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Joined: 1/13/2017

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Subject : Fixed Trade Size vs % Of Equity
Posted : 8/31/2018 7:42 PM
Post #45309 - In reply to #45302

Hi Jim,

Your very detailed post #45287 above does an excellent job of pointing out the problems with lists: survivability, non-existent symbols in the past, changing members of indexes, etc. Those difficulties exist no matter what allocation we use, so they have to be taken into consideration and minimized as much as possible with dynamic lists, Omniscan, etc.

Our goal is to compare various systems and strategies as accurately as possible. We want to see the trades that would’ve been generated by the strategies / systems in diverse situations and market states according to the rules built into each.

I took your advice and created 2 ATM methods that are identical, except that one uses % of equity set at 10% and the other uses a fixed $ amount set at $10,000 (also 10% when they both start with $100,000). You’re correct that they give vastly different results, but I’ll try to explain why the % of equity is the best choice at the moment, and why using a fixed $ amount has a fatal flaw.

This is a log scale chart showing both results using non concurrent ATM;

It’s correct that when using % of equity the trade sizes and equity are MUCH larger toward the end due to compounding. We can adjust for that visually by using a log scale chart (above), but have to agree that the size of the trades are completely unrealistic. However, for our purposes size doesn’t matter - we simply want the best representation of the stability and performance of the strategies and systems when they trade according to the rules of the method.

The following chart isolates the % Of Equity run in a normal (non-log) scale chart;

Notice that the ATM allocating and ranking functions kick in and pick the trades according to the settings we’ve chosen, with a maximum of ten 10% trades at any time. This gives us a fairly stable avg % invested over the 15 year period.

The following chart isolates the Fixed $ Amount run in a normal (non-log) scale chart;

The critical point to notice here is that there are almost 50% more trades taken (9,938 vs 6,689).

The 6,689 trades taken in the % of equity run is the number determined by the correct application of the ATM method’s ranking and allocation settings. The 9,938 trades taken by the Fixed $ run includes 3,249 extra trades taken because the fixed dollar amount trade size as a percent of the available equity declines rapidly as the account grows in size. This allows it to take many more trades, thereby negating the settings in ATM that would normally allow only the 10 “best” trades to be taken before reaching the equity ceiling.

Below is a table showing how the change in account size up or down has an effect on the % of the account assigned to each trade;

I built this ATM method to use 10% of equity / trade, which limits it to picking the top 10 trades available before running out of equity.

When using a Fixed Trade size of $10,000, the only time it’s trading according to those ATM rules is when the account size is $100,000. If the account grows to $200,000, the $10,000 trade size becomes 5% of equity (allowing 20 trades) and when the account reaches $1M the $10,000 trade size is only 1% of equity (allowing 100 trades). This allows the method to take virtually any number of trades that are available at that point, and negates the settings that should cause it to select the best trades.

This is the fatal flaw when using a Fixed Trade Size: as soon as the account moves away from the starting equity, in either direction, the % of the account allotted to a trade varies and is no longer correct - and the results are therefore inaccurate. If the account increases in value, the % of the account allocated to a trade decreases, and the number of trades that could be taken increases. The opposite occurs when the account size decreases, so simply setting a "Max # Of Trades" to 10 would not alleviate the error when the account had decreased below the starting equity.

When using % Of Equity, as the account moves up and down the size, number, and ranking of the trades in ATM adjusts to follow the rules of the method.

We want the best representation of what to expect from the system. I agree that it’s definitely unrealistic to think that we can make multimillion dollar trades, but we’re using the Port Sim to determine whether the specific allocations we’ve chosen in the method worked over a long period of time in the past.

Currently, the most accurate way to do that is by using % of equity. Unrealistically high trade sizes as time goes by are a necessary byproduct of the process, but all the associated statistics (# of trades, HR, MDD, etc.) are accurate. That simply isn’t true when using a Fixed Trade Size.

I realize this challenges what you’ve proposed, Jim, but I hope this explanation helps to clarify the difference in results when using a Fixed Trade Size vs % Of Equity…


[Edited by mholstius on 8/31/2018 7:47 PM]

Attached file : 00 Percent vs Fixed 01.png (163KB - 1117 downloads)
Attached file : 01 Percent Inv.png (150KB - 1150 downloads)
Attached file : 02 Fixed amount.png (147KB - 1129 downloads)
Attached file : 04 scale.png (70KB - 1113 downloads)

Deleting message 45309 : Fixed Trade Size vs % Of Equity

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