Sorry boys, that answer is a non-starter. Close though You add another strategy to capture the failure trades from the first strat. Trading a specific strategy, then adding another is a form of diversification. Properly executed the additional strategy lowers drawdown and increases profits. The "tradeoff" is the extra work to find a system that complements your primary, and can be executed in real time. As I recall Alan, you used to (or maybe still do) execute several systems concurrently via Tradestation. Good luck everybody. Steve
Good point steve, but i cant honestly say that one way is better than the other. Just like knowing when to vary the size has risks(having a losing trade after you up the size or a winning trade after you down the size) diversifying with another strategy that captures the failed trades of the first will also have risks(the times when the two strategies are correlated). Now quantifying those risks is a science on its own merit. LOL Anyway, not an expert, just throwing out my opinion.
As for institutions, there are more discretionary guys than systematic. I mention guys because: 1. The term trader is a very broad term. 2. There are a lot of quants. Most end up as analysts, some develop "grey box" models, very few can develop "black box" models. 3. All the grey-models developed are executed by trade desk clerks. They add executionary and non-quantitative values to the "grey box". Clerks call themselves traders. 4. There are dealers who uses discretion. They make markets and etc., they don't act in the same way as a clerk. Different size and fundamentals. 5. There are props in large institutions. They vary in style like the public/retail, but mostly dicretionary (uses technical analysis and a more "inside" fundamentals... 95% or so...). Usually, a systematic trader doesn't get into this category... It becomes more like "internal hedge fund" role. Finally, the demographic of the "style" is pretty much the same as the public or retail. It's just that, you need a strong crudential behind you to actually become a "trader" for an institution, unlike retail where all you need is some capital or a bit of luck. It's a bit obvious that the institutional traders are more sophisticated than "MOST" retail, due to the selection process. Not all though... at least you won't see all the immature questions and replies, you see in ET. As for system trading, it becomes a bit different. Like I mention above, the quants are usually too "academic" just running numbers and sticking data inside some formula. In a sense, they are ignoring the market... maybe a better way to mention this is they are obsessed with something different. In reverse, the system developers in retail are too immature. I've seen a lot of good ideas (thanks for posting them) which isn't applied and gone to waste. It's a matter of sophistication from knowledge and experience. Another aspect is the competition surrounding you that gives you the drive. Eventually, we're all fighting for a larger portion of the pot. Most are proven traders or bunch of Ph.D.s... it becomes interesting if you're in it, watching money and pride all tangled up... Oh... there's a high turnover...
1.As mentioned before, add a complimentary strategy. ->No tradeoff. 2.Increase your capital base and diversify your trading within the strategy. ->No tradeoff. 3.Use dynamic leverage. ->Hurts your Sharpe.
I've been asked this before. The correct answer is to increase the risk per-trade and reduce the notional account size. By doing so, you move further out on the risk/reward curve and get closer to optimal f. Ex. risk 1.5% of 300k and put the 700k into paper. Drawdown of 10% on 1 mill. is 100,000 or 1/3 of the 300k trading account. The tradeoff is the drawdown is more likely to be closer to the 5% and 10% areas than it would if you stuck with the .5% risk per-trade. Use monte carlo tests to figure out the trading account size needed for the drawdown levels requested. The clue is the trading method only needs 50k to trade. Everything else is extra and can be used to do this kind of tradeoff.
<i>Trading a specific strategy, then adding another is a form of diversification and properly executed this tends to both lower drawdown and increase profits. The "tradeoff" is the extra work to find a system that complements your primary, and can be executed in real time.</i> I have seen three different, non-correlated mechanical systems in a basket all hit max historical drawdowns within same period of time. For example, diversification does not help if one is short stocks, bonds and gold futures right now. Weak analogy, but you get the picture. I would choose position sizing as the superior method of risk/reward control. If managing 1mil, presume it to be swing or trend mode. Adding to winning positions gives best possible chance of catching trend moves with max leverage, while suffering quick losses with minimal leverage. Size matters most, big or small :>)