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It is now March and I just received my February statement. Apparently, I've just double my account balance last month, which is the same as saying I made 100% profit last month. I've crashed twice before. I made back the loss one time before, effectively doubling my balance, though in a much longer period. But in one month. That's unreal.
I knew my automated system is on a roll. The average win rate should only be 75%, but this month win rate is more like 90%. I even wanted to reduce position sizing last week because statistically this high win rate should end anytime. I wanted to say that I am the man. But I know the overly favorable gain is probably due temporary market flavor rather than the result of my hard work.
So the real question comes. For March, should I
1. Increase my position sizing.
2. Decrease my position sizing.
3. Stay with the same position sizing for consistency.
4. Just sit out.
I am still deciding between 2 and 3. It is tempting to want to increase my position sizing. I can possibly make more money now that market is in my favor. But I've crashed twice before with gambler's ruin by always go for maximum position sizing. Has temptation taught me anything?
If you made tons of money last month then why are you thinking about sitting this month out? Clearly there's something about the current market that is favorable to your strategy. Trading definitely has an aspect of luck to it and I would say size on up.
Blowing out is a pretty lame thing to do, though. It sounds like your system runs a huge risk of ruin if it has a drawdown period. There are some things to consider:
Did you make 100% just because you didn't hit your system's typical drawdown stat?
Did you make 100% because you got lucky on a couple large winners?
Why was the system so successful this month?
And I don't know about you, but I'm pretty much aware of where my account stands every day and every week that I trade. Why was it a surprise to you that suddenly this system started printing money? I understand that it's automated, but surely you know what it does on a daily basis...
Also, heads up. By talking about huge winners and doubling your account and making millions, you will probably draw attention. I know MLM ran into that in the past. Hell, I'm sure that every successful trader on here has had his/her share of "I'll pay you anything, just tell me quickly how to trade in 15 minutes" emails.
While i have not been algorithmic trading for very long, I find a few alarm bells ringing for me. It basically boils down to, do you understand what happened? For instance (fake for instance), the profit was because your system picked up oil and oil doubled (leveraged obviously) because one oil producing country caught on fire. Do you understand why your system pick up something? Do you understand why that thing made profit? if you don't understand either, then you don't know what your system is doing and you need to breath and figure it out slowly. This is not meant to be rude or discouraging, but if you program a system, you want to know what its doing any why its doing it. I have a feeling you're trading with paper money, and that is a very good thing, really understand why the system is working or failing. What I am really trying to say is, if you're asking such a question, you really need to know your system better. Once you do, you will understand why you made your profit, and then be able to decide if the reason why is sustainable, just a passing trend, or just dumb luck. One month is nothing, 3 years, that's something.
How is it that you have an automated strat that doesn't adjust position size and risk tolerance after a significant increase/decrease in equity? Obviously if your system is risking 1% per trade, for example, and the increase in your equity enables you to add to your position size to maintain the 1% risk, then that's something you should do.
The absolute returns in future can be very high and still not conclusively non random because of the leverage. 100% in 1 month is not unreal or anything impressive even without knowing the risk you took. Even knowing the risk taken isn't sufficient though because there is another factor of risk, let's call it "fragility". In other words, even if you made 100% in 1 month risking only a 2 ticks per trade then without a longer term record we don't know if your method is overly fragile or not. A more fragile method might have a very high rate of return with low risk but then as you elude too if the win rate drops or something then it could give back money just as fast.
Higher returns are normally result of increased volatility. But, the volatility can also work the other way too.
As for what you should do, you should try to understand the cause of the change first. As for increasing position size, if you can increase and decrease the size based on the relevant factors and you think the relevant factors will continue then it could make sense.
You should look at the stability of the win rate over time. You might track it with a rolling window. If it changes randomly, often the case, then you should not change the position size. If you see a serial correlation in win rates, that is losing periods tend to follow winning periods then you may want to monitor for any changes and decrease size if you see that. If it trends overs over time with some long term average then you could use that too to slowly increase size.
