I was wondering lately, what would the -almost- perfect trading system look like?
-A high % of winners
-A good win-loss ration (like 3-to-1)
-relative drawdowns of less than ..% (let's take 10)
-small % of the account at risk per trade the system makes
Most equity curves of individual trading systems that seem to shoot to the moon usually have large drawdowns: the stable system (high % winners) is usually combined with an aggressive money management strategy (e.g. set number of lots = 50% of my account * leverage ratio / 10.000(0): depending on whether you have a mini account or not). The high % of winners lets you do that but it would be wiser to set your asset allocation % of your AUM (assets under management, or for the non-professional: your total account value) to a 1 or 0.5 times Kelly (you see I'm a really big fan of the Kelly Criterion).
If you don't use a money management stoploss in your trading system of about 2% you should incorporate this in your money management strategy and be really conservative if you're in it for the long haul. I personally think gambling is for people who don't know statistics and/or have a latent urge to become poor, but if you do have the Vegas mentality, just go for it and place number of lots equal to account * leverage ratio / 10.000 (something tells me you'll have a mini account and not a regular account, if you do this).
An example of growth-optimal strategies who allocate money according to the Kelly Criterion should not be confused with exagerated conservativity: it's just the only smart way to trade: let me give an example:
f: what we seek: the % of the account to place in this system
b: the odds received on the winner: 3-to-1
p: probability of winning: let's take 70%: I've seen this more than once
q: probability of losing: 30%
f would in this case be equal to:
f = ((b*p)-q)/b
f = ((3*0.7)-O.3)/3
f = 0.6
60% of the account should be allocated to this trading system to optimize the growth of your account. The gambler will pick 100% because he loves that 70% (and will probably boast about it to everyone who wants to hear), the bonus pater familias type will be overly concerned with the 30% losers and will place 20% of his account in this system. Both of them are wrong!
The fun part of this is that the b,p and q's are dynamic: they change with every trade you make and so should you asset allocation: that's why you need to code it into your EA! The more you win, the more money you want to put in it, and when there's is a "loosing streak": a number of consecutive losses, you want to scale down your exposure to this "moneyburner", or to this temporary "money burning phase" the system goes through. Vice versa, when things go well you want them to go better. If you know that your system's consecutive losses are clustered together (maybe because the EA opens more than 1 lot in the same bar with the same "logic" behind it) you could even anticipate a loosing streak and stop live trading for a while, but I'm not a big fan of doing that: I'm a big fan of coding the Kelly logic into your EA, putting it on a server and letting it do its thing for the next couple of months.
So there you have it: optimize, don't be conservative or a gambling man!
(or woman)!
-A high % of winners
-A good win-loss ration (like 3-to-1)
-relative drawdowns of less than ..% (let's take 10)
-small % of the account at risk per trade the system makes
Most equity curves of individual trading systems that seem to shoot to the moon usually have large drawdowns: the stable system (high % winners) is usually combined with an aggressive money management strategy (e.g. set number of lots = 50% of my account * leverage ratio / 10.000(0): depending on whether you have a mini account or not). The high % of winners lets you do that but it would be wiser to set your asset allocation % of your AUM (assets under management, or for the non-professional: your total account value) to a 1 or 0.5 times Kelly (you see I'm a really big fan of the Kelly Criterion).
If you don't use a money management stoploss in your trading system of about 2% you should incorporate this in your money management strategy and be really conservative if you're in it for the long haul. I personally think gambling is for people who don't know statistics and/or have a latent urge to become poor, but if you do have the Vegas mentality, just go for it and place number of lots equal to account * leverage ratio / 10.000 (something tells me you'll have a mini account and not a regular account, if you do this).
An example of growth-optimal strategies who allocate money according to the Kelly Criterion should not be confused with exagerated conservativity: it's just the only smart way to trade: let me give an example:
f: what we seek: the % of the account to place in this system
b: the odds received on the winner: 3-to-1
p: probability of winning: let's take 70%: I've seen this more than once
q: probability of losing: 30%
f would in this case be equal to:
f = ((b*p)-q)/b
f = ((3*0.7)-O.3)/3
f = 0.6
60% of the account should be allocated to this trading system to optimize the growth of your account. The gambler will pick 100% because he loves that 70% (and will probably boast about it to everyone who wants to hear), the bonus pater familias type will be overly concerned with the 30% losers and will place 20% of his account in this system. Both of them are wrong!
The fun part of this is that the b,p and q's are dynamic: they change with every trade you make and so should you asset allocation: that's why you need to code it into your EA! The more you win, the more money you want to put in it, and when there's is a "loosing streak": a number of consecutive losses, you want to scale down your exposure to this "moneyburner", or to this temporary "money burning phase" the system goes through. Vice versa, when things go well you want them to go better. If you know that your system's consecutive losses are clustered together (maybe because the EA opens more than 1 lot in the same bar with the same "logic" behind it) you could even anticipate a loosing streak and stop live trading for a while, but I'm not a big fan of doing that: I'm a big fan of coding the Kelly logic into your EA, putting it on a server and letting it do its thing for the next couple of months.
So there you have it: optimize, don't be conservative or a gambling man!
(or woman)!
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