Monte Carlo w/ your money management

EDIT) The point of this thread is that you can combine extremely risky MM w/ moderate risk MM, and break even in off years, or make insane profits in "on" years. This doesn't mean you turn a losing system into a winning system. It just demonstrates that the same exact entries/exits can produce wildly different outcomes.... which can be possibly be used to a trader's advantage.

Post 20 best sums up the idea

I've spent hundreds of hours analyzing the "best" money management approaches.

i'd like to share a little bit of my hard work with you.

aside from "the market is random" argument, your account balance will vary wildly depending on how you position size your trades. case and point: the identical signals of your system can make you 1000s of a percent ROI, or put you in the red, depending on your MM.

it's no wonder MM is such a hot topic.

the key questions to ask yourself:

1) am i trying to compound the living crap out of my account, and get lucky for a few months?

2) am i guarding against wiping out my initial risk capital (dollars that came out of your pocket to fund the account)

here are a few graphs:

here is the raw "pip performance" for 2003 w/ my EA.... about 1800 green pips.

it shows the system's gains in terms of pips, where each pip is worth a buck.

here is the same system, where i ramp up the risk after reaching a 25% gain on the account

result: breakeven, even w/ all those green pips

the same system again, after slowly increasing risk w/ each new high

result: +600%

my point is, some years the aggressive system hits grand slams.... but in this example, the drawdowns forced me back to breakeven.

i'm just trying to give you food for thought here..... some years a MM will do amazing things, others it will break even or put you in the red.

Excellent topic, and I'll be glad to check out your graphs and hear more from you so Thanks!

I'm sure you've noticed that, as time progresses and you gain more experience, you've moved from 1 to 2 just like I have. As soon as possible, get into free trades- that's one of the most important things I can say from my experience. Free trades are better as a small gain than as a loss, whether it be small or large.

When you say that you've ramped up the risks, does that include on all trades taken?

IMO, I can understand and justifying putting added weight into a position that has greater probabilities than others- but I can't justify putting more risk into ALL of my trades. Is there a set way that you determined this risk or was it just on an "every trade" basis? Thanks for any more input!

hi

i call myself a "House money trader" because i am a firm believing in betting more w/ house money than with my own risk capital.

i should post an example of how ramping up the risk pays off HUGE in some years... but am too lazy to create the chart now.

the bottom line: i don't try to quantify the probability that my trade will be successful or not. i look at them all the same.

the basis for ramping risk up is simply to push my agenda of being riskier w/ money that wasn't mine to start with. i am extra careful w/ my own money, because once it goes, there's no guarantee it will come back.

Hello Tdion et al.,
Speaking of mm and risk, one issue that's been bothering me lately is
increasing the leverage vs. lot size on a profitable setup;

Are these two playing the same? Never had experience with leverage above 200:1.

the real stimulation you experience when looking at your money management is based on taking profits.

high risk trading will inevitably crash the account. i am wrestling with pulling 90% of my profit off the table when i've reached 1000% gain, and starting over again with the remaining 10%.

it's interesting to look at discrete management too.... where you risk X percent PER MONTH if you are down.... in other words, you only risk more additional funds from your own pocket if you are in a drawdown.

these are the types of things i mull over when i assess risk.

try using kelly's formula to optimize lot size, it most probably will give you the best result

nah.... i don't believe much in expectancy of trade setups...

a setup can win 10 times in a row one year, and lose 10 times in a row the next...

i threw out conventional money management 2 years ago.

oops forgot to thank you for your input...

slide,

leverage reduces the margin requirement in your account, leaving more $$$ available for risk. for me, higher leverage is better, but that's just my own trading style.

lower leverage will force a margin call sooner....

You are taking the piss aren't you?
The Kelly formula will lead to risk sizes that will kill you real quick on string of losers.

Anyway, back to the topic of the thread, check out this http://hquotes.com/tradehard/simulator.html, it's an eye opener.

right on track with your link craig:

there was a great post by philmcrew awhile back that talked about the order the trades occur

his example showed 100 trades on a graph.... he took the same 100 trades and put them in random order.... the drawdown was more severe than the first graph

w/ monte carlo, you can mix the same 100 trades up over and over, and see different drawdown/runup periods...

i try to consider this... that even if there is a certain expectancy exists (which i don't believe in) the order of the trades over X time period will change your drawdown/runup sizes

well regardless of whether this thread makes it's way to the scrap heap or not, the content is very interesting

what i have shown is that the exact same set of signals can have vastly different performances, based on a combination of several MMs

the bottom line is that when you can seperate your money into several accounts, and trade the exact same signals with different position sizing rules, you can be extremely risky but still come out ahead in off years.

This thread is extremely enlightening. Very interesting and makes you look at mm a different way.

Thanks for the hard work and effort you put into this topic. I would like to see a lot more and have this subject looked at by all.

Kelly's good if you KNOW your expectation. If you guess wrong, it'll ruin you.

Great topic, very worthy of discussion, IMHO. Many thanks for sharing.

I agree that position size has a huge effect on bottom line. However, look at the equity curves in the early posts, and you’ll notice that the peaks and the valleys occur in the same places (for the obvious reason that they’re the same profits and losses, caused by the same entries and exits). The MM (position size) weights the size of the peaks and valleys. If a winning trade happens to coincide with a larger position size, the peak is a large one; and vice versa. Hence it ultimately depends on how the wins and losses end up aligning themselves with the bet sizes. So unless we know in advance that the probability of the next trade being a winner is higher than usual, there’s no mathematical justification for increasing (or decreasing) the stakes.

The implied logic in post #4 appears to make sense, but if, having increased the bet size (as a percentage of account equity) at the RHS of the curve, the system encounters a bad run, then the increased bet size will work against it. If I understand correctly, what this is basically counting on is the fact that, as the equity makes new highs, the method is further vindicated. But assuming the entry/exit algorithm remains unchanged, that’s not really the case.

If we’re merely attempting to use MM to capitalize on luck, then we have no real edge. We are basically buying a lottery ticket.

Monte Carlo ultimately demonstrates that overall expectancy remains unchanged, no matter which order the wins and losses occur. If it was feasible to sum up the results of every possible permutation, the net effect would be the same as simply taking an unweighted average. Since, over a vast number of trades, taking every permutation into consideration is unworkable, Monte Carlo acts as a proxy, by running a simulation.

Here’s the supreme irony: with a negative expectancy method, we will inevitably proceed to ruin, given enough time; and the larger the average bet size, the faster it will occur (at least, mathematically). With a positive expectancy method, we can still experience ruin, if our bet size isn’t conservative enough to allow us to ride out the worst drawdown along the way. See the illustration in my recent graph here: http://www.forexfactory.com/showthread.php?p=2072611 (with additional explanation a couple of posts later)

The Kelly formula gives the optimum bet size mathematically, but it doesn’t give ruin the special significance that it warrants, for an activity such as trading.

BTW, there’s a very comprehensive thread on MM here: http://www.forexfactory.com/showthread.php?t=34484

David

[EDIT]
Perhaps I misunderstood slightly. But I stand by everything that I said, for whatever that's worth.

Post #3 is actually akin to an anti-Martingale strategy. Bet size is being increased when the account equity reached a certain level. From the green histogram, it appears that it's also being reduced (accordingly) when the account falls. So what is happening is that the system's ability to recover, following a larger size loss(es), is being hampered by the lower position size. Hence it returns to somewhere around breakeven following a series of losses, and must work harder to recover (and then progress). IMHO this illustrates a drawback of inconsistent position sizing.

In post #4, no decrease in position size takes place, allowing a full opportunity for recovery.

Even after reading Ryan Jones’ justification for fixed ratio, I've yet to see conclusive evidence of an MM method that out-performs a simple, fixed fractional approach. I'd be delighted to be convinced otherwise, because I'm definitely on the lookout for any way that I can improve my bottom line.

BTW, attached to this post (here: http://www.forexfactory.com/showthread.php?p=1861870) is an XLS that hopefully demonstrates why sophisticated betting systems offer no improvement, expectancy-wise, over flat betting.

i don't think i've done a good job of explaining the idea

obviously this thread has nothing to do with how to obtain green pips... the focus is on maximizing those green pips when (or if) they come....

the first graph is profit/loss in terms of pips.

the second graph is elevating the risk once a certain percent has been achieved (the "house money" as i like to call it...)

the third graph is a slow and steady increase in risk as the account grows




here's the point of the entire thread: trade 1/2 the account as demonstrated with the first MM and 1/2 the account as demonstrated w/ the second... the end result would have been +300% on the year (1/2 of 600%)....

there are years when the 1st MM would have made several thousand percent for me.... so it is definitely worth considering trading that way, even with a small percentage of my account.... and supposing i did risk 1/2 my account, +300% would look very small compared to a few thousand %

to do what i am saying, you'd need two different accounts, completely isolated from one another