Trading least risk while trading at your worst

Well I've just come out of two VERY nasty days of trading. Had 5 losses in one week (not that the weeks even finished) which is a first for me.

Howz my account? Dented oh yes, but I'm no fool. my risk is relatively low per trade so all I've lost is this months profit. Last months profit and my account is still intact.

Earnt a little of this months profit back this morning too.

I'm quite pleased my system has been able to handle a rough patch like this.

However I'm always interested in improvement.

Paul Tudor Jones in the book, Market Wizards, explains that when his systems are trading at their worst, he also wants to trade with the least risk.

This sounds effective and simple, but when you think about it it's very complex.

When do you scale down your trading size? At what point do you scale it up again?

One of the things that catches my attention is say I have two losers and decide to scale down my risk, when I start getting winners again, I'll only be trading with a small position! My losers were big and now my winners are small. I've basically taken the losses then missed out on a big part of the equity 'recovery'.

Any thoughts?

you've realized that you can't game the money-management aspect to gain an edge.

you either have an edge or you don't. scaling up and down the position sizing doesn't so much affect whether you will make money or not, it's more to do with smoothing the overall equity curve and probably even more relevant to handicapping a system or strategy that is underperforming, and then letting it run wild when conditions are again favorable. doing this is also good for the mind i bet and stress levels.

if you do it wrong then you are going to handicap yourself overall instead of optimizing returns. but then again, if you randomly alter the position size (as opposed to strategically do it) then overall it should all balance itself out in the wash and the edge should push towards profit.

Statistical edge and the kelly ratio.

If you believe (and apparently you do) that markets behave in cycles, and that there are periods when your trading system works (e.g. trending markets, ranging markets), it is logical to reduce risk when the market isn't in your favor. Interestingly, this property of markets is the main reason why the Kelly's optimal F is useless in trading - my experience is also that winners and losers tend to come in waves.

Try to calculate your edge, using some sort of exponentially weighted moving average, so that the most recent trades that were taken under the current market conditions weigh the heaviest.

Or, take the easy road, and make a rule of thumb. Assume you normally trade at 2% risk. Reduce this to for example 1.5% after, say, 3 losses. Keep reducing risk as you keep losing. To avoid lagging behind too much, I'd increase risk again fairly quickly (e.g. moving back to 2% again after 2 wins). Of course, the rule of thumbs you might want to use depend on your personal preference.

And: IF markets behave in cycles, AND a trading system performs well under certain market conditions, and bad under other conditions, THEN this type of money management can provide an edge.

If it were me:

I would take a look at those five trades and look for some commonality. If you can find commonality then you can modify your rules to prevent taking these trades to begin with. Otherwise you are going to develop a cycle where you loose 2 trades, adjust your risk % down, win a trade, adjust it up, then lose again.

Just my 2 cents, Best of luck

Jacob

As of now recovered over half the losses.

The reason for the losses was because while the market was moving up, it was chopping the downside. Everytime I went in I would get stopped, if I reversed (given opposing conditions) it would resume the trend.

hard to tell when this will occur again, if I could forecast a choppy market I'd already be a millionaire.

even to detect it early is insufficient as I don't know if the choppiness will continue