisfactory profit, consider adding that second contract. On the exit side, keep a trailing stop somewhere safely back from where you think the market shouldn't go, but OCO that with a profit target where you think the market might, in your wildest dreams, get to.

Joe diNapoli, Mr. Fibonacci, has some interesting techniques for being a bit more quantitative about profit targets. You might track him down somehow and see what you can find. He's spoken at TAG a few times, so that'd be a good starting point. Maybe someone else can amplify on this point...

>2. You mentioned some notes of Chuck's TAG lecture some years ago.
>How could I get them? Please give any other reference to book,
>author, etc. you consider valid

The TAG talk I heard was in 1993, but Chuck has spoken at TAG several other times, too, on various subjects. Contact Tim Slater of TAG at 504-592-4550 for tapes lecture notes from old conferences.

>3. I guess that what you mention as volatility trailing stops is based in a
>certain X ATR of the last Y days? (I myself find it very useful, as the
>"turtle" way of determining how many contracts to trade related to
>percentage of equity risk and volatility (ATR).

I see in looking up that TAG phone number, that Chuck spoke on "New Techniques Using Average True Range" at this year's TAG conference. I should order that tape myself...

Gee, this is sounding like a ringing endorsement for Chuck LeBeau, and I guess it is. :) You can learn a lot of good stuff from his work.

Cheers, Jim

--------------------------------------------------------------------------------

Dealing with excessive Volatility:

I have a rule of thumb that I try to apply in cases of high volatility that helps me to decide if I should enter a
trade in a high volatility situation. I should warn you that this rule sometimes saves me money and it
sometimes costs me big profitable trades. The primary benefit of the rule is that it is objective and disciplined. The rule keeps me from just guessing and agonizing over what to do in situations where the volatility is obviously extreme. The rule has some inherent logic that helps me to quantify "extreme" volatility on a system by system and market by market basis.
The rule is that if the recent daily range is greater than the money management stop (!!!) you are using, you
don't do the trade. The logic is that our money management stops should be outside the range of what normally happens in one day. To have stops closer than that is to be inside the "noise level" where you can get randomly stopped out for no good reason. Once the market settles down to where the range between the high and low is less than the amount of your stop you could then enter the trade and safely place your stop.
Now let me give you a specific example. We just took a quick but big loss on a Yen trade today and it is now set up for a new trade tomorrow. The range over the last day or two, as we all know, has been far beyond
normal, several times more than our protective stop loss. The trade for tomorrow should be skipped because
of the volatility rule described above. If you like, the trade can be entered at a later date when the average
true range is less than our stop.
This volatility rule applies to all systems and markets. It does not come into play very often and it is not
something we just made up for the Yen. I have found it to be a valuable rule that I have used for years to limit
my exposure in times of excessive volatility.
Please keep in mind that high volatility is an opportunity for unusually large profits as well as losses and if
you skip a big winner you will certainly regret it. For those with more than adequate capital an alternative
solution is to reduce the position size and arbitrarily change the money management stop to a much bigger
number on a temporary basis. If you can afford losses of this size this might be a better solution because you
would avoid being stopped out needlessly and you would still be able to participate in the big winners. Based
on past experience I would say that as a minimum a stop of about two recent average true ranges (!!!) would be
required. Obviously this would be a huge dollar amount to be risking in Yen or S&Ps right now.

--------------------------------------------------------------------------------

My approach is to make stops depend on "percentiles" of the recent true range. That is, you take the past 59 days' true range values and sort them from lowest to highest. The reason I use 59 is that the percentiles are easy to calculate. The nth value is the n/60th percentile. For example, the lowest true range is the 1/60th percentile and the highest true range is the 59/60th percentile. The median is the middle value, the 30th.
The 90th percentile is the 54th value. So let's assume you want a stop that will only be hit 10 percent of the time and be missed 90 percent of the time. That's the 90th percentile, which is the 54th value in the list! If you're a little more gun-shy, take the 75th percentile, which is the 45th Value. If you're are real risk-lover, go for the 95th percentile, the 57th value. I think you want to use the true range rather than the high minus low because that accounts for overnight risk.
M. Edward Borasky http://www.teleport.com/~znmeb

--------------------------------------------------------------------------------

A Purchase stop should apply only until the equity price rises above the purchase price. At that time, the Trailing stop should apply, and the Purchase stop should disappear. The Trailing (High) Stop should NOT apply until the equity price rises above the purchase price. I contend that, in Monacle, both the Purchase and High stops are applied at the time of purchase.
Consequently, if the equity goes down after purchase, the lesser of the two stops will
determine the stop condition, and, hence, the performance of the portfolio.
This can be easily be seen by using the Optimize function with any DAA system to simultaneously vary both the Purchase and High stops through a range, say 1 - 10. Plot the resulting portfolio Average Returns as follows:
Make a plot with Purshase Stop as the X-axis, and High stop as the Y-axis.
Write down the value of the Avg. Return for each back test at the intersection of the applicable stops. Thus, for example, if the DAA returned 25%/yr using stops of P=7 and H=8, then write 25 at the intersection of 7 on the x axis and 8 on the Y axis. You won't have to fill in the entire grid before you will see a pattern. The result is that, for any given value of High
Stop, the portfolio performance will vary for all values of Purchase Stop less than or equal to that of the High Stop, but will remain frozen thereafter at the value achieved when the High Stop is equal to or greater than the Purchase Stop.
I believe that this can happen only if both the High and Purchase stops are being applied together at the time of purchase. Thus, if you buy a fund and its NAV heads down after purchase, you will get stopped out at the value of the High stop, if it is less than or equal to the Purchase stop.

Rodger arogert@ix.netcom.com


Rodger - I believe that all your observations are correct - both purchase stop and trailing high stop are in effect at the time of purchase. The purchase stop remains fixed at the percentage below purchase for the entire period. The trailing stop rises as the NAV rises. Where I disagree is the statement that "A purchase stop should apply only until the equity price rises above the purchase price." - Why??
The next statement is also puzzling: "At that time, the Trailing stop should apply, and the Purchase stop should disappear". - Again why??? - If you buy at $30.00 and set a Purchase stop of 4%, you want to sell if the NAV drops below $28.80 (-4%). Suppose the price rose to $32.00, Don't you want to protect yourself if price turns around and drops 4% below the purchase point? Why do you suggest that the purchase stop should no longer be in effect if the price rises above the purchase??
However, many people put too much reliance in either stop loss option. More than 85% of the systems give better returns when both purchase and trailing high stops are set to Zero! That is "0". Waiting for the Cutoff about 2/3 of the way down the ranking often produces better returns, and lots fewer trades. Try it!!

Good luck - Howard Gadberry gadberry@sound.net
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 楼主| 发表于 2004-9-4 19:41 | 显示全部楼层
Money Management 6

Money Management:
It's something that most people spend very little time on. The most important aspect of trading is not sexy, exciting, or easy to describe, so who would want to spend time on it?
Who cares if I have 8 losers in a row for $500.00 each? It might only take a few trades to make back my $4,000 and more.....

I would suggest a 1% parameter per trade. If you have a winning method, the only way you can lose is by running out of money. Why take the chance? Never risk more than 20% of your account on your total current trades (cumulative risk, remember, all of the trades you are in, can and at some time (!), will be losers)

Trade long term to cut down on the costs of slippage and commission. Roughly 20% of an average account is spent on those costs per year.

If you want to be more advanced, I would devise a sliding scale of initial risk that was quite small when the original starting capital is at risk and increases if one has profits over a self-chosen Mendosa line of acceptable returns. (ie At the beginning of the year or when down for the year while original capital is at risk, the risk would be .5%. Profits between 1-10% would be risked at a 1% rate. Between 10-20% 2% etc. The numbers used are
for example only.)

In a long term trading situation where the market often gets away from the stop creating unenviable situations, I suggest peeling off contracts, but never below 1, to smooth volatility. (i.e. $100,000 account. Buy 5 Silver at 5.00 on the entry signal. Original stop is 496, 1% risk. [&cent;470,0 - &cent;471,0 = $50] At the close several weeks later the price is 600, but the stop has only moved up to 580. The account is now worth $125,000, and the risk, close to stop, is $22,500 or 18.0%. My 'peel off level' is 3%, this is higher than initial risk because it is dealing with open profits. I can risk $3,750. The risk per contract is $1,000; therefore, I can only have 3 contracts. I cover two.)
This will smooth volatility without adversely affecting returns in the long run.
It will hurt returns in massively trending markets, which number one or two a year, but it will help returns on an 'average' move. It will cut the volatility by over 50%.

By combining the sliding scale of initial risk and a sliding peel off %, both per trade and depending on the initial risk, one will see that money management has much more to do with returns than entry exit decisions. However, the best money management in the world will not work if one's methods do not have an edge over the market.
Scot Billington scot.billington@nashville.com

--------------------------------------------------------------------------------

Robert Buran Company bobburan@usa.net

Markets must move in such a manner so as to Frustrate, undermine and defeat the best interests of the majority of market players. According to this rule the majority cannot make money in the marketplace. The markets will totally ignore fundamentals if the majority of the market players act on those fundamentals.

Price movement is predominantly random, i.e. not 100% random, but predominantly random. The "secret" to making money in the market is locating that small portion of market behavior which is not random and exploiting it. I do not feel that conventional technical analysis is of any value in doing this. The problem with technical analysis is that it will present the illusion of uncovering hidden relationships between price behavior and various indicators.
I would submit that all such indicators are as random as the price behavior they attempt to predict and that all profits and losses realized from trading such indicators will be randomly distributed.

First law of price movement is:
If prices move up there is greater probability they will move higher rather than lower.
If prices move down there is greater probability that they will move lower rather than higher.

Second law of price movement is:
If price goes up you must buy the market long and if price goes down you must sell the market short.

The problem is that when we look at the chart we want to buy low and sell high. You cannot, however, buy bottoms and sell tops. You can only follow a trend which has already been established through price movement in the same direction as the position you are taking.

You must understand that when you elect to buy long a market when price rises you are in effect buying the market at the worst possible price at the time of your entry. It's not going to feel good and it's not going to look good on the charts. But by "buying high" you are probably going to be placing yourself on the minority side of the market and therefore assuring yourself of profits.

Stop and Reverse method:

The stop and reverse method involves utilizing some kind of indicator or a price based on an indicator. If the system is long one contract and the market comes back and the price is hit the system sells 2 contracts and reverses to a short position and so on. Of all possible trading strategies I have found this to be the least profitable and grossly inefficient with respect to the use of margin. I will discuss margin efficiency in greater detail later but for now it need only be said that systems that are in the market all the time tie up your margin needlessly. Markets tend to move sideways about 85% of the time and consequently these systems will have your margin tied up doing absolutely nothing for at least 85% of the time. These systems can also whipsaw you to death while moving sideways.

Trailing Stop:

The second most common way mechanical systems take profits is through the use of a "trailing stop." The idea behind a trailing stop is that it allows you to "let your profits run" while at the same time "locking in" any profits you may have already made. My experience with system design and trailing stops has been that the trailing stop is at best a mediocre method of exiting a profitable position. The problem is that if the trailing stop is too tight it results in your having your stop tagged right before the start of a big move. Conversely if your stop is too deep it results in many small profits going to large losses. The other problem I have with trailing stops is more theoretical. With a trailing stop you are trying to take profits only after the market has turned against you. Frequently you are forced to sell out your long position when many others are trying to sell too. You are then moving with the crowd and this is almost inevitably going to cause you excessive losses.

Therefore the rule I have developed with regard to taking profits is:
*** You should try to take profits only when the market is moving strongly in your favor.

This is much more consistent with my contrary philosophy of trading. If you are long a market and the market takes off like a space ship you should sell. By doing so you put yourself on the minority side of the market selling to the majority of panicked buyers. That is how you make money in this game.

Bob Buran:

What should you do, however, if your position starts out bad, get worse and then threatens an uncontrolled hemorrhage of your account equity?
Unfortunately this happens with about 15 or 20% of our trades and our ability to keep these losses within a normal distribution pattern is what makes or breaks us as traders. This is a particularly critical issue if you are using Systems without stops on day of entry. Let me
assure you that you are utterly mad if you place no stop on day of entry. The day you enter a trade is the time you are most likely to be gored.
I originally experimented with using a money management stop strategy on my day of entry. If I were trading three coffee contracts and figured $2500 was as much as I wanted to loose I would put a stop in about 220 points away from where I got in (1 Point = &cent;166 to &cent;167 = $375 = &cent;37500
$2500/3 = $833/Contract &cent;250000/3 = &cent;83333,3/Contract
&cent;83333,3/$375 = 222 points

The problem was that on some days 220 points was far more than I should be risking and others 220 points wasn't enough. The market didn't really care about what Bob Buran was willing to risk.

Out of this frustration I developed a simple strategy that probably works better than anything I ever developed. If you are sick of always having your stops run, this simple strategy is going to be a big help. If you got into a trade based on a longer time frame such as a time
frame based on daily data you need to develop a stop loss strategy that is based on a shorter time frame. For starters you should kick up an intra-day bar chart on your on line computer screen and set the bars to something like 3 to 10 minutes. If you are following our trading rules you are going to buy when the market goes up. This upward movement should create some kind of upward wave on the intra-day chart. You should measure this wave from its top to its bottom and if you are long the market you should place your stop at the point that represents a 75% retracement of that wave. If you are short the market you simply
reverse the process. Hence my rule for placing your protective stop is:

Place your protective stop at a point that represents a 75% retracement (5/8 or 6/8) of the wave/move that got you in.

Here again you see why the "buying high" strategy doesn't sell systems. Buying point B (which is the high) looks like a terrible place to enter this market. Why not sell at point B? Or if we have to go long why didn't we buy at point L (which is the low)? Don't despair. Because you feel that way others will feel that way also and so they, the majority of market players, won't buy because it's too scary. The market in the best tradition of the "Rule of the Screw" will sense this hesitation by the timid majority and move much higher. That will encourage the timid majority and they will then jump into this market in a buying frenzy. At that time you will calmly sell your positions back to the frenzied majority and take your profits.

The point I'm making is that when you first get into these trades they seldom look good and you need to use the 75% retracement rule to place a stop so as to give yourself some peace of mind. If you go back and look at Figure 2 you can see how this stop was calculated. I measure from point L (low) to point H (high) and take 75% of that and subtract that from point H to determine the stop which is equivalent to the price shown at point SS (sell stop).

If you are an Elliot Wave purist you may notice that there are other smaller waves in figure 1. Try to keep it simple and try not to miss seeing the forest for the trees. I'm not an Elliot Wave purist and what I do with a 3 to 10 minute chart is to measure from the highest high after your buy point has been hit to the lowest low on the screen.
Usually that is going to be the lowest low in the last day or two. That's what I mean by "the wave that got you in."

The Fibonacci Connection

Some of you sharper readers may at this point notice that maybe I might really just be playing around with Fibonacci ratios. Indeed what we are really saying when we elect to place a stop at "75% retracement of the wave that got you in" is that if the market fails to be supported at the 5/8 or .618 Fibonacci retracement point, it becomes a "Fibonacci failure," a trend reversal and we need to get out of the way of a collapsing market. Believe me you are going to be very happy to be out of the market if these stops are hit and it will be very unusual for the market to "tag" these stops and then move higher. This is the most effective stop loss strategy we use.

Some of you technical analysts may at this point feel somewhat indicated. Here I am telling you first that technical analysis is a lot of baloney and then I turn right around and start using Fibonacci ratios for stop placement. Of course the ratio .618 wasn't invented by a technical analyst. It was known to ancient Greek and Egyptian mathematicians as the Golden Ratio or the Golden Mean and was used in the construction of the Parthenon and the Great Pyramid of Gizeh. Then again maybe I just like Leonardo Fibonacci because he never was a floor trader and never tried to sell me a seminar or a $3,000 piece of trading software. In any case I confess to having almost obsessive fascination with Fibonacci expansion and retracement analysis.
Nevertheless I don't think that at this time I have developed fully all my ideas regarding this. I am, however, giving you the most significant part of my work with these ratios.

Summary and Conclusions

These "laws" (If Prices move up there is greater probability they will move higher rather than lower; If prices move down there is greater probability that they will move lower rather than higher) are permanent, will not break down and cannot change in the future.

Once we have entered a trade based on these rules we will reject traditional "stop and reverse" and "trailing stop" strategies of exiting our trade. Instead we will:

Take profits only when the market is moving strongly in our favor and place our protective stop at 75% retracement of the wave that got us in.

Some of you may at this point be ready to reject these market theories as being far too simple to be useful. Before you toss this manual in the trash, however, I want you to go back to the appendix and look at my equity curve for the past seven years. Look at the summary of my monthly profits from January 1, 1989 when I became fully automated, through June, 1991. Look at the consistent income and small drawdowns.
How many gurus do you know who have included seven years of real-time trading records along with the materials they are selling?

I learned these rules in the marketplace and while attending the "School of Hard Knocks." On the surface they may seem simple, but implementing them in the marketplace is a more complicated process. Later in this course I will show you how you can consistently gain an
edge on the markets and automate a trading system using these same simple rules. Using these strategies you need not fear that these basic rules will break down or stop working. They can't stop working anymore than Newton's Law of Gravity can stop working. I believe if we stop looking at all those wiggly lines, charts and complicated formulas and concentrate instead on simple up and down price movement we can beat the pants off the big boys. Call this back-to-the-basics trading or call it anything you like. I call it financial security.

Design a system that puts you in an average of 2 markets every day and never more than 5 markets. The drawdowns were extraordinarily small and the equity curve was amazingly smooth. Based on my testing I figured I could make about $100,000 per year with a $60,000 account.

Random Distribution of Profits and Losses, the Professionals' Nemesis

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A system cannot know what the market is doing after entry. Your trade plan can. That is your edge. It is not second-guessing but intelligence-gathering upon entry. Systems may be giving you a signal again and again. Does this mean to add at every signal? Your trade plan must address that. I have liked the three add-on points. Use your own ideas.

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Don't draw any conclusions about a system (or indicator) on the basis of isolated examples. The only way you can determine if a system has any value is by testing it (without benefit of hindsight) over an extended time period for a broad range of markets.

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Exits:

1. Exit at a target, i.e. a retest
2. Exit at a target, i.e. an expansion
3. Exit at a target, a fixed profit objective in dollars
4. Exit at a target, an objective chart point
5. Exit at a target, a subjective chart point
6. Exit at a time interval, 4 days
7. Exit at a combination profit time, first profitable open, 2nd profitable close.
8. Don't exit but just reverse
9. Exit on a range expansion
10. trail a stop off the low
11. trail a stop off the high
12. parabolic exit
13. Exit on close
14. exit if the day's close is less then 66% of the daily range in the direction you are trading

On backtesting, find the maximum profit on each entry before a reverse signal is triggered. Then use something like a standard deviation of maximum profits to find a probable profit range. Take profits on partial position when that profit target is hit, then run a trailing stop.
On stock system trades my first target is 2%, then a trailing stop of 62% of maximium move after 3 days. The system takes advantage of intermediate term swing moves (days to weeks), hopefully catching a few trends. I almost always get knocked out of trend moves, so am designing ways to re-enter the trend after being stopped out. The simplest is to re-enter
when the high (for long) or low (for short) bar is taken out on close. Then I need a stop system on that re-entry.
-
A.J. Carisse carisse@brunnet.net

> This means taking smaller profits and not letting any get away from you,
> it also does not mean trailing a stop because if you do, you will get an even smaller profit.

Not sure about that. This will get you out early too much. One of the difficult things to properly realize is that the performance of an instrument does not bear any relationship to your specific entry. By concentrating on its current characteristics in relation to your entry
point, your exits will suffer significantly. You must let the instrument tell you when it is time to exit. Simply put, this means - the point when you can calculate that your capital would be better off in cash or in something else. Patterns, ranges, and TA can give us valuable input to where this point is, but one thing's for sure, it has nothing to do with how little or much you've made so far on the trade. As far as moving stops go, at least this is relevant, but they are still somewhat arbitrary, and at best are an over generalization (i.e. always exiting on an X retracement without regard to the peculiarities between patterns).

This is a complex matter, and one's approach will vary according to what is traded and one's preferred style. However, there are a couple of principles that would apply universally. In all cases one should seek price confirmation for one's decisions. Ultimately, price patterns are king, and it is wise to at least wait for a reasonable indication that the trading is starting to go the wrong way. As well, while we need to spend a great deal of effort on trying to formulate efficient exit strategies, all this is wasted if we don't stick with whatever rules we have formulated. This isn't always easy in the heat of a trade, but I've found that more often than not, sticking to our well thought out plans will prove to be more profitable.

> So, what I am thinking is to exit when the trade is moving in your favor
> and as long as you made money, be happy.

You'll be happier, though, if you can develop more efficient exits. In terms of risk, i've found that the old adage of giving your profitable trades a little more leeway (not too much of course) makes a lot of sense. It's important, though, that you consider the option of re-entry into your calculations, which is a tool that can allow you to tighten up your exits a little more while still capturing a large part of the bigger moves.

> I would like to hear from experienced traders on this philosophy. I have
> had many times where I have had 500 profit into a trade and did not take
> it only to have the trade fail to my stop. I am a one lot trader so it
> is hard to scale in and out.

I never let profitable trades go south. You need to tailor you exits a little more to performance, as for sure there isn't any way that one should go from a good profit to a good size loss. Having separate objectives is usually the main culprit here, as is setting your exit criteria too loosely. Ideally, an exit strategy should be totally removed from your entry, and just focus on the thing being traded. As simple example, let's say that you plan to exit whenever a set of MA's cross. So - either they cross, or you're still in the trade - regardless of your P/L at any point (which must be kept separate). This doesn't mean that objectives shouldn't be considered - but in terms of the instrument's performance, and not yours. For instance, if you can sense that a meaningful retracement is at hand, on the basis of its recent range of similar moves, and the price pattern suggests that it is underway, you could consider exiting, but this still has nothing to do with where you entered.

> I don't let 500 get away from me anymore, but then I am not letting
> profits run either. I suppose a solution would be to build up the acct
> with one lots and later use three lots to scale out and leave one on for the big pull.

I'm not a big fan of this approach, simply because the odds are either with the play or they aren't. Therefore, there is a right and wrong answer in terms of whether to hold or not, and the task is to try to determine which is the case. Whenever you focus on P/L, you will tend to be overcautious, and believe me, I've learned this the hard way. It is much better to focus
exclusively on the present (the short term odds), while putting the past behind you (where you entered, and thus your current P/L), and letting the future take care of itself.

Regards, A.J.

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Bill Shumake bshumake@our-town.com

The first is to always trade a fixed unit of contracts per money invested. In other words a person may decide to trade one contract for every $50,000 of capital, in this way risk-of-ruin is always kept constant.

A second approach was suggested in which the number of contracts traded is increased after the second or third consecutive loss.
The idea being that if a trader has a system that say 60 % correct on average, after two consecutive losses the probability that the next trade will be a winner is about 84 % and if three consecutive losses occur the probability is 93.6 % that the next trade will produce a winning trade.

A third approach, which is simply a conservative variation of the second, is to only take trades after two or three consecutive losses occur. This is a very interesting approach which warrants investigation. It is based on the idea that all freely traded markets go through bases of accumulation/distribution and then an explosive trending move followed by another basing period followed by another explosive move. The money is made, of course, in the explosive moves. If you could isolate the explosive moves you would have the perfect system. This approach attempts to isolate these moves by waiting for two or three consecutive losses, which typically occur during a basing period, before a trade is taken. When a trade is taken, the odds of it catching a trending phase is increased.

With regards to strict money management ideas such as only risking 1% or 2% of total equity on any given trade, the reason I think you find so little written on the subject is that there is not much to write about. What I mean by that is that a trader has very little information to base money management decisions on. For example, a great deal has been written about money management with regards to playing black-jack. One reason is that a black-jack player has information about the odds of winning a given hand, information about exactly how much is at risk and information about exactly how much stands to be won on any given hand. This information allows the black-jack player to use money management systems that allow him to vary the size of the bet in order to maximize his ultimate winnings. Many people have tried to adopt similar strategies for trading. Unfortunately as traders we only have information regarding two areas; what our approximate odds are of winning a given trade, and how much we stand to lose if we do not win. Unlike the black-jack player, we have absolutely no information regarding how much we might win on any given trade, should it turn out to be a winner. (We have an idea of what the average winning trade has been in the past, but no information on any one specific trade in the future.) It is because of the lack of information on this one critical area, "how much will be won on this trade," that most money management systems deal only with putting a certain percentage of capital at risk. However, I believe this is entirely adequate, because ultimately money management exists to do one thing; to make sure you have enough money to stay in the game and continue to trade until winnings offset losses and a profit is realized. If you have a system that is 60% accurate and limit your loss per trade to approximately 1% of total equity your probability of success approaches 100%.

Something else you should consider when thinking about money management and the idea of only risking 1% per trade is the psychological effect. As you no doubt know, one of the key elements to successful trading is being disciplined in applying the rules of your system over time. Those who can consistently apply their system usually win and those who cannot be consistent ultimately lose. Only risking 1% on any given trade means I can be wrong more than 50 times in a row and still have over half my original money. Place this in the context of a system that is 60% correct, where one might routinely be wrong only 4 or 5 time in a row and you can see that it makes trading a much less stressful endeavor and insures that it will never be difficult to pull the trigger on a trade. In other words it makes it easy to be disciplined and consistent with your trading strategy, which in turn guarantees your success. To give a real life example, I read the other day that Linda Raschke typically trades one contract per $100,000. When I read this I thought back to when I was a young boy and my father would attempt to trade futures on a $3000 account (he was never successful by the way). Can you imagine how much easier it must be for Linda Raschke to pull the trigger on the next trade after experiencing a loss than it was for my father when he had just experienced a loss. It is this psychological factor of money management that I personally believe is the most important. Remember, trading is only fun and worth the profits if
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you can sleep well at night. This is why I believe you see so much about risking only 1 or 2 percent per trade...it is very simple, and while it may not be the path to maximizing gains, it does insure that the trader will always be able take the next trade and apply his system with discipline and consistency. In short, risking only 1% per trade may not make financial sense but it does make Peace-of-mind sense, and in this business, peace of mind is itself a valuable commodity.

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Jack Schwager: New Market Wizards:

- nothing else but Volatility can be measured

- when a bigger than daily average move occurs, there is a 55% chance of being followed by a similar directional move on the following day (probability edge is not sufficient after allowing for slippage & commissions).

- 1 coin: 55% chance of landing on heads (i.e. odds of getting heads of a single coin is 55%)
- 9 coins: 62% chance of getting more heads than tails
- 99 coins: 75% chance of getting more heads than tails (binomial probability distribution)

- Fund:
Average Daily Volatility = 1% (1% change per day)
Annual Return = 20% approximately 54% of the days were up (135 of 250 days), 46% of the days were down (115 of 250 days)
Annual Return = -20% approximately 46% of the days were up, 54% of the days were down

- the worse slippage, the better the trade
- Fundamentals = funny mentals (Ed Seykota)

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Coin Toss:
Ted Juszczak tedj@net-link.net
In a system that is correct 50% of the time (which is typical of most trading indicators and flipping a coin too) strings of losers and winners will approach 15 in a row. In other words, if a coin is flipped 1000 times, probably (key word) at least once, heads will occur 15 times in a row, tails 15 times in a row also.
There will be even greater occurances of 10 and 11 heads in a row, and numerous runs of 4 and 5. Very few indicators are better than a coin toss.
The same can be true of winning and losing trades. Those strings of losers will occur even more frequently in a system that has 40% winners. A winning system only needs bigger wins by a certain percentage. The probability of winning times the average win minus the probability of losing times the average loss just needs to be greater than zero to generate profits over time. A casino wins about 55% of the time - they wired it into the rules of the game. With only a 5% edge, they can pay all of those employees, give away free drinks and meals, build lavish palaces and subsidize travel. The casinos in New Jersey alone, paid taxes on $6 billion from the take on slots alone in recent years. Your broker and and his colleages in the pits get about 5% slippage and commission. If you use just about any indicator it's going to be "right" about 50% of the time, leaving you with a 45% system. You just have to make sure your average win is greater than your average loser, and not quit just because you started off with that string of 15 losers in a row.

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Money management and Trading business
Gwenn Ael Gautier Gw.Gautier@wanadoo.fr

1 - Trading constant size is riskier than increasing size. Indeed, as traders you have fixed costs, and you have to face unexpected events in trading and or life. Let's say you have
- a $100.000 account to live off
- a 100% return yearly
- $80.000 in living, tax and trading expenses yearly

If you are trading constant size, you'll move only very slowly over the years out of your undercapitalized status.
If you are trading with a view to increase along the way, it may still take some time, but you will indeed take off.

Now if in two years you have to face a $100.000 instant loss due to an accident, illness or something, which situation would you rather be in? The prospect of higher risk due to increased size, is also a prospect of lower exposure to unforeseen bankruptcy. I vote for the first.

2 - Increasing size is to be tested just as a system is. Sampling, back testing, forward testing etc. Check all ratios. Is your system displaying typical behaviors? Do winning streaks follow losing streaks, or are outcomes randomly distributed? What are your chances of having awiner after a winner? Two winners? etc.
What are your chances of having a winning streak, after a losing one? A positive return after a negative one? Is their seasonality? Depending on the above, you may increase in %, in steps or according to immediate results, period etc.

3 - Consider trading as a losing game, hence play very conservative as long as your not in a winning position, find ways to be agressive when you are. May be add along the way, or play much bigger in some circumstances.

4 - ABOVE ALL, BE ABSOLUTELY CONSISTENT. With money management, more than anything else, lack of consistency will totally ruin your best laid plans.

5 - Take out profits on a consistent basis, in a consistent way. Either you pull winnings, or you pull revenues, but decide once and for all and TEST, TEST TEST everything. These steps should account foreway over 50% of the time you spent on testing your system.

6 - Same for breaks, holidays etc.

7 - Test for capital accumulation. Your plan should allow self insurance.
Remember, anything can happen, and you want to still be around tomorrow.
Plan for the B scenario, your retirement, etc...

Then you may also look at system diversification, market diversification:

8 - I only trade individually working systems, which also work on a combined basis. Last thing I want is having all drawing down together all the time.
For some time I traded a group of 4 uncorrelated systems, two of which were underperformers, but very uncorrelated. Guess what, they "max drew down" all together, tripling a 15 year combined max drawdown (or over 20.000 combined trades tested).

9 - Know when to stop something that is not working. Just as for a single trade, your activity must have a stop, if things are not right (see 8 above).

10 - Market or product diversification: Again, each must stand its own test, and in combination. For me option writing works well with futures system trading combined. Make sure also, you have the means and resources to follow it all day in day out.

11 - Ideally, generate revenues elsewhere for basic living expenses. It is amazing how much this reduces your stress level, and increases your returns... But is difficult to implement.

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Turtletrader:

Q1) How much capital do you place on each trade? Is this precise?
Q2) When should you take a loss to avoid larger losses?
Q3) If you begin a losing streak do you trade the same? What formula do you use?
Q4) How should you prepare if trading both long and short positions?
Q5) Is trading affected by commodities that move at different times?
Q6) How is correlation handled in practical trading sense?
Q7) Should you have profit targets? Yes or No?
Q8) Does a portfolio of long and short allow one to trade more positions?
Q9) How is your trading adjusted with accumulated new profits?
Q10) How are stops handled when volatility is a concern?
Q11) Is there a method to limit entry risk with options?
Q12) How does one prepare for unforseen large scale trends?

Money Management questions (Ramon Barros ramon@wr.com.au)

Q1) How much capital do you place on each trade? Is this precise?

Capital per trade is for me a function of my plan's edge, the market's volatility, and the correlation between the markets I trade. I use Gallacher's formula to determine this.

Q2) When should you take a loss to avoid larger losses?

This is a function of my trading plan.
The first element is my initial stop, placed where if hit I am wrong about the trade. Then the second step is, once I have a position, the market must act in accordance with the scenario for my trade - or - as the Phantom of the Pits puts in, the trade must prove that it is a winner.

Q3) If you begin a losing streak do you trade the same? What formula do you use?

Measure a losing streak over the portfolio (not just one market at the time).
I start to reduce numbers once a predetermined level is hit.
Again this is function of statistical data based on my trading history and the current volatility of the mkt.

Q4) How should you prepare if trading both long and short positions?

I'm not sure what this means. Do you mean holding back to back? If so, I don't engage in this practice. For me a long and short of the same position is the same as no position.
If you mean when do I stop and reverse? Again this is a function of my plan.
If you mean some sort of spread strategy - I don't trade spreads.

Q5) Is trading affected by commodities that move at different times?

I trade only FX but keep an eye on Gold, Interest Rates and the Stock Market - using Intermarket Analysis to provide an overview of the longer term trends.

Q6) How is correlation handled in practical trading sense?

This is a function of the capital allocation formula I use.

Q7) Should you have profit targets? Yes or No?

I use the "rule of three" with profit objectives for the first 2 thirds. The last third looks to capture unexpected trends and is usually taken out by a trailing stop.

Q8) Does a portfolio of long and short allow one to trade more positions?

As above - I don't understand "portfolio of long and short..."

Q9) How is your trading adjusted with accumulated new profits?

Once I have made 30%, I add 15% to my capital base and apply the same strategy each 15% thereafter. Each financial year begins afresh.
This means after making 30%, 45%, 60%,... on each step you put 15% of the profit in your account. I want to ensure that I keep some of my profits. Also prevents the normal situation where a loss of 15% is a greater $ amount than a 30% loss because of a rapid escalation of capital.

Q10) How are stops handled when volatility is a concern?

My stops are a function of the market's structure and volatility. If the volatility becomes unacceptable, then I take a trading holiday.
My stops are placed where if hit, I am wrong about the trade. Most times I exit a trade before the stop gets hit. When I plan my trades, I plan for certain things occuring and if they don't, I exit. POP (at http://www.futuresmag.com/library/phantom/phantom.html) puts it much better: "Assume a trade is wrong and has to prove itself within a specific period; if it doesn't exit."

Q11) Is there a method to limit entry risk with options?

I don't use options.

Q12) How does one prepare for unforseen large scale trends?
This is a function of last last third of my contracts.

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What is the way to measure the Risk To Reward ratio ??

Really this question depends on a number of factors. I am going to make the following assumptions for this post:

1 you have a written trading plan

2 your plan contains a number of setups

3 you have historical data pertaining to your trades so that you can calculate the mean plus/minus one standard deviation for your profits.

4 you can also calculate the mean plus/minus one standard deviation for your losses.

5 you can calculate the number of trades that have made money and the number that have lost. By dividing wining trades by the total number of trades, you will have the probability of success (PS).

6 you have at least 30 profitable and 30 losing trades from which to make the above calculations.

Once you have the data above, you can now calculate your RR.

The mean minus one standard deviation of your profits is the minimum profit you can expect to make 70% of the time (P); the mean plus one standard deviation is the maximum loss you can expect 70% of the time (L).

The formula for calculating the RR is:

(P*PS)/(L*(1-PS))

e.g.

if your probability of success (PS) = 55%
if your mean -1 std of profit (P) = $1000.00
if your mean + 1 std of loss (L) = $678.00

then your RR =

(1000*.55)/(678*.45) = 550/350 = 1.8

If you have enough trades, you can categorize them by mkts and setups.

You can also substitute the average profit for "mean - 1 std" for (P) and the average loss for "loss + 1 std" for (L). However, I believe that since the average represents a 50% occurrence, you are not putting the odds in your favour by doing this.

If you if need to learn some basic stats and (like me) run at the mention of a maths formula, read "Statistics Without Tears" by Derek Rowntree. A great book in that it teaches basic
stats without a single formula!! I believe all traders would improve their bottom line by understanding basic probability theory.

Note that the formula above says nothing about how many contracts you should take as this is a separate issue altogether. It merely states that given "x" contracts on your past results your RR, 70% of the time, will be "A".

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The more volatile the market, the more likely that you will have a large move against you
and therefore you shold work with a tighter stop. However, there also is a contradictory approach that says that the more volatile the market, the more leeway you should give it. What is right and what is wrong? I don't know. You simply have to try both methods and pick the one that you feel the most comfortable with and that matches your overall trading strategy.

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The main movement in markets comes from people observing what others around them are doing and reacting to it. So there's a kind of dynamic interaction rather than a specific response identifiable with external news arrival.
It is the dynamic interaction between groups of market participants, who differ in their risk and reward objectives and in their trading time-frames, that is the key to explaining market behaviour.
The fact that some people trade at short time intervals with high risk for profit, while at the other end of the spectrum some trade infrequently at low risk for hedging purposes, creates a set of relative effects where groups react in different ways to events and then react to each other's reactions.

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First off, there are many strategies that try and increase/decrease contracts
as a function of the last x trades off of certain equity curve movement.
The point that is important to keep in mind is that any strategy that relies
on the last x trades is inferring that there is a dependency in the trading
system.
For example, if you toss a coin 49 times and all 49 times you get heads,
what do you think will happen on the 50th toss? If the coin is a fair coin,
then regardless of the 49 tosses, the 50th toss still has a 50% chance of
being heads and a 50% chance of being tails. In other words, the results of
the previous 49 trials offers no useful information.
In looking a trading systems, one measure for assessing if you have a
hidden dependency in your system is to do a statistical runs test, also known
as a Z-test. Given the systems Z-score you can determine if you have a
statistical dependence. If you don't (and most systems don't) then trying to
trade based off of the last x-trades offers nothing to improve the system and
perhaps even degrades the performance.
In an effort to try and control drawdown in a money management scheme
I typically pay close attention to the systems historical largest loss on a
single contract basis. If you can incorporate this largest loss in your
money management model, you can usually maintain better control over drawdown.
I prefer to use this number over say average loss, average trade, etc.

Neil Peplinski qa3135@email.mot.com

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The best way is to start with a unit bet. Then it all depends on how the hands are streaking. If you are going to win, then you should increase your bet according to the Fibonocci sequence. Otherwise decrease your bet to the square root of the previous bet. This way you will be winning your large bets and losing your small bets. Some call it "locking in" your profits. Everyone knows that everytime you win a hand you are playing with the house's money - so keep betting more, you've got nothing to lose.
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 楼主| 发表于 2004-9-4 19:47 | 显示全部楼层
Money Management 7

Money Management:

The best way to test this (an interesting experiment for your thesis) is to
try a positive expectation game. Have 10 marbles 6 black (winners) 4 white
(losers); randomly select and return the marbles 100 times. Have room full
of people trying different money management systems starting with a
hypothetical $100,000; winning or loosing what they risk for each "trade".
(Or record the sequence and do it yourself). The results will range from 0
to Millions. Try a 70% game. The results will also range from 0 to millions.
This is why the worlds best and largest traders have very simple systems but
sophisticated MM rules.

The best definition I've come across for MM is "how many". Your system
should tell you when and where to get out, only after these decisions have
been made should you then use your MM system to decide HOW MANY, but the two
decisions should not over-lap.

You are right to try antimartingale systems, increase with wins, decrease
wth losses. The exact nature of the system determines the best formula. With
wide stops like an n-day breakout, something like 2% is a good starting point, however
this would be suicidal with close stops. A volatility based formula would
stop be better to stop you getting too carried away.

> I also tried to increase/decrease position size according to the
>dependency among the last x trading days of a trade. When there is a
>Win-Lose-Win-Lose pattern I increase-decrease-increase-decrease, when
>there is a Win-Win-Win-Win pattern I increase continuously (e.g. every 5th
>day). Also not very satisfactory.
>Am I on the right track but on the wrong branch?

Close.
Example 1: If your MM rules are to risk 2% of a $100,000 account ($2,000)
Your system stop is $1000 away so you take 2 positions. The market moves up
and you have a $4,000 profit but your system exit has not moved. You are
now risking giving back 4% ($4,000) If you want to keep a constant 2% risk
you may consider reducing risk back to 2% and just selling one at the
market.

Example 2: The same as above except your system has a reason (a technical
one, not a MM one), to move up the exit stop. The new stop is risking only
1% now ($1,000) so you could now double your position size a buy two more at
the market. With this MM system you could increase dramatically your
position size while never risking more than the original 2% to the market.

Example 2 is the basis of the very successful turtle trading system along
with a very simple n-day channel breakout entry and exit system. There are
many variations on this i.e. you could risk say 1% for initial positions and
4% marked to market or MARKET HEAT as it's sometimes called.

The idea is to limit risk and maximise profits by letting your tested
technical system give you a reason to enter and exit the market, and MM to
say "HOW MANY" but the two are quite separate decisions.

Andrew Dykes at "Kerry O'Connor" koad@ihug.co.nz


Money Management/Expectancy/Expected Value:

>1) I tried a very close system stop, e.g. a $500 stop while Volatility (in
>terms of a 15 day Average True Range) was higher than $500 at least in 2/5
>of the cases. - I was surprised as the results were not too bad, as I could
>"pack" more Nr. of Contracts with a close stops which obviously paid for
>the higher number of stopped out positions.
>Do you consider such close stops as hazardious?

As long as your realise that this $500 stop is not a money management rule
but a trading rule. If you wish to include it in your system then by all
means test it and see what it does to your expectancy (!) ***. A MM rule does not
alter your expectancy therefore is not at trading rule.
>
>2) What I was thinking about is to have a recursive money management system.
>That means I just look at what results a certain system produces, e.g. an
>average loss of $1000, an an average profit of $3000 and has tendency to win
>big after a loosing streak and vice versa (lose bigger after a winning streak).

I've not found this to be true to any meaningful extent. I would caution against trying use so called "streaks" to determine outcome. This is the very psychological bias that allows casinos to prosper. If you know the expectancy (!) *** of your system then every trade has the same expectancy going in, the actual result of any one trade is close to random. Also I've found the only way to have the "real world" trading to match up to your hypothetical expectancy is to trade multiple markets and use many years of data in your testing.

>Any ideas how to build the average loss/average profit into a money
>management plan? - Unfortunately I never played Black Jack, otherwise I
>would maybe have an idea.
>To know to suffer a loss in 60% of the time, and to have a profit in
>40% of the time is advantage (Expected Value = 60% x -$1000 + 40% x $3000 =
>$600), but I am not quite sure how to implement it into a valid method.

To see how good a system is I like to then divide the expected value $600 by
the average loss ie $600/$600 = 1 Which means your expectancy is $1.00 per
dollar risked. This is a great way to compare different systems.

If the system has been tested properly with adequate slippage an expectancy
of .5 is tradeable and .7 is a good one. An expectancy of 1.0 will make you
rich!

Here is one plan, however the unfortunate truth is only with a large account
can one truly use it or any effective MM plan,

Firstly I use my gambling formulas to determine maximum bet size for
greatest return (unfortunately this will result in large drawdowns and you
have to be psychologically prepared to trade through these.)

I use the Kelly Criterion. Kelly % = A-[(1-A)/B]
{A is the % of winning trades in decimal format (reliability of system) and
B is the average profitable trade in $ divided by the average losing trade in $

e.g. a coin flip game: the reliability of the system is 0.5. In this game you
make twice what you risk when you win. Thus B = 2. Therefore the amount of
remaining equity you should risk to produce the maximum rate of return is

Kelly % = 0.5 - [1 - 0.5)/2] = 0.5 [0.5 / 2] = 0.5 - 0.25 = 0.25

The maximum bet then is 25%.

Now with this information I would take 80% of Kelly to be on the
conservative side (20%) I then work out how many different markets I will be
trading i.e. 10. So I would allocate 2% of my trading equity per position.
If in this example my account is $100,000. For each new position I would
subtract my initial entry price from my exit price then determine "How
many". I might be able to afford 4 corn (if the amount risked was $500 or
less) only 1 Swiss Franc and maybe have to forgo an S&P if the initial stop
was further away than $2000.

If I have on 10 positions and all of them go against me on one day I'm
still within the Kelly Criterion. But I know the "how many" has not changed
my expectancy (!) *** in any way.

>Is this what I call a recursive money management system? You decide AFTER a
>trade what (rather 'how many') to risk next? This obviously requires
>dependency between the trades. But I also read very often one should see
>each trade independently, what a contradiction.

No, I have never seen any evidence of dependency between trades. A well
thought out system should have the entry and exit point fixed before the
trade is entered. The difference is your risk. The money management
discussion "how many" is then based on your total account size.

>The problem I had (to transfer the experiences from the game to the futures
>markets) was a) that I did not know if I should consider daily changes (daily
settlement) as a streak or the last x closed out trades (which could be weeks away).

There are 3 basic approaches:
Core Equity Method: to use only the value of your account from closed out
trades to determine positions size, less the amount risked on each open position.

Total Equity Method: the cash in your account as above, plus the value of
any open positions.

Reduced Total Equity Method: A combination of the two. It's like the core equity method but you add back open profits if the stop has been moved into profit.

>b) that I often increased risk when the market was already lost steam, so
>big drawdowns were the result.

The only way to avoid this is to trade many un-correlated markets at once.
The selection of your portfolio is crucial. (And not an easy task by any means).

>What do you mean by 2%? - Initial risk?

Yes 2-3% of your account size for the initial risk and maybe double that for market heat (Marked to market on the close). However this market heat should not mean moving your stops (this would change the expectancy (!) *** and would mean you are trading a different system) but by varying position size. This is of course the luxury of a large account and is not usually possible for the individual trader staring out. In fact it doesn't necessarily increase overall profitability but should produce a smoother equity curve, and cause less psychological problems.

I can't recommend highly enough the "Special Report on Money Management" by Van Tharp (I mentioned it in my last e-mail) which covers all of the above in great detail (different position sizing methods, different models of money management).

>> For each new position I would subtract my initial entry price from my
>> exitprice then determine "How many".
>You are probably talking about the stop loss (exit) point here or do you use target exits
>(at a profit)?

Yes stop loss exits. I never use profit targets. I always follow the basic cut losses short, let profits run. The reason this works is in the nature of distribution of the trades. There is not the classic bell shaped curve but one with "fat tails" i.e. there are more large moves than would be expected if they were random. By having an initial stop to prevent the unusually large adverse moves, and a trailing stop to attempt to capture as much of the extraordinary large moves, it is possible to profit in the long run.
As a result all profitable systems I've seen are trend following and have less than 50% win to loss ratios.
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 楼主| 发表于 2004-9-4 19:48 | 显示全部楼层
>Do you try to be in different markets all the time (i) or is it possible
>that you trade only one at the time (ii)?

When I say I'm in the market this includes buy stop orders above the market or sell order below the market. I then "trade" about 35 market world-wide and would have open positions in about 60% of them at any one time.

It's all about having a positive expectancy then applying it as much as possible. As a blackjack player I used a system which had the odds of one player coming out ahead over a weekend to 2 out of 3. Two players together could, by combining banks effectively double the number of days and the probability of winning would be 3 out of 4. By the time we had a dozen players we won every day!
Trading is the same, the more markets the better. I would even add a market
if I knew it was less profitable than the others (of corse this is impossible to know in advance) because the smoother my equity curve the higher my bet size can be.

>If (i), you must have a very 'easy-going' Entry Signal, which gets you in
>very often, otherwise you couldn't be in, let's say, 5 markets simultaneously.

As I said previously having an order in the market is the same to me as being in it. But don't be too worried about entries, it's a common beginners fallacy. It's the same as those "Lotto" type lotteries where you get to pick your own numbers (birthdays, lucky numbers etc..) Obviously as an educated Man you know this makes no difference to the outcome.
Entries are the same. If you don't believe me try using all the well known
entry techniques, Channel breakout, moving average cross-overs, volatility entry etc and if they are profitable after 5,10,20 days few are even as good as random entry.
They seem important because the decision when to get in is the last time a trader is in control. Exits are at the whim of the market. Only money management makes any real difference on your profitability.

>>Is this what I call a recursive money management system? You decide AFTER a
>>trade what (rather 'how many') to risk next? This obviously requires
>>dependency between the trades. But I also read very often one should see
>>each trade independently, what a contradiction.

I know of no dependency between my trades. "How many" is a function of
account size and the percentage you are willing to risk.

>Do you measure correlation among markets with the LN (Natural Log) of price
>changes? What I even find difficult here is how do the programming efficiently (I do
>all the calculations with MS Excel): I must have all the data (of all commodities involved)
>open to calculate a correlation matrix in a certain time window. This eats up all my
>memory... Maybe I should calculate the correlations beforehand and write the
>results into a separate file where it is read from during simulation? Danger is to 'lose >contact to reality' here. Which program do you use to run your calculations?

None of the above. I don't consider correlation among markets to be a mathematically problem, rather a common sense one. For example I'm currently short Swiss Franc Futures so I don't have a position in D-Marks. Just from looking at the charts of these markets they obviously move in a similar fashion. From experience I know to sell the weaker contract and buy the stronger. Grains and precious metals obviously have some correlation as do
bonds and Euro's. S&P's have a negative correlation to bonds but not always. It is just a matter of paring down position size when you feel you may be over exposed to a particular sector. I know of no formular which improves on experience in this matter.
I know this is not too helpful to an academic study of trading however the nature of market a forever changing. Oil and Gold moved together in 70's but by the 80's they were quite different.

The point to remember when testing a trading system, is that testing is not about accuracy or exactness. We only have last years data to test on when we really need next years! It would be similar to trying to find out who would win the next Austrian Elections by polling the French, i.e the wrong data pool.

To quote William Eckhart "The delicate tests that statisticians use to squeeze significance out of marginal data have no place in trading. We need blunt statistical instruments, robust techniques. I.e a robust statistical estimator is one that is not perturbed by mistaken assumptions about the nature of the distribution."

>I have heard about the fact that moving stops would change the expectancy and varying
>position size will not. But what is the (mathematical) explanation of this?

>I do not really understand why a money management rule does not alter my
>expectancy.

Your expectancy is per dollar risked. A 2-1 expectancy game does not change
if the bet size changes.

>Is it correct that any additional rule which alters my expectancy (up or
>down) is dangerous and should be avoided?

It is important not to have too many degrees of freedom. Do not use rules which would only affect a very rare occurrence. If I had to choose between two otherwise equal systems I would go for the one with the lessor number of imputs or degrees of freedom. This would be the one that would be less "curve fitted" and more likely to work in the future.

>I know the Kelly formula for quite a while but never tested it.

The kelly formula should be use only for total portfolio risk. Assuming the worse case scenario and all positions act as one and move against you at the same time. It is much too large for an individual position.

>In practical terms, that means you decrease position size during the life of a trade instead
>of moving your stops closer, right?

Yes, although this depends on the system. The only way to know is to test all possible
variations. Remember trading is a much psychological as mathematical. Over all profitability is irrelevant if the trader cannot stomach the drawdowns.
So changing position size during the life of a trade is more to do with keeping a constant risk but doesn't necessarily increase profitability. If your exits are particularly clever it may be better to keep the bet size constant.


Andrew Dykes at "Kerry O'Connor" koad@ihug.co.nz

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Fixed Ratio money management technique (Ryan Jones' company):

As you stated, Optimal F is the quickest way mathematically to increase your
account balance. As you also noted, it comes at the expense of large drawdowns.
Additionally, better systems will typically have larger Opt. F drawdowns because
better systems yield a higher optimal fraction, such that when a loss does occur,
you have a large amount of your account at risk.

Ryan's "Fixed Ratio" money management formula looks to maintain the drawdown of an
account at a constant percentage level. In other words you increase or decrease
the number of contracts traded in order to keep your drawdown at roughly the same
percentage level. This theoretically makes the account easier to trade because you
don't have the wild equity swings associated with optimal f. This money management
approach boosts account returns well above single contract trading, but still
falls short of optimal f levels. It's just at matter of whether or not you could
withstand (both psychologically and in regards to account capital) a 60% or 90%
drawdown that is quite typical of optimal f.

I've purchased and worked with Performance I (Ryan Jones' software package for
fixed ratio). At $1200, the software leaves something to be desired (pretty much a
glorified spreadsheet) although a new version was just released (free to current
owners). Basically what you're paying for is the concept, which is fully
disclosed. Bottom line: Fixed Ratio is unique, but not stellar. I believe if you
study Vince's material (opt. f) and Kelly's techniques and fixed fractional
trading and get an understanding of how money management works, you could probably
come up with an approach that works just as well as Fixed Ratio. If you're looking
for someplace to spend money, however, this is as good a place as any!

Neil Peplinski qa3135@email.mot.com

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Never risk more than one days range. In general, it is preferable to exit in the direction that the market is going I believe. I am also interested in this type of discussion, because I have a great entry technique and am more interested now in a great exit technique. Most trading systems expound on great entries but ignore how to have great exits. Many Gurus recommend scaling out of trades in order to cut down risk. Finally, when the risk is greatly reduced and some profits are protected, a final contract is left to go for the big long home run. The first few contracts are taken off at targets, and the final one is let run with a loosely trailing stop.
For small accounts, a profit target is probably preferable for short term systems and a trailing stop is preferable for long term systems. The system that I am trading allows your profits to run for one day, and then you nail them the next day. If the market keeps going in your
favor, you reenter. The system skips a lot of profit between where you took profits and reenter. I am thinking about how to fill the gap.

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Money Management-Van Tharp:


Long trades have a high positive expectancy but make you money only 25% of the time. When the market starts up trending (winning streak on the long side), the probability of it continuing is about 70%. A winning trade could last 15 days or more, and (if you risk the maximum allowed) you could double your equity each day. Thus, a winning trade that was allowed to double each day for 15 days could pay more than 16,000 to 1. However, if it didn't go 16 days, you would lose all of your profits. For more information on expectancy or probabilities, see the questions and answers below and Dr. Tharp's comments on money management.

Short trades have a negative expectancy but they make money for you 75% of the time. However, you could loose up to 20 times the amount you risked. Thus, any time you risk more than 5% of your equity on the short side you risk bankruptcy. A losing trade only
lasts one day, but a winning trade can go as long as 15 days and as short as two days. The art form to winning this game is to be able to capture as much profit as possible from a winning trade while, as the same time, not letting the profit get away. For example, if a winning trade went 15 days, you could make as much as 16,000 times your initial risk if you continually risked the maximum. But, if you continually risk as much as possible on a
winning trade, you will eventually lose all of your profits.
All trades are not necessarily 1:1. The market can move in your favor or against you at 1:1, 2:1, 5:1, and even as much as 20:1 on the short side. There are occasional 2:1 losses on the long side.

During the course of play, each player has a listing of the last 10 trades they placed. Here is how to interpret some of the columns:

Risk - the amount risked during the trade
L/S - indicates whether the player traded on the Long side or the Short side
Mkt - indicates the market movement:
Up = a win on the long side or a loss on the short side
Down = a loss on the long side or a win on the short side
Chg - indicates the amount the market moved
Close - your closing equity (Equity + Amount)


YOUR LAST 10 TRADES

Date Equity Item Traded Risk L/S Mkt Chg Amount Close

06/12/1996 50000 Ethiopean Rice 00500 L DN 01 -00500 49500
06/25/1996 49500 ABC Shoes 00880 L DN 01 -00880 48620
07/03/1996 48620 Monitors Inc 00200 L UP 02 +00400 49020
08/28/1996 49020 Monitors Inc 00200 S UP 01 -00200 48820
09/01/1996 48820 Manual Trans 00200 S DN 01 +00200 49020
09/04/1996 49020 Cups Mugs Inc 01000 L DN 02 -02000 47020

Thus, if you risked $1000 on the long side, as it did with "Cups Mugs Inc." and the market moved down by 2 times, then you would end up losing $2000.

If a player elects to "go short" and the market enters a long winning trade, you won't be permitted to participate (except by going short) until a loss occurs and a new item is presented. The reason for this is that we are simulating the whole issue of allowing profits to run, but not letting them get away from you. By going short, you have elected not to participate in that particular trade. Remember that a winning long trade can last many
days. Thus, when you go short, you may be locked out of the game (except to go short again) for a number of days.

Only one stock or commodity is traded per day. During a winning streak, the stock or commodity being traded remains the same from one day to the next. Once a loss occurs, a new stock or commodity is offered. During the winning streak, you can risk a maximum of your initial trade on that item plus any profits you have realized since the item was offered. If you risk $0 on the long side, you will not be able to participate in a winning trade because the amount you can risk is limited to $0 throughout the trade.

Players that are unable to return to the Virtual Trading Exchange daily are letting their profits ride (once they have some) just like in the real markets. However, we do have an error in the
logic of the game in that program only lets your profits ride during the second day of your participation in a winning streak, but not after that. In fact, if you let your profits ride, by not
participating, you risk getting the results of the trade on the day you return (instead of the next day). We will not fix errors of this type, so you are on your own if you try it. You need to
take this into consideration when considering your money management prior to placing your last trade, and then place the trade accordingly. You can also decide to place a "stop" in the
market by entering a "0" as your last trade, effectively preserving your capital.

There may be circumstances where you will notice two trades listed on a single day. This tells you that the exchange automatically executed your trade at the end of a winning streak (which would have occurred during one of the days which you were not participating but had a trade on) before switching to a new item. By not participating, you were letting your profits ride. This is the only circumstance which will cause two trades to be listed on the same day.

When a winning trade starts, it may last as long as a week or two. It is considered to be just one trade. If you elected to take it on the short side or risk $0 on the long side, you have
essentially decided not to participate in that trade on the long side. However, you can make more short entries on that trade - should you decide that the winning streak should be over. Your risk on the short side is only 1:1, but remember that a winning trade can last a long time.

There is a lot of uncertainty in the markets, just like there is a lot of uncertainty in the game. In other instructions, we say that certain things will probably happen. However, nothing is
certain. And if the unexpected happens, it is your problem. We will not resolve such problems in your favor. It's one of the hazards of trading.

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How to Play the Simulation:

The best way to describe how to play the simulation is to take you through a series of trades to see what will happen. The names of the stocks or commodities used in this example are purely fictitious - any resemblance to actual companies is purely coincidental.

Let's say that the first trade is MicroLoft, Inc. On day 1 you place a trade for $1,000 on the long side. The next day, you look to see what happened in the market and find that the
market moved against you at 1:1 and you've lost the $1,000 (if you had gone on the short side, you would have won).

TIP: Each day, the market switches instruments unless there is a profit on the long side.

Now, on day 2 everyone is trading on Gold. You place a trade for $1,000 on the long side. The next day, you look to see what happened in the market and find that the market moved against you again, this time at 2:1 and you've lost the $2,000 (if you had gone on the short side, you would have won again).

On day 3, everyone is trading Silver. Again, you place a trade for $1,000 on the long side. The next day, you look to see what happened in the market and find that the market moved against you again, at 1:1 and you've lost another $1,000.

Your new equity is now $46,000. If you had gone on the short side for all three trades, your new equity would have been $54,000.

On day 4, everyone is trading WXYZ Corp. Again, you place a trade for $1,000 on the long side. The next day, you look to see what happened in the market and find that the market moved in your favor at 1:1, and you've now won $1,000. However, if you had decided to go short on day 4, you would have lost at 5:1, or $5,000, and would not be permitted to trade on the long side until a new instrument is offered.

___________________________________


TIP: When there is a win on the long side, the short side can lose anything from 1:1 to 20:1. Once the market enters an up trend, it enters a new mode of play. WXYZ Corp. is now trending up. It will remain the instrument offered as long as it remains in the up trend
(i.e.: until the first loss). Subsequent, days are just a test for you (those of you who've made money on the long side) to be able to let you profits run, but also lock in some of the profits by raising your stop (i.e., not risking the maximum).

On day 5, WXYZ Corp is still being traded. Your decision now is whether to risk all your winnings or to raise your stops. You decide to trade $2,000 on the long side. The next day you look and find the market is still up trending and you have won at 1:1, or $2,000. You have now made $3,000 on this trade!

On day 6, WXYZ Corp is still being traded. You decide to transfer $500 into your equity by only trading $2,500 today. The next day, you look to see what happened in the market and find that it moved in your favor, and you won $2,500.

Your new equity is now $51,500 with $5,000 to risk.

On day 7, WXYZ Corp is still being traded. You decide to move an additional $1000 into your equity account by only trading $4,000 today. The next day, you look to see what happened in the market and find that it moved in your favor, and you won $4,000.

Your new equity is now $55,500 with $8,000 to risk.

On day 8, WXYZ Corp is still being traded. You decide to only risk $2,000 on the trade. The next day, you look to see what happened in the market and find that it moved against you,
at 1:1. This trade is now concluded and you have $53,500 in equity. You've made a total of $7,500 on WXYZ.

On day 9, Arizona Oceanfronts is being traded and the entire process begins again.

It pays to cut your losses short and to let your profits run. You do this by implementing good money management techniques. Our simulation has been designed to provide you interactive feedback during the course of play. The simulator has been programmed with a set of rules. If it senses that you are trading in a highly risky manner, you will receive
an instructional email message to help you out.
___________________________________

Questions & Answers:

I don't have access to the internet over the weekends. Why does the simulation run continuously?

The simulation runs continuously by design. During the design phase, we considered the problem that some people that may only have internet access at their office during "regular business hours". However, our simulation is being played by people all over the world in various time zones, thus it was impossible for us to define what "regular business hours" would be for each player.

Furthermore, the goal of the Virtual Trading Exchange is to teach people money management skills. People need to learn to consciously consider their money management strategies each time they place a trade. Thus, if a member is unable to participate over a weekend, holiday, business trip or any other time, then they need to consider this when deciding how much to risk on the last day that they are able to participate. Their money management should tell them to either reduce the amount they are willing to risk on the trade or to place their trade on hold by placing a stop in the market (entering a "0") as their last trade.

This game seems like gambling, not trading, to me. You'll even lose on long trades most of the time. What am I suppose to learn?

It's not gambling because, unlike the casinos, the game has been programmed to give you a positive expectancy if you go long on every trade. It is actually a good simulation of long-term position trading. The losses only last a day and you've got to let your profits run. You also have to learn to make sure that your profits don't get away from you. Thus, if you play the game well, you'll learn the lessons necessary to be a good long-term trader/investor.

I don't have a lot of information about any particular stock or commodity that you give. How am I suppose to make a decision?

Actually, taking every trade in this simulation is a little like following a system. You don't know which trades will make money, but you know that you will make money if you take them all and manage your money well. You also know that you have a positive expectancy by trading on the long side.

The key to making money in the markets is money management. That is what we are emphasizing in this game. Most people think that the key to success is analyzing the market and finding the next winner. That's why most people have a lot of trouble making money. We're trying to teach you how to make money in the markets through money management. Hopefully, you'll be open to learning about it.

How can I make a decision on this trade (it could be any one) when I can't see a chart of it?

The answer to this question is again the same as the last one. Follow the expectancy and go long. The key to this game is money management (how much to risk) and how much to continue to ride on a trade during a winning streak. Going long or short shouldn't be a part of your decision making. However, we allow you that option because most people like to make stupid mistakes.

Why not give us a portfolio to trade?

A portfolio would be useful, but our goal with this simulation is to teach you money management. That's easier to do when you only have one item to concentrate on. We want to make the lessons simple and easy for everyone to understand.

What's a good strategy to use in this game?

We don't want to give one strategy and have everyone play that. However, we will give you some general hints:

Trade a percentage of your equity on each trade --- enough to do well, but not so much that you'll get too far "in the hole". You might consider increasing the percentage when you are ahead and decreasing the percentage of equity when you are behind.

When the market is up trending (a winning streak on the long side), conserve some of your profits. On method is by protecting a fixed percentage of your profits (which is like using a trailing stop in the market). When the market starts up trending, you may only protect a small percentage at first, but as the trend continues, protect more of your profits. One way you might trail stops (and there are many) would be to trade 80% of the maximum on day 2; 60% of the maximum on day 3; 40% on day 4; and 20% on day 5 onward. However, you can do any number of possibilities in terms of protecting your stops. For example, if you risked 100% of what's possible on days 2 and 3 of a winning streak, you'd risk losing it all, but you'd have an 8:1 (2^3) = (((1/0,25)^3)^0,5) = (((1/0,25)^(3*0,5)) winner after three straight winning days. If you risked the maximum in a trade that went ten days, you would have a 512 (2^9) (((1/0,25)^9)^0,5) to one winner. However, in order to get that profit, you would have to risk all of your profits on days 2 through 10 - which is probably not a wise decision.

Incidentally, you can determine how much you are allowed to bet during a winning streak by risking your total equity. The computer will reject the trade and telling you how much you can
risk. You can then elect to trade a percentage of that figure.

I am having trouble reconciling the following statements: Long trades have a high positive expectancy but make you money only 25% of the time. Short trades have a negative expectancy but they make money for you 75% of the time. How can you have positive expectancy with only a 25% success rate, but negative expectancy with a 75% success rate?
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 楼主| 发表于 2004-9-4 19:48 | 显示全部楼层
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Expectancy is a function of both the probability of winning and the size of the average gain to the average loss. For example, imagine having a bag of marbles in which there are 99 black and one white. The 99 black ones will cause you to lose whatever you risk. The one white one will pay off 1,000 times what you risk. Each marble is replaced in the bag after it is drawn out. Thus, on any given trial, you only have a 1% chance of winning, but a great positive expectancy. I'd play that game all day, but you must be in the game to capture the 1000 to one marble. [1000 * 1% - 1 * 99% = 10 - 0,99 = 9,01]

Most people don't understand expectancy, so that's why we do it that way. To understand expectancy better I'd suggest that you either subscribe to our Market Mastery newsletter or purchase our Money Management Report. Also see the expectancy section of this web site.

When you say that their are only 25% winning trades, please look at the following scenario and tell me if there are 25% winning trades.

Gold Loss
ABC Stores Loss
Golf Shoes Win
Golf Shoes Win
Golf Shoes Loss
Copper Loss

Would you agree that there are only four trades there three losses and one winner that eventually loses. Thus, the winning percentage is 25%.

Yes, that is correct. There are three losing trades -- gold, ABC Stores, and Copper -- and one winning trade -- Golf Shoes. Thus, there are 25% winning trades.

Be looked at the trials in this game, and there is no positive expectancy. Your engineers need to re-program this thing.

I agree that we have some bugs in the program. The biggest bug is that it doesn't force you to let your profits run beyond the second trial of a winning streak. However, you have to take
advantage of those streaks (by letting your profits run) and you can't keep betting it all (which means you have to raise your stop). When you do that there are some big winners. For example, there was a potential 96:1 winner on the long side in one of the last two games (see below). Not one person took advantage of it. In addition, the random generation has not had any really big winning streaks in the past, but there is a good chance of one in the future.

There is only a positive expectancy on the long side when you allow your profits to run. For example, a good strategy after a win might be to risk 80% of the maximum on the second bet of a win streak; 70% of the maximum on the third trial; 50% of the maximum on the fourth trial,; 30 % of the maximum on the fifth trial and 20% thereafter. If the streak, only starts out with a one to one winner, might not want to risk more than 50% on the next trial.

In the last game, there was one trial that started out as a five to one winner. If you had risked a thousand on the first trial and let the whole winnings go for the five winning trials, you would have made $96,000. But let's say you did something like the following:
Trial Risk Amount Won New max. risk
1 $1,000 $5,000 $6,000
2 $5,000 $5,000 $11,000
3 $7,000 $7,000 $18,000
4 $9,000 $9,000 $27,000
5 $8,000 $8,000 $35,000
6 $6,000 ($6,000) $29,000 (Total Gain)

Look what happens, you make $29,000 out of that streak on an initial risk of $1,000. That's almost a 30 to 1 gain. Even if you left your risk at the initial win of $5,000, you would still have made 20:1. However, no one was willing to do that. And, of course, no game has a positive expectancy if you don't play the big marbles. Remember that the core risk on this trade - the risk to your core equity - was never more than $1,000.
During the rest of it, you were just risking open profits.

Some winning trades pay 5:1, others pay 2:1, and others pay 1:1.
What is the distribution of those trades? Also some long trades lose at 5:1, 2:1, and 1:1. What is the distribution of those?

If we've programmed things correctly for the current game (beginning September 21st 1997), the long trades can only win or lose at 1 to 1, with an occasional 2:1 loser on the first trade
only. (There has already been one exception to this on November 7th). The way you'll make a lot of money is to be able to as much as double your capital everyday by riding a winning streak 10 to 15 days. But of course, if you continually double your risk, you'll eventually lose it all. You have to lock in some of your profits, just like you would with a stop order in the
market.

I have made some simulated runs assuming a 25% chance of a winner being long and a 70% chance of a winner continuing the next day. I also assumed that a long wins and loses by 1:1 each day. I'm betting a constant size on each day, and stay with the initial bet during the
whole long trade if it trends. The bet size is $500. I recorded 100 runs and found out on the average one breaks even. To conclude, your rules don't give a positive expectancy on the long side.

The long trade is one trade. Your initial risk might be $500, but you can risk $1,000 on day two, $2,000 on day three, $4,000 on day 3, $8,000 on day four etc. By day 14, you could risk
as much as $446,000. Your core equity risk would still only be $500 since it is the same trade. Please understand that -- if ABC Stores wins for 8 straight days it is still only one trade. You can let profits ride in a trade. That's what is wrong with your calculations. Money management determines how much you risk initially. But money management also controls your position size during the trade. The golden rule of trading is let your profits run.

You need to lock in some of your profits. Otherwise, you'll eventually lose your core equity risk and all your accumulated profits in that trade), but you could theoretically make 16,384
to 1 on the initial risk of a trade that goes 15 days. A trade that goes 15 days is not that probably, but some big winners are.

What if I haven't played for a few days, how do I know if we're in a winning trade or not? And if we are in a winning trade, can I jump into the middle?

There is no way that you can know if we are in a winning trade or not if you've been away for a few days. However, the odds are much greater than the 25% that we will be in one if you've
been away for a while. Yes, you can jump right in. Just realize that if it is already going, it might not last that much longer.

I've been following the winners and number 26 appeared to go short and then go back in on the long side. The rules say that cannot be done and I haven't been able to do it. What gives?

That's a great question and it illustrates how one of the querks in the game, previously given in the instructions, works. When you leave the game for a period of time, the computer does
not process your trade until you return. If the trade is no longer in a winning streak when you return, it will be counted as a loser (even those it would have been a winner had you played the next day. Here's what happened with number 26.

11/06/1997, 0190815,Viper Technologies , 0001120, L, W, 01,
0001120, 0191935,
11/06/1997, 0191935,Viper Technologies , 0002240, L, L, 01,
-002240, 0189695,
11/09/1997, 0189695,Basket Ball Inc , 0001000, L, W, 01, 000
1000, 0190695,

Viper Technologies did not actually have a losing day until 12/7. However, #25 made a trade on 11/6 and then did not return until 11/9. Since the 11/6 trade had not been resolved, it was declared a winner, but the next trade was carried over and lost at double the best size. As a result, it might have looked like #26 really went short on 11/8 in Basket Ball Inc.. But was really happened was that several trading days were skipped.
__________________________________

If you look at what people are doing with money management in this game, it is really atrocious. First, if you want to get into the top 10 in any of the first three games you could probably bet $50 long on every trade and make it. Sometimes there are only 10 profitable people in a game (aside from our staff members and people who are cheating and playing two accounts at one time), and you get into the top ten if you make $500. Most of you want to get into the top ten immediately. Resist that temptation and just follow your discipline. Most of the people in the top 10 end up doing something foolish and then falling behind. Be patient.
Most of you give into the temptation to bet with the probability and you do so big time. Several people risked everything on the first trial and went bankrupt. If you risk more than 5% on the short side on any trial, you risk bankruptcy.


--------------------------------------------------------------------------------

Percentage risk and percentage return do not have a symmetric effect on the portfolio, because the required percentage return to recoup a given loss (in percent) increases geometrically with the size of the loss. Not adjusting the trading size to the portfolio value (by decreasing with greater risk) would lead to an increase of risk at an increasing rate (as expressed by the increasing leverage of a fixed-size trading position).

The process of translating portfolio risk into number of units traded, under given price risk estimates, is shown here using a T-Bond position as an example.

Example A: Proposed LONG position in US T-Bonds at 100
(Unit Face Value US$ 100,000)
Estimated (Accepted) Price Risk: 2%
Allocated Equity to this trade: US$ 1,000,000
Accepted Portfolio Risk on Position: 1.5%
Calculating Accepted Position Risk in absolute US$ = (1,000,000 * 1.5%) = 15,000
Calculating Accepted Per Unit Risk in absolute US$ = (100,000 * 2% ) = 2,000

Accepted size of the trading position = 15,000 / 2,000 = 7.5 units of T-Bonds at face value US$ 100,000 equalling a US$ 750,000 investment. If contract sizes do not permit the exact trade size as calculated, we mostly round down to the lower possible trading size (lower risk), here, a US$ 700,000 investment.

Example B: Actual Market Price is now at 101 (up from 100)
System calculates price risk to be 3% (up from 2%).
Allocated equity now at US$ 800,000 (due to losses in other markets within the portfolio)
Accepted Portfolio Risk unchanged at 1.5%

Calculating Accepted Position Risk in absolute US$ = (800,000 * 1.5%) = 12,000
Calculating Accepted Per Unit Risk in absolute US$ = (101,000 * 3% ) = 3,030

Calculated accepted position size = 12,000 / 3,030 = 3.96 units of T-Bonds (at face value US$ 100,000), rounded up to 4 units, equals accepted position size of US$ 400,000. The system will therefore issue a signal to sell US$ 300,000 worth of T-Bonds in order to adjust the position to changes in the price risk and in the portfolio composition, expressed in the lower portfolio allocation.

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CAPITALIZATION

Capitalization (actually, the lack thereof) is perhaps the most overlooked, misunderstood, and MAIN reason why so many traders starting out fail to achieve their goals. They go into their new business without an adequate supply of a traders lifeblood: CAPITAL. Think of yourself as a general or field marshal. You are fighting a war. If the war goes badly at first and your opening battles all end in defeat, then you must have adequate reserves to carry on the struggle until you emerge victorious. You lose all your soldiers, guess what? YOU LOSE!!! A general can not hope to fight a successful campaign without enough soldiers in his army. A trader can not trade his account properly if financial armageddon rides upon every trade.

YOU MUST BE SUFFICIENTLY CAPITALIZED! IF YOU ARE NOT YOU ARE DOOMED TO FAILURE FROM THE BEGINNING!

THE RULE OF 4.5

What then is sufficient capital to begin trading the S&P/DJ? As a common sense guideline I have developed a simple and straightforward method to determine what your MINIMUM account balance should be to open your account and begin trading. I call this THE RULE OF 4.5. Simply put, you can NOT risk more than 4.5% of your total equity on any single trade. This gives you the advantage of being able to lose 20 times in a row without having your account wiped out. (If you do lose 20 times in a row I want you to do 2 things: 1) Realize that you were not meant to be a trader. 2) Send me your methodology so I can fade it).

All kidding aside, there is something known as LUCK and STREAKS. If you begin trading 2 S&P contracts with $5000 and run into a bad streak (say 4 out of 5 losers for a loss of $2500) at the very start, you are going to seriously think about quiting right away! Thats a 50% drawdown in equity in a very short period of time...maybe even ONE day! It will be very difficult from a psychological standpoint to trade properly after that or have confidence in your abilities. Yet if you were properly capitalized you would have only suffered a %12 drawdown on those S&P contracts, not nice, but you can dig in your heels and continue the fight!
Below is a simple table to determine what your MINIMUM opening account balance should be based upon the Rule of 4.5. The amount of the contracts varies based upon the account balance. Remember: you must always begin with TWO contracts at a minimum, or you do not stand a ghost of a chance to be profitable.

OPENING ACCOUNT EQUITY: 7000 10000 13000 16000
# Dow Jones (DJ) you can trade: 2 3 4 5

OPENING ACCOUNT EQUITY: 20000 30000 40000
# S&P 500 you can trade: 2 3 4


If you stick to the above table, and do not deviate from it (and for goodness sakes, if you do deviate, do so on the side of caution), then you have an excellent chance of making money. If you disregard this advice, you do so at your own peril! THIS MAY WELL BE THE SINGLE MOST IMPORTANT ADVICE I AM GIVING YOU. IF YOU LEARN NOTHING ELSE, THEN LEARN THIS.
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