Jim Dean![]() Sage ![]() ![]() Posts: 3022 Joined: 9/21/2006 Location: L'ville, GA ![]() | A discussion started in the middle of an ATM thread which is very important, but was somewhat outside the scope of the thread. Mark Holstius asked that it be moved elsewhere. Here is the link to the original thread: https://www.omnitrader.com/currentclients/otforum/thread-view.asp?threadid=15825 Here are the initial posts on that topic, earliest to most recent. ********** John W - Steve has just raised a most important topic - what is the best way to get an apples to apples comparison of each strategy? I have been using a different approach based on investing a Fixed dollar amount, not percent of equity or fixed trade size. I noticed when I played with Mark's terrific ATM M&M strategy that the results for Outlay, Return and PPT% are significantly different using each of these 3 Allocation methods. Using percent of equity results in trade sizes in later years that are significantly different from those in earlier years, so better profits or worse losses in later years skew the average results per trade. Profitable strategies that trade a lot are very susceptible to skew because equity compounds rapidly in later years. Strategies that don't trade much or have middling profitability are not very susceptible to skew because their equity doesn't change much. Mixing profitable strategies that trade a lot with those that don’t trade much or profitable strategies with losing strategies will skew results for both types. Similarly using a fixed trade size weights the dollar outlay and results and PPT% more heavily towards shares with bigger share prices and that skews average results. So, for comparison purposes I believe that fixed dollar has the advantage that every trade is equal dollar weighted. The input from OT into the comparison spreadsheet is in dollars outlay and profit - the input ideally should be equal weighted dollars. We are spending a lot of time on spreadsheets and ranking strategies, have we considered if we have the right approach by using percent of equity? I'm raising the question of what is the right approach to get an apples to apples strategy comparison? ********** Jim Dean - I heartily agree that fixed dollar is far to be preferred over percent of equity. I’ve tried to suggest this many times over the years - but there is so much “marketing inertia” associated with percent equity that it never seems to take hold. Another aspect to this and argument for it is the nature of the trader’s lifestyle. Unless the reader is already very very wealthy, then it seems to me that it would be a fairly normal thing for the profits from trading to be “skimmed off” to one degree or another, for vacations or large purchases or paying kids tuition etc. So, once again I applaud the idea of using fixed $ vs pct equity. And also suggest another couple of future Port Sim options be added: 1. Fixed account size with side Cash account. That is, start with $100,000 or whatever amount, and siphon off all profits above that into a (separately tracked) Cash account. The Cash account would be drawn down to replenish the trading account any time it drops below $100,000. Advantage of this is they it treats every day of the historical test period exactly the same as every other one, in terms of available equity. 2. Alternative to #1: Bounded account size with side Cash account, between say $100k and $200k, where profits above $200k siphon off to Cash and losses below $100k are replenished from Cash. Of course the reporting stats would be the same - total P/L would always be the sum of the trading account and the Cash account. I believe either of these two may be a much closer representation of traders who “trade for a living” rather than investors saving for retirement. And they both assure trade sizes that are reasonable across the entire test period. ********** LSJ - Jim, I wholeheartedly agree with the side cash acct concept. The reason we who are not lottery winners trade is to make use of the income. Another view on trade amount has to do with risk. Using a percent of equity does not take that into account. Simply put, if I were to buy 100 shares of a $100 stock on margin then I have a $5000 investment but with proper trade management that is not $5000 or $10,000 of risk. I would prefer sizing a trade based on how much I am risking. That would be the dollar amount to a fixed loss stop. In this case if the loss stop was $2.00 below entry then I am only risking $200. In that case then assuming I had the margin I could invest considerably more in that trade and it changes my whole approach to performance testing. [Edited by Jim Dean on 9/1/2018 9:24 AM] |