Resouce for serious system developers
- Thread starter BeingProfitable
- Start date
This is something that can be avoided by scaling down the system at a certain point. What I do is estimate the max drawdown over a certain trading period, then scale down the system when that point is hit. Scaling down works great and does a good job keeping a system alive long enough to make a come back in most cases. However the negative side is that the system will ironically start to scale down right as a series of winners strikes. But in my opinion the pros of scaling down beat the cons.
I am not clear what exactly you mean? do you mean
increasing size only after expected MDD is met
he means, you must always reduce your size just before you blow out. that way, you won't blow out.
That's OK for the exceptional guy who can smell a blowout coming. Even in his case, it merely will only lengthen the pain.
It's funny how all these compounding examples always avoid the effect of taxes on the gains...
It is impossible to know when a system is just in a bad drawdown period or if it is going to fail completely. All we can do is make a plan to allow the system to have a fighting chance to make a comeback without hitting critical drawdown (blow out). Once it hits that critical drawdown it is all over.
Here is an example. Say we have a system where the estimated max drawdown is 25 points of xyz future contract. Then say I want the critical drawdown to be 50 points. When the system hits 25 points it starts to scale down slowing the possible rate of loss all the way to 50 points. Once the system hits 50 points it is terminated. Now if I traded 1 contract per 100 points of profit, then my total loss would be 50%. These parameters can be played around with to match risk tolerance. An agressive system might try to scale up every 25 points of profit + margin, a conservitive one would do 75 points plus margin locking in 25 point per contract of profit.
Simulated profits = no real risk and best of all... no taxes baby
