Reinvesting profits

F

FireWalker

I'm looking for creative ways to reinvest profits.

If you have an edge and a truly random distribution of winners/losers, to maximize profits you should reinvest 20-30% of your total profits. eg. If your account is up $100, calculate how many extra shares/contracts you could trade to risk $20-30. That strategy yields amazing results in theory.

However, I'm working on a system that has an excellent edge, but the distribution of winners/losers is not random. Winners and losers clump together in small streaks of 2 or 3 trades. The system does well in chop and badly during trends. In that case, is it still wise to reinvest that 20-30% at a constant rate?

Here are the basics of the system:
Avg win: 3.0
Avg loss: 0.6
Win rate: 45%
Max DD: 7-10%

Has anyone else had a similar issue? What are some other ways to reinvest profits?
 
Those numbers sound incredible. View it from an asset allocation frame. John Templeton talks about a 3 bucket theory: cash (ie. t-bills and similar), investment (your trading account) and funny money (to do with as you please). Decide on appropriate %'s and every month or every quarter, pull profits from the trading account and disperse them accordingly.
 
Those numbers sound a little too good to be true :) Make sure you're not over-optimized, if you are you will fail even without re-investment
 
Quote from FireWalker:

I'm looking for creative ways to reinvest profits.

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I don't think this is an area where creativity should come into play.
Try something simple and proven.
 
I agree about it sounding too good to be true. But the rules for entry are unbelievably simple and there's not much to optimize. It's 100% candlestick formation based with objective entry rules. (programmed into IB) I am entering the trade using a risk point that's defined intraday and holding for a swing trade which might explain the 5 to 1 R/R. The large risk of .6 is mostly due to overnight gaps against me and includes data from 2000-01 (much more volatile environment). Normally risk is .20-.40 on DIA and I expect average reward to be around 2 points.

I've backtested over the past 3 years with very consistent results and have been watching in realtime. Finally I said to hell with it and went live last week (100 shares). I'm not convinced either (yet), but it has been a good start.

My question though is if you should attempt to formulate a reinvestment plan based on the character of the system. I know how the system behaves and the market conditions that it won't work under. The point is... trade distribution is not entirely random. Three losers in a row increases the chance of the next one being a winner. This is because a market cannot continue in its current state indefinitely. It has to revert at some point. The system is basically anti-volatility and anti-trend. Trend and volatility can't continue to increase forever.

About once a year the system gets 7 or 8 losers in a row (eg. the trades leading up to hysterical market tops/bottoms). But the next trade typically pays for them all.

Consistent profit reinvestment doesn't seem appropriate in this case. That once a year losing streak could wipe out all profits for the year if you reinvested consistently.

Perhaps:
Reinvest after a win
Reinvest after 3 losses
Otherwise trade 2-3% of capital

I'm looking for ways to compound and use the market's money as leverage. Drop the consistent reinvestment rate to 10%?
 
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