trade equity curve,is it possible?

Discussion in 'Risk Management' started by robinxing, May 17, 2007.

  1. I doubt something so simple could work, unless someone provide more evidence. It may be just a software ad to attract more user.

    But I could be wrong. Looking for more input.
  2. empee


    no, trading the equity curve is a fallacy with survivorship bias. It looks great because you only look at equity curves that worked. What if the equity curv never came back, than your risk of ruin was far greater.

    So, ppl only show good equity curves. If a equity curve looses its ascending slope, trading the equity curve is disaster.

    So as long as you can predict that your curve will always work than I guess you can do it :p

    If your curve stops working, everything that gets "better" gets far worse (drawdowns, risk of ruin, etc)
  3. interesting idea. hadnt thought about this before.

    if you have an as yet unknown deficiency in your trading method that makes it weak under certain conditions in the market, it could get reflected in your equity crossing below the moving average. Reducing size and frequency of trades under such conditions seems sensible to me. Similar logic could be applied to cases where you are going on a psychological downward spiral, and this method could act as an independent external rule (similar to stop losses etc) for money management.

    i think this is an interesting idea worth considering as an extension of the principle of not adding to losers.
  4. empee


    the problem is most of the time you deviate from your curve are the best trading times (assuming your system considers the market "fertile" most of the time). So resizing to smaller size usually means you miss the best times/the times when it comes back fastest. In short, usually right after you have it failing is when it actually performs best.
  5. i can see that as a reversion to the mean applied to a trading system/ equity curve.

    But my point is that there could be valuable information in the feedback that the equity curve is providing you for your trading method itself.

    The closest parallel that i can think of is the commonly recommended money management method of stop losses. On the one hand, if you are really sure of a short and it goes up you will just become more sure of the short and keep at it, and on the other, your stop is hit and you get out. For proponents of the stop loss method, the upward stock price move nullifies the original thesis (other than risk management) and hence stops are hit.

    Anyways, i just got introduced to the concept, need to think for a while
  6. mydesign