This thread starts with a question, and hopefully will end with an answer. Given a $100 account and .1 lot sizes, how would you handle a system that indicates it may, at some unknown time, drop as much as $200 or more before picking back up? The obvious answer seems to be to wait for a typical draw-down of $150+ (in a parallel demo account) and then if you thought you could count on your data telling you that $200 is probably your max draw-down, then you should be good to go (live). Another variation could be to wait for a $100 draw-down (before going live), and then to take the next trade after a loss. If you take a loss on this one, wait for another (demo) loss in addition to the one you just took live. This is in the interest of finding out just how small an account could initially survive the perils of getting off the ground where the granularity (.1 lots) would seem still too risky for it to work. I am interested in starting with $100 and repeatedly bringing the account up to $300 (+200%) about twelve times in a row, just to prove a point. Of course, i'd like to do this in as short a time as possible, without a lot of waiting around for a significant draw-down in my proposed system. One way to shorten the waiting time would be to have several systems where the max draw-down data seems trustworthy enough. That way, it should not be long to get on board (live) with one of the systems.
I think you are right. Best would be to wait for the full maximum drawdown, and then go live. But a much better scenario would be, if you work on your strategies and fix the drawdown. If you havent a very high winrate with your strategie, its almost impossible to grow 100,- bucks. the statistical drawdowns will eat it up, before you can come into profits.
It's $100 dollars, why wait for a month waiting for a drawdown. Just trade it, if you lose, wire more. You'll never hit a home run if you don't swing.
Aren't you the guy who can see 40 years into the future? http://www.elitetrader.com/vb/showthread.php?s=&threadid=239084
I think you are right about finding a system with a high winrate. However, that often (usually?) means using a stop-loss that's larger than the take-profit. I could get a pretty high winrate with a $100 stop loss! I'm currently working on a system that might work with a $21 stop loss, giving me three(?) losses deep into the initial principle. If anybody has a system that works with a smaller stop loss (using .1 lots) please let me know! I suppose it's possible i could take my strategy(s) and somehow reduce the draw-down from say, $200 to $100, using some kind of filter that trades the equity curve. That would be similar to waiting for a full draw-down on the initial system. So i'm currently leaning toward multiple systems, each geared to a $21 stop loss, where i can trust the data that tells me how deep the max draw-down is likely to be, within a margin of error of -3. I should not have to wait long to be able to get in.
No i'm the guy that thought it was believable that someone adequately educated (from the future) could overcome time constraints because of the non-linear (holographic) nature of time. And i thought that some information published in a book may be trade-able due to the believability of the guys story...the guy who says he has talked at length with persons from the future who have transcended personhood (and time).
I hear you. But i'm doing this experiment for accounts where the holder would not understand that principle. The way i see it, i need to rack up some stats that say i'm batting 10 for 10, which would be 1.000 in baseball terms. Even .333 is not good enough. One solution is to have several small holders pool together, enough to get in any time and be able to sustain the inevitable draw-down sooner than later.
I have never seen a system indicate anything re. future drawdowns. But I know one can use the trade distribution out of backtesting (or much better, out of forward testing) to run MC simulations and estimate the probability of any size of drawdown happening in a run of N trades. From that, one can decide on a maximum drawdown he is willing to let the system run into, before pulling the plug. At that point in time, the only thing he knows is this estimated probability of having to pull the plug on the system, in the next N trades (and really, it's just that, an estimated probability). So my first question to you is, what does this $200 drawdown represent (how many trades are you considering to establish it, and what probability are you considering)? And, more importantly, what does a $100 drawdown represent? What makes you feel your system will likely survive a $200 drawdown limit, but not a $100 drawdown limit? The question about the $100 drawdown is very important, because its answer will actually tell you the probability of you starting to trade the system at a current $100 (unrealized) drawdown in the next N trades, should you decide to wait for that event to start trading the system. But there is more to it, than just starting the system ... assuming you start trading it and say double the account in the 1st series of trades, what are you gonna do? keep using the same position size, and allow effectively the max drawdown limit of $200 to play, or increase position size before you hit $400 in account balance & be faced with the exact same question? IMO ... if you have done your homework seriously (backtesting, forward testing, MC sims), you are perfectly equipped to answer your own question & start trading safely. But from your question itself, it seems you still have a bit of prep work to do before going live.
I ought to know what MC means, but you'll have to refresh my memory. Yes, we have backtesting and some forward testing to indicate what size drawdown to expect in a system that works long-term over N trades. Yes, the more N trades the better we can estimate that. Yes i agree its going to come down to an estimated probability. In my case, i would ideally want to start at a drawdown that is 80% or 90% max that i felt i could survive if it were to match a max drawdown from the data i've gathered over N trades (the more the better). The $200 represents the max draw-down in a system i'm currently looking at over 111 trades walking forward on a demo. The system i'm looking at is using 5 lots on a $10,000 demo. So i'm taking the largest drawdown in term of dollar$ and dividing by 50 to scale it to .1 lots. The $100 is the proposed initial account balance (principle), which may be sacred to somebody. It is all the play i have before the account goes bust and someone would lose faith. Talking pretty small potatoes here. But for every $100 initial capital, there may be another $1000 to $10,000 waiting in the wings for some signs of life...for proof of concept. Figure $100 is all the average person is willing to trust in what i'm going to propose. The $100 represents my margin of error, should i start trading at a draw-down of 80% to 90% of what the data indicates may be a maximum draw-down, although that will never be a hard number. I think what i would do is trade .1 lots till the equity curve hits a new high plus some. Then i think i would get out of live trading and wait for another draw-down as before. Rinse and repeat until i've got enough in the account to handle a full max draw-down (plus some) if i continued to trade with .1 lots. I would only go up to .2 lots if i built up enough equity to handle two times the max draw-down estimated so far. Yes i still think i have some prep work. I'd like more certainty about the estimated max draw-down in whatever system(s) i propose to use. I'd like two to four systems whose draw-downs i feel confident will hold at some level. I'll have to pull the plug should i go in at that level and it goes deeper and eats up the $100 margin of error. I might like to assemble a spreadsheet to help make some estimates. If all goes well, i'll go to bat and hit 12 for 12. At that point, finding more capital to work with won't be difficult.