Money management, is this all you need?

Quote from dandxg:

This is really funny, but I have been debating the ideas of MM, game theory, and stats for a good month now. Hopefully my post will add to this thread and not highjack it. I understand the basics of game theory, stats, and have read Tharp's book Financial Freedom.

So let's say you have a method that runs 2-1, 3-1, reward to risk with better than 50% closer to 70%. It's a descretionary method and I determined these stats by looking at 200 trades minimum manually backtesting. If I have 3 losing trades in a row, which my stats show is the max consecutive loss out of 200 do I take the next trade because it should be a winner? Or do I quit as I did because I was at max DD per contract ( I trade e-minins ). Since there is a degree of discretion in the trade set up, I stopped because I felt I was out of tune with the market that day. Do you agree? Tharp says that 200 samples is probably too small. I could have atleast 10 straight losers in 90% win over 100 trades. So which is right, which is better. A backest of many trades over atleast 30 over the last few weeks of give market condition. Look forward to some thoughtful replies. :cool:

Dan
More...


Examine why the trades didn't work out. The answer should illuminate next steps:

If your original analysis was correct (based on the systems entry signals) - stick with the system

If your original analysis was wrong - determine why and fix.

If you're unsure whether the decision to trade was "right" or "wrong" (as defined by your system) -- time to explicitly redefine the system to minimize the discretionary component.

A couple suggestions:

1) Keep a journal. The idea here is to develop a historical database for pattern recognition at a later date sometime in the future. You're winners should have something in common. As well as your losers...


2) Conventional wisdom suggests any system requires a logical rational as its success.

Why does your system work? What market, psychological or fundamental principle does the System exploit?

If theres no other reason than 'it backtests well', time to reevaluate the entire thing.
 
After saying all that, I'm reluctant to admit that a 200 sample size for a quasi discretionary system is too small.

More trades are needed to determine if its you or the system thats mistaken.
 
Thanks for the replies. Hopefully they provide insight to the OP as well. It's nice to have the weekend, time to reflect and ponder.
 
Too many people saying "Tharp said" or "I read a book that" An author does not a profitable system make.

Money management will not make an unprofitable system profitable on a regular basis.

I second the person who said you need an EDGE. Without this, you will never outlast the trading costs and the risks of trading.

This site is long on people who have no clue about what real trading involves and people who claim to be profitable (and talk as if they are), but it is short on people who are serious money-makers and serious traders.
 
Quote from jtnet:

i remember somone a while ago was doing a live test where they would randomly or at pre determined times everyday based on like a simple criteria go long or short a market no matter what it was doing and practice strict money management and stop loss and target rules, i dont know the outcome... i think woody did it
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That really is an excellent exercise to test and hone your trading skills, and something that any skilled trader would gladly demonstrate.
 
Quote from rcanfiel:

Too many people saying "Tharp said" or "I read a book that" An author does not a profitable system make.

Money management will not make an unprofitable system profitable on a regular basis.

I second the person who said you need an EDGE. Without this, you will never outlast the trading costs and the risks of trading.
More...

Reminiscent of all the business and political shows that have a "panel of experts" that almost always consist entirely of clueless journalists.

I couldn't disagree more though about the so called 'edge". If you're pressing the buttons yourself you are a discretionary trader and therefore subject to all of the challenges of real $.

It isn't hard to get someone to the point where they can read a chart properly (which you would call an edge). But that's not where the problems lie (or begin), nor is it where you're going to find an "edge".
 
Quote from dandxg:

This is really funny, but I have been debating the ideas of MM, game theory, and stats for a good month now. Hopefully my post will add to this thread and not highjack it. I understand the basics of game theory, stats, and have read Tharp's book Financial Freedom.

So let's say you have a method that runs 2-1, 3-1, reward to risk with better than 50% closer to 70%. It's a descretionary method and I determined these stats by looking at 200 trades minimum manually backtesting. If I have 3 losing trades in a row, which my stats show is the max consecutive loss out of 200 do I take the next trade because it should be a winner? Or do I quit as I did because I was at max DD per contract ( I trade e-minins ). Since there is a degree of discretion in the trade set up, I stopped because I felt I was out of tune with the market that day. Do you agree? Tharp says that 200 samples is probably too small. I could have atleast 10 straight losers in 90% win over 100 trades. So which is right, which is better. A backest of many trades over atleast 30 over the last few weeks of give market condition. Look forward to some thoughful replies. :cool:

Dan
More...

I think you find a good edge through your own observation of market tendencies, rather than data mining for an edge. There should be a good reasons why the edge exists, relating to trader psychology. The testing part is to give you some verification that your principles work in practice and to see how the trades would have worked out if you had placed them in real time.

A good general rule of thumb in sample sizes is as follows:

*Less than 30 observations is a small sample and may be unrepresentative
*Between 30 and 100 observations and your sample is likely to become increasingly representative of the population provided it chosen randomly
*100+ you can be fairly confident your sample is large enough for inferences to be made about the population provided the observations are chosen randomly

Having said that it also depends on the nature of the edge. For some edges it is very difficult to get a significant number of samples. Also, if your edge holds up across different timeframes and markets it is more robust.

Once you have established that an edge exists you just have to get in there and place a few trades. See how it works out for you.
 
Quote from rcanfiel:

I second the person who said you need an EDGE. Without this, you will never outlast the trading costs and the risks of trading.
More...

Good trading begins and ends with your edge.

Money management and position sizing can (rather quickly) take you from being a good trader to a greater trader.

This process reinforces what maxpi describes as the psychology of "will to hold the position", none less than Jesse Livermore himself said that "the difficulty is in the sitting and waiting".

At the end of this rainbow, is the satisfaction of having accomplished the goal of being a successful trader. Certainly a task worth undertaking, that few can master and no one can take away from you.

Good trading,

Jimmy Jam
 
I have opinion about this so called edge.

Finding an edge is not hard.
The problem is that you find this edge from the past data and you don't know how long it will last. This is what happened to me (I know, I am still newbie in trading). I found what looked like a very good edge: it was intraday trade of opening range breakout. I tested it back for about two years of data, that is about 500 trading days, which meant about 700 trades. Now this would be statistically significant sample, right?
So I started trading with real money, at the start it looked good, but I still didn't increase my position size (the profit cushion wasn't that great). Six months of trading resulted in breakeven, one month you're in profit, then you're in loss, etc. Then bam slam and I lost 45% of my equity (lucky me it was not a big account - just for learning purposes). What happened? I was prepared to sustain twice as big drawdown as the backtest of two years showed. But what happened is that even bigger drawdown kicked in and you wake up to realize that your "edge" is just a dream :D
 
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