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Discussion in 'Risk Management' started by kut2k2, Jun 25, 2013.

1. kut2k2

I thought this thread was going to be simple. But fortunately I did a little research and came to realize that many ET members regard overtrading as something that didn't even occur to me.

Much to my surprise, it turns out that "overtrading" is an ambiguous word. I regard it as trading too large a size, i.e., trading too large a percentage of your account. But many (most?) here regard it as "trading just for the sake of trading", i.e., trading too frequently.

That's cool, language can be ambiguous and I'm a flexible guy. But this is the Trading Management forum, not the Psychology forum, and people who trade too frequently are what I call trading addicts, not overtraders.

So this thread isn't for members with discipline problems or emotional problems that lead to some trading addiction, this is for those who have discipline and a plan that works, i.e., yields positive expectation.

So the question is, when are you trading too much size?

More specifically, given that you have a trading system with positive expectation, you also have an optimal trading fraction (hereafter referred to as your "Kelly fraction") which most likely is unknown to you.

The reason for the unknowing is that outside of the fairyland examples of biased and/or uneven-payoff coinflips, the Kelly formulas are only approximations.

But let's assume that you could find a formula that consistently fell within a range of your true Kelly fraction. What would this range be, ideally or acceptably?

Oh yeah, the "other thing" in the title is undertrading : when are you trading too little size?

I previously posted that ideally I wanted something consistently between 90% and 100% of the Kelly fraction, but that works out to 95% Â± 5%. Now I think a more realistic goal might be 100% Â± 5%.

So is 105% of Kelly overtrading? Not to me but YMMV.

So what is an acceptable range of trading fraction values for you?

2. stevegee58

1) Have a system that specifies conditions where entry and exit signals occur (time and price)
2) Take only your system's entry and exit signals
3) Use small position size on each entry and pyramid into larger positions

You can only overtrade in frequency if you have no system (i.e. totally discretionary)
You can only overtrade in size if you're gambling (i.e. sizing on gut feelings)

3. kut2k2

Could you be more specific on #3? Thanks.

4. stevegee58

Each time you get an entry signal, add to an existing position. i.e. add to winners

(Obviously my suggestions have a trend following bias)

5. kut2k2

So no specific numbers? For example, start with 1% and pyramid up to 3%? And do you consider undertrading as something to be avoided like overtrading?

6. stevegee58

That's up to the individual, as is the system traded.

Undertrading implies you're not taking every entry and exit signal; you're applying discretionary filtering. If you determined that certain filters benefit your system then they'd be part of the system, right? Why filter on the fly? You're not trading the plan any more.

7. kut2k2

That's not what I defined in the OP. I get the unhappy feeling that we're talking past each other.

8. dom993

I use MonteCarlo simulations to assess the mean & st-dev of max-drawdown on 1 year worth of trading of that system at minimum position size (1 "unit"), then define my Max Allowable DrawDown (MADD) as the mean + N*st-dev (per unit) - I most frequently use N=5 (5 sigma).

I always start trading a system at minimum position size (1 unit), using an account size defined as MADD + margin requirement. I increase position size by 1 unit each time the system has gained 150% MADD+margin-req from the prior reference point (this guarantee I retain a fraction of the system performance up until then). That 150% could be anything greater or equal than 100%, depending on one's goals.

Anyway, my definition of trading too large size is simply trading a number of units U for which U*(MADD+margin req.) > NAV

9. bwolinsky

Another kutku2 I cu talking about kelly criterion 2 too often again kut2ku2?

The Kelly Criterion does not allow for excessive win percentages with large wide w/l that are leptukurtic, this means it is irrelevant until pyramidding is added in a fixed setting that nearly every algorithm I've seen cannot do.

For example,

A 2-1-2 pyramid will really trade in lots of 1,2,3,4,5,6, 7,8,9,...10. Thus, the criterion is not applicable to the fixed lot size it is concerned with fixing from the start of the investment and the laughable plausibility of it having a usefulness beyond fair warning about trading gambling without a plan is more disturbing to those who would at least like to see some commentary out of the more expert traders who recognize that these discussions might come out with better understanding about how to position size for growth but overtrading is referring to a brokerage issue related to the promotion specifically by brokers or futures broker of illegally frequent trading called churning but also secondarily though and probably less prioritorially to the size.

10. kut2k2

Interesting alternative.

How do you determine what your minimum position size is? And is NAV just another word for your trading account size? Thanks.

#10     Jun 25, 2013
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