Is the current Trade Planning and Trade Management a farce?

[trade4ever2day]

Quote from vladisld:

I think the similar approach to Money Management was described in Vince Ralph's "The Mathematics of Money Management" many years ago.

You are quite right. What the OP describes is probably the oldest approach known for money management and by calling it a "process" does not change this fact.

In Michael Harris' "Profitability and Systematic Trading" the chapter on risk and money management starts by discussing consecutive losers and how they are related to the risk of ruin and drawdown. Then he develops several mathematical equations for the estimation of the starting capital and of position size.

The process he describes is something like that:

1. First determine the required starting capital based on risk percent and maximum amount to lose on each trade.

2. Next determine the proper position size so that the risk percent is maintained for given entry and exit prices.

The above are the first 2 steps out of 6 in total of the author's Risk and Money Management Plan.

I do not agree with Michael Harris' suggestion that new traders should start with 1% risk. I think it should be lower, like 0.5% or even less than that.

The OP made a serious mistake when he specified the starting capital in advance and then decided on his risk percent. These parameters are related to the amount risked on each trade.

Then the OP is wrong to think that others have not considered the problem of consecutive losers. Actually, most authors approach the problem given this fact.

But the OP's most serious mistake is to relate a specific streak of losers to drawdown. It is true that maximum drawdown depends on the max number of consecutive losers but it is more than that. One may get 4 losers in a row, then 1 winner and then 3 more losers in a row. Estimating the drawdown based on expected max consecutive losers is a serious mistake and Michael Harris in his book explains that using equations from probability theory and examples.

I think that if the OP refrains from making arrogant statements about new approaches that actually are very old, then the discussion he started may turn out to be useful, especially to him and maybe to all of us.

 

[Rabbitone]

Quote from Charlton:

An interesting thread - For me risk is at the heart of my business model, so I question your points about position size being a small percent for day traders and larger for swing traders.

I admit that over a very short period risk might be greater as it may be more difficult to establish the nature of the market, for example trends, but after that a longer holding period introduces more risk than a shorter holding period.

So if you have a particular risk profile you wish to adopt within your business model, should you not have smaller position sizes for swing trading and allow larger position sizes for day trading ?

Charlton

Thank you for your question Charlton. Please give me a second to answer your question.

In most authors books position sizing is computed first and then drives the author’s strategy in live trading. There is no thought given by the author whether the money management rules created by the author will work with your strategy or business model. In most books the author uses position sizing to support their specific method of trading. Unless you trade exactly like they do using their position sizing model will not fit your business model.

Let us take an author, in this case Bennett McDowell (I respect his work). In his book “The Art of Trading” he states on page 78 “…proper money management allows you to stay in the game and avoid entirely losing or depleting your capital. …Never risk more than 2% of your trading account…. Note: Advanced traders can benefit from risking more than 2% …. The 2% figure is used here in order to protect you from risk of ruin…” What McDowell is saying is for his ART of trading, using his exact strategy, this is his way of using money management and using his business model this is the way to trade it. In this case he tells you what your business model must be and how to manage it. If this matches you style and method of trading then you got it all from him.

His objectives in money management are the as mine “ …to stay in the game and avoid entirely losing or depleting your capital. “ The question is what does this mean to people who do not trade like McDowell. The position sizing principle you are trying to write into your business model is:

What is the maximum rate (or amount) of funds loss that the trader is willing to accept during a performance period and cumulatively from other performance periods. This is what will drive position sizing.

In the McDowell case the 2% worked fine. In the case of the day trader I mentioned in the last segment the 2% rule was a disaster. When a trader builds their own edge and adopts the touted 2% position size they are taking an enormous risk that it will work. Plus they have no idea at what rate their funds loss may occur with their account.

Now back to your question about position size that was. “So if you have a particular risk profile you wish to adopt within your business model, should you not have smaller position sizes for swing trading and allow larger position sizes for day trading?”

What you are looking for is a general rule of thumb on position sizes. I have never found one after 12 years of research. The reason there are not any direct rules is because of the principle above applies differently to each style of trading with the rules of each trader’s business model to the strategy they are trading.

What you are trying to account for is how fast a trading strategy accumulates losses in a performance period. A swing trading strategy may actually be more efficient and require larger position sizes than the poor performing day trading strategy. That is why you have to gather stats on the strategies you use and develop rules they can operate with in. They will tell you when they are not performing how big a position size is to use.

 

[Rabbitone]

Quote from trader3cnd:

The 2% rule was proposed many years ago by position and trend following traders (I think one of them was Ed Seykota) and ONLY for systems with relatively low drawdown levels. For high frequency intraday trading like the example you gave professional traders do not recommend more than 0.25% risk percent calculated based on real-time net equity value. or even less.

Why don't you read a few good books on the subject before trying to reinvent the wheel and show publicly you do not understand the subject.

You are also unaware of the fact that risk percent is an anti-martingale risk management method and as such the actual amount risked decreases as equity decreases.

More advanced risk management methods calculate the risk percent per trade based on a multiple of ATR and an allowable maximum risk.

I will think about your comments this summer at my lake cottage while I relax in retirement (from the profits of using this method). In fact I will probably burn a few of those books you recommend in my campfire. At least they will serve some good purpose.

 

[Rabbitone]

Quote from infolode:

Excellent topic and assessment. Trade planning and management, like taxes
are critical subjects that few focus on.

infolode

Thank you. I agree with you completely.

 

[psytrade]

See "Quality Money Management" by Kumeiga for more in detail examination of this process.

Especially important given the high correlation of assets nowadays is almost a commentary on the fact that everyone uses the same risk management. ....


Good thread

 

[Rabbitone]

Quote from vladisld:

I think the similar approach to Money Management was described in Vince Ralph's "The Mathematics of Money Management" many years ago.

Yes, Vince Ralph was a giant way ahead of his time in the early 1990s. He had some interesting empirical techniques, especially in the area of fixed fractional trading and time spent in drawdown. I like his ideas very much. However, some the areas he never got around to are:
- How do you build a trading business model to support these mathematical items.
- How do you test a strategy with his math imbedded in it (using today’s technology).
- In a live performance period how do your sift thru this math to define what is going right or wrong with your strategy.
- What live trading procedures are necessary to support your business model.

The money mangers of his time loved his ideas (that is his book "New Money Management"). He only surfaced again in 2007 and I see he has a new book coming this may. Should be an interesting read.

I would be interested in any spins you have from Vince Ralph’s point of view.

 

[Rabbitone]

Quote from alexandermerwe:

You are quite right. What the OP describes is probably the oldest approach known for money management and by calling it a "process" does not change this fact.

In Michael Harris' "Profitability and Systematic Trading" the chapter on risk and money management starts by discussing consecutive losers and how they are related to the risk of ruin and drawdown. Then he develops several mathematical equations for the estimation of the starting capital and of position size.

The process he describes is something like that:

1. First determine the required starting capital based on risk percent and maximum amount to lose on each trade.

2. Next determine the proper position size so that the risk percent is maintained for given entry and exit prices.

The above are the first 2 steps out of 6 in total of the author's Risk and Money Management Plan.

I do not agree with Michael Harris' suggestion that new traders should start with 1% risk. I think it should be lower, like 0.5% or even less than that.

The OP made a serious mistake when he specified the starting capital in advance and then decided on his risk percent. These parameters are related to the amount risked on each trade.

Then the OP is wrong to think that others have not considered the problem of consecutive losers. Actually, most authors approach the problem given this fact.

But the OP's most serious mistake is to relate a specific streak of losers to drawdown. It is true that maximum drawdown depends on the max number of consecutive losers but it is more than that. One may get 4 losers in a row, then 1 winner and then 3 more losers in a row. Estimating the drawdown based on expected max consecutive losers is a serious mistake and Michael Harris in his book explains that using equations from probability theory and examples.

I think that if the OP refrains from making arrogant statements about new approaches that actually are very old, then the discussion he started may turn out to be useful, especially to him and maybe to all of us.

It is now no wonder we learn so little on ET’s forums. I am always amazed at how little leverage we give an idea on these forums. But, apparently for some traders there is no room for alternatives. I ask a hypothetical question to be debated. I show a method I not only researched and built from the ground up that makes profits...

And then there is Vince. For years traders have been badgering Vince to finish what he started in the early 1990s. He never did finish his thoughts. That is why I never used what he has to say. Try applying his principles to an automated trading system in this age. It is very hard to do.

Then there you are, like others, spewing out dogmas of Micheal Harris heresy as though he is a god and we should all worship him. Reminds me of Jim Jones British Guyana. And you say in example after example “Micheal Harris says… you made a serious mistake…after serious mistake.” Tsk tsk… Harris is a different method and mind set. This is what others have been saying repeatedly for months in Trade Management forums about Harris.

I said the example I gave on drawdowns was a “simple” example. It illustrated one idea. That new trader’s pick up on ideas like the 2% position size that are disseminated widely and use it to destroy their trading accounts. ET is “litered” with threads where this happens. I'm trying to show an alternative to prevent this from happening.

Lastly, if you want to tell me my assumptions produce incorrect results and show me in detail how I can correct them. If you want to tell me my logic can be corrected and give concrete examples on how I can improve it. That is fine. I will listen. If you have constructive comments we can go some where with this and will make progress. Great. But spewing forth venom like you did never accomplishes anything constructive and was a serious mistake …

 

[Rabbitone]

Quote from psytrade:

See "Quality Money Management" by Kumeiga for more in detail examination of this process.

Especially important given the high correlation of assets nowadays is almost a commentary on the fact that everyone uses the same risk management. ....


Good thread

Thank you. This is a book I have not read. I will have to get one.

 

[Fractals 'R Us]

What's wrong with Kelly math for position sizing? Any trading system can be characterized by win to loss average ratio and percent of winners, that's all it takes to get the Kelly position size. If those parameters are going to change a lot over time I would suggest that the system is not as systematic as it should be.

People argue that Kelly was dealing with systems with only two outcomes and trading doesn't fit that model. I don't get that. If I place a trade and the instant I get filled I place a bracket order then there are only two outcomes. I have not tested this idea in real time or back testing but it's pretty high on my do-list...

 

[intradaybill]

Quote from Rabbitone:

I'm trying to show an alternative to prevent this from happening.

Rabbitone, I guess some are trying to say that your alternative is already there in the literature. The only thing you actually said is that given the possibility of consecutive losers, 2% is high for intraday traders and it must be lower. I don't think anyone disagrees with this point. In addition I don't think that 2% is a religion. People are free to choose their own risk percent as long as their position size is calculated accordingly.

To be honest I haven't see how your alternative method or process, as you call it, is any different than what people have been discussing in the literature. The only difference I can see up to this point is your claim to reduce risk. However, someone with a trading system with a proven winning bias and good performance record with low drawdown isn't going to do it. I agree with you that newcomers to trading must lower their risk but the methodology doesn't change, only the numbers.

Maybe you should first present a summary version of your methodology and associated equations, as trader2cnd suggested I think, and then we can discuss it. The subject is always current and important.