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The key is geometric growth enabled by low draw downs
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The key is geometric growth enabled by low draw downs

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The key is geometric growth enabled by low draw downs

I am a firm believer that a good system with good probabilities is extremely important. But the big profits come only if your system can grow geometrically. There are many ways to profit in the market. Many paths you can take to profit. But the real bread and butter happens when you can manage your money in a way that allows you to scale your position over time.

I believe it takes a measurable mechanical system to be able to do this effectively. You need to have a consistent results that you can measure. The system must have relatively low draw downs. There are strategies that are profitable but have deep draw downs. Good money management can protect you when you do have large draw downs. But if you consistently have large draw downs it kills geometric growth potential. I will give up a certain amount of profit to keep my draw downs low because I know I can scale. Really I just need fairly average returns to scale into geometric growth if draw downs are under control.

There is no" holy grail" strategy in trading imo. The nearest thing to a grail is excellent money management. That is what makes or breaks you. That is what allows you enter into an account that geometrically grows over time.

Honestly, I am not looking to just make a living and survive in trading. I am looking for geometric growth. In 10 years I want to be sitting on a boat. There are a lot of money management techniques that work quite well each with strengths and weaknesses. I find the Fixed Ratio method works the best for me. Great book on the subject is "Ryan Jones - The Trading Game". I read this book several years ago and applied it to my trading and has made a huge difference.

Here is an example of how this can scale

Using a delta of $1000 meaning every $1000 in gains on a per contract basis you go up 1 contract. At 2 contracts need profit of $2000 to go to 3 contracts at 3 contracts profit of 3k to go to 4 contracts and so on and so on. Essentially every year you would need to produce $12,000 in profits on 1 contract. In 24 months you would be trading 25 contracts and account would be worth around $310,000. So 24k in profits on 1 contract produced over $310k over 2 years by scaling geometrically into more contracts. This is an aggressive example just to get my point across. If have draw downs greater than $1000 against 1 contract will slow this down.

So my key in getting an account to grow in a geometric fashion is to identify a reasonably profitable setup, look at my draw downs, then find my delta. I try to set my delta a little more than where my stats show my maximum draw down. You can be more aggressive or more conservative. More conservative for me would be to set my delta at twice my expected draw down. I have put this into practice for several years and it has worked really well.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."

Last edited by liquidcci; June 21st, 2011 at 08:39 PM.
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  #3 (permalink)
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FYI I use Market System Analyzer for position sizing. It may have already been mentioned on this forum.

It has fixed ratio plus many other methods. It is interesting to see how different methods affect your scale. It really is a very powerful program and has been worth every penny for me. If you use NT can just export out your backtest trades or trades you actually took and then do analysis. I am sure any program that allows CSV export out it will work with it. I think it also takes other file formats. As a trader this or a program like it is a must have in your arsenal. It cost me the profit of about 1 trade on one contract so cheap by trading program standards. Has paid for itself many times over.

Money management software :: Market System Analyzer

If anyone uses a program like this one I would love to know about it.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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This gets into the very basic nature of "strategy development"

When you approach the entire venture as a systems engineering endeavor, it becomes much easier to optimize/maximize.

From an ATS standpoint, fixed position strategies have the advantage of being simple....somewhat more "consistent" and repeatable, but more importantly, they feature a lower element of second and third order risk. You can run basic bracket orders without IOG and with most trade servers, your orders are maintained even when you lose positive connection (a plus for certain strategies that are in the market a high % of the time).

I've found that optimizing fixed position strategies can be very useful.

However, I've also found that employing sophisticated money management techniques can really multiply your profits. In the modern computing age, we can do things that weren't feasible 20 years ago.

Tools like trailing stops, for instance, can greatly modify your losers. When you take that concept further, the use of concepts like parabolic and multi-tiered stops REALLY start to make strategies that otherwise seemed fruitless, very promising.

I'll tie this in by agreeing with you. The holy grail, would be a trading system that is profitable, with minimal drawdown and CONSISTENT over time. (in essence, it makes money in most market conditions).

Albert Einstein stated that the most powerful force in the universe is exponential compounding. The idea that over time, even a small increase, when perpetuated, becomes very formidable long term.

In order for this concept to have value in trading, your system must either have a large return rate, or be very consistent over longer periods of time. (for smaller returns).

I've found that most traders give up on the second option....it's difficult to craft a strategy that performs in most markets. That is unless you use basic technical drivers like volume and price action. Volume and price action strategies are much more resistant to changing markets. That is to say, they're nearly fool proof, as the worst case scenario for a profitable trade approach is that the market goes cold and you get less entries (but at least you're not LOSING money). Indicator based systems tend to be higher order and are more succeptible to fundamental market changes. Basic volume and price action strategies are in short words....basic.

But like I said, I think a LOT of traders give up on those basic types of strategies, because without sophisticated money managment techniques, they seem like a dead end.

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10% - 20% net return per day (average range)
90% reinvestment rate
10% withdrawal to pay bills
93% accuracy to an empirically valid target (minimum)
Less than 10% back-to-back signal failure per block of 20 trades
50:1 to 100:1 leverage (depends on system health rating)
Relentless trade execution

In my experience, few things trump accuracy to an historically relevant and current specified target. Equally as important is an understanding of the difference between Money Management Strategy -vs- Money Management Model. The MMM drives the MMS and the MMS drives the trade Signal. Thus, good "money management" is a good "trade signal."

One of the keys to success that I have found, is to work the problem backwards. Most traders start with finding a trade signal and then finding a money management strategy, with no money management model in existence. This approach tends to have severe psychological effects on the trader as well as adverse side effects on the trading account balance. Because there is no fiscal purpose to trading, other than to "make money," the trader ends up floating from signal to signal, indicator to indicator, never really using any of them long enough to understand their true purpose and truest potential. Most every trade signal or indicator on the planet will "make money." So, why are so many still failing to do so? The answer can be found in the Money Management Model.

The Model sets the Fiscal Policy. It establishes the framework for the accomplishment of a specific Fiscal Goal. Without that framework, its hard (next to impossible) to know whether or not the equity curve is on, or off course. The Model contains the reason why one has entered the business of trading in the first place. Would opening up a Barber Shop or buying a new McDonald's franchise, get the individual to the same place from a fiscal standpoint? These are the kinds of questions that the trader (before becoming one) needs to settle in their own mind. Once the individual has a fiscal measure (how much money is needed or desired in total) determined, the building of the Money Management Model can commence in earnest.

Next, comes the Money Management Strategy and its sole purpose for existing is to keep the revenue flowing into the trader's account, such that the fiscal target set forth in the Money Management Model is realized in full and on schedule. The Strategy deployed will be based on the schedule requirement of the Model. If the Model is set for reaching X dollars by Y date, then the Strategy will need to conform to that time-line. This will determine the type and kind of Money Management Strategy that can and should be used, to keep the equity curve in-line with the requirements of the Model. But, there is more - so much more.

Taking this approach, the trader can then use the requirements of the Strategy, to determine the path used to locate the indicators and signals that have the necessary capacity to yield the revenue that keeps the Model on course. This is very subtle, yet very powerful concept. If the Model calls for X dollars and the Strategy is capable of producing it in Y time, but the indicators and signals used are only capable of producing X-n, then Y time will never be realized. This is what give many traders that feeling of "spinning their wheels" getting nowhere fast. But, if the indicators and signals are optimized to the needs of the Strategy, then the Model remains on course and on time.

When the goal drives the research, it draws the traders brain like a hidden magnet, to only those areas of indicator, signal and trade strategy ideas that fit the Model. What's the point in trading an indicator, signal or methodology that can't take you home. And, how can one know what home looks like unless they've Modeled it, first. Does the Architect grab the tools (indicators, signals and methodologies) first and then attempt to build a House. We would fire that Architect on site. Better yet, we would never even consider hiring such an Architect to begin with.

Model, first. Build tools, second.

I only wish I had someone to tell me that years ago, when I first start in the business.

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That looks like pretty interesting software. It is rather absurd that every platform does not have an entire section devoted to MM. I believe trading blox has something like that.
If you want to learn R, the R community has put together a package based on Ralph Vince latest ideas.
The Leverage Space Trading Model | (R news & tutorials)

I don't get the point of ranking system parts though. It is like there is no point if this were a car forum debating if the spark plugs are more important than the oil to an engine. If one person is trying to drive fast with no oil and one with no spark plugs, both are complete fools.

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Here is a nice old article trying to make some of Vince ideas easier to digest.

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The key is geometric growth enabled by low draw downs-securef.pdf  
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"Site" should be spelled "sight," etc. Same for all other typos that I can't get to inside my posts, etc., etc., etc.

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liquidcci View Post
I find the Fixed Ratio method works the best for me. Great book on the subject is "Ryan Jones - The Trading Game". I read this book several years ago and applied it to my trading and has made a huge difference.

Here is an example of how this can scale

Using a delta of $1000 meaning every $1000 in gains on a per contract basis you go up 1 contract. At 2 contracts need profit of $2000 to go to 3 contracts at 3 contracts profit of 3k to go to 4 contracts and so on and so on. Essentially every year you would need to produce $12,000 in profits on 1 contract. In 24 months you would be trading 25 contracts and account would be worth around $310,000. So 24k in profits on 1 contract produced over $310k over 2 years by scaling geometrically into more contracts. This is an aggressive example just to get my point across. If have draw downs greater than $1000 against 1 contract will slow this down.

Thanks for the trading game suggestion. I got it from my local library today. Going to have to read it more.
One thing I think he misses with Ralph Vince optimal F is in the example above you may well be over optimal F with 4 contracts on with 4k.

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dutchbookmaker View Post
Thanks for the trading game suggestion. I got it from my local library today. Going to have to read it more.
One thing I think he misses with Ralph Vince optimal F is in the example above you may well be over optimal F with 4 contracts on with 4k.

dutch sure thing. I modify it on the start. If my delta was set to 1k it would be to thin to start in my opinion. The biggest strength of fixed ratio is as you add contracts the amount per contract gets larger and larger. Idea being as you trade bigger you need more cushion. However, imo it is weaker on the front end. So what I do is spot my account with a start amount. I may do something like start with 10k on 1 contract and then increase per 1k. What this does is give chance for delta to work its magic while protecting my front end from draw downs. Not exactly what I do as per market per strategy things change but kind of how I approach it.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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