Not much changes this week, with the situation pretty much stalled, due to luck of funds and continuous liquidations.
We can at this point terminate here this test, since I think we took all the good we could take and we can draw a few conclusions.
First of all, the result is that we have lost practically all
(93%) the available capital, of which about
171K in commissions and
5K in interests.
This test represents obviously a failure from the $$$ perspective. On the positive side, we have the fact that we
could add a tons of great new concepts and features, and engine refinements which would have been impossible to even conceive if we never experienced the various trading issues and tasted the defeat. In other words, all we have lost in money and, we have gained in the growth of the methodology (concepts) and technology (engine improvements), and therefore somehow "incorporated" as an investment. (In fact, I often wonder how so many platforms out there can actually work effectively, as apparently they never lose
)
So what are the "mistakes" and the things that need to be fixed ?
-
Excessive order size compared with available capital
Apparently, the most obvious reason for this failure was the excessive size of the orders and excessive betting. Also, the initial usage of instruments with relatively large margin requirements (ETFs) did not help. With large orders the
price range where we can trade and recover the hedging orders becomes narrower, and once we finish our funds, we are forced to take losses and enter a spiral from which is hard to get out, with trading expenses and interests continuously running.
-
More "tactical" approach
It's quite easy to run out of money, if one wants to trade under any conditions. It appears that waiting for
suitable conditions on selected instruments, may be quite beneficial as it can save significant drawdown. Clearly, waiting for right "occasions" can be less fun than trading all the time: on the other hand having money tight in a DD situation is not much comfortable either. This would also help containing the
trading expenses (commission/interests, etc.), which do add up inexorably.
- Assume a 100% DD
Concerning the "risk analysis", while obviously people try to comfort themselves looking at the DD of a possible strategy applied to past data, it remains the fact that the use of past data for such activity is mostly delusional. And the situation is often made worse by the fact that often the "strategy" itself is selected based on past data, leading to the most obvious curve fitting. This means that whatever is our belief and our desire to believe that the past could have some statistical significance in order to say something about the future, the truth is that
there is no real way to contain the DD.
Now when it comes to trading, the word
"risk" is no more an abstract concept, because given enough time, the price curve will always find ways to make you hit any level of DD (this is a probability 1 event).
Given that, I think it may be beneficial for an investor that if he has a given maximum level of DD in his mind, to be allocated for a trading venture (say R = 30%), then only a correspondent portion TC of capital C could be traded, and just assume that what is being traded has a 100% risk of being lost. So one would use (traded capital) a portion of capital equal to TC = C * R. The point is that a "modular" approach to allocation can help on the psychological side and also have several practical consequences, because once hitting the margin requirements limits, a number of defensive mechanism, from both the trader and the broker take place which can help to keep the situation under control. Then, one can decide if it's the case to allocate another chunk of money, or possibly wait for more favorable circumstances.
Thank you all for following, and we will have soon more tests on this great site (which btw keeps improving), trying to use what we learned thus far: so the fun will continue.
