Backtesting money management (illustration included)

[RobinHood]

I'm currently working on backtesting different money management strategies over some of my discretionary trading accounts.

To those that trade professionally, have you found that it is best just to keep your money management simple (e.g. 1% fixed fractional risk) or do you get creative with not only increasing exposure(pyramiding) but decreasing exposure based on your equity trend? What would you recommend I learn in order to optimize my money management (books etc)?

I'm concerned that I could easily overdo this and optimize my money management too much.

Here is an example of what can be done with some money management optimization.

This is my experimental discretionary account with and without money management optimization (reason for so many "contracts" is because it is CFD account):


NORMAL, FIXED FRACTIONAL.

http://bp1.blogger.com/_znF9pQ5oe98/SEKcsv6j2tI/AAAAAAAAAFg/1y2Cm-xhSpU/s1600-h/unoptimized.PNG




OPTIMIZED. OPTIMAL F POSITION SIZING, Equity crosses 3-trade M.A causes 90% reduction in trade volume(just to illustrate)

http://bp2.blogger.com/_znF9pQ5oe98/SEKc0sNs5nI/AAAAAAAAAFo/vvhnsGtJJjk/s1600-h/optimized.PNG


At what point am I just getting arbitrary? because I can see *some* validity in using an M.A on your own equity curve. If your losing and the environment is the same this could be a signal that something is wrong with your trading etc

 

[tech/a]

Well your certainly looking at the right end of town!

Firstly there are all sorts of position sizing techniques the easiest and best I have found is F/F.

The basics of good M/M are cutting losers and letting winners run.
This is a fine balance one which every trader constantly tinkers with to extract the best return (more so for me than stock selection!).
Pyramid hell yes and there are many ways this can be done--the best way?--Will depend on timeframe and risk. Compounding profit/leverage sure all of the above.
Equity curve trading---The prblem here is you never know when you'll get an FLX trade.If you've turned off your buying due to a cross below your equity curve then during that period your method may well fire off a buy---trade not taken due to cross--trade never entered and there for missed.

The impact of continuing to trade can be seen in the Techtrader exercise which--(I stopped long term trading in July last year) has now made spectacular new highs in its equity curve---It did and is trading FLX---(so am I but shorter term)

Best books.
Get to Radges seminar---seriously the best---clearest on the topic you'll find.
If thats impossible get his DVD on the seminar.

 

[Synergy]

Without knowing too much about it, I'd say the small amount of data and small groups of winners is probably distorting the truth. If the good sized winners had been spaced evenly throughout the data it'd be a very different picture. I know the idea is to bet more once you have a win, but because you have so few winners, i think the plan needs to be safety 1st.

On a side note, the 2 charts are a little deceptive, the optimised system looks to have a lower drawdown, but actually has a 31% drawdown compared to 21%.

 

[RobinHood]

Tech/a what is the Techtrader exercise? and FLX?

 

[tech/a]

Tech/a what is the Techtrader exercise? and FLX?

Its on the chartist site.(Radges site).
Its a longterm trading system which has been traded live there for 5 yrs.--Still is.
FLX is one of the stocks which has run for the method.
Over the years we have had many do similar.

It was designed years ago to attempt to demonstrate that non professional traders good develope and trade a methodology profitably.

After 5 yrs seems we---you-- anyone can.
Provided you know why and how to skew the numbers in your favor,which the exercise obviously does.

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