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I learn Technical Analysis in the last 20 years and I realize that the answer is probably No and…Yes.
The most of the indicators are Lagging Indicators and only few of them are Leading Indicators.
Both of them are failed when the market does not have a clear direction and as a result you will probably going to bring back all your profits to the market.
This is the No answer.
The Yes answer, as my experience telling me, comeing only when you understand and develope Risk or Money Management (MM)
I have the feeling but I am not sure that many developers here do not bring enough attention to this matter… The few that doing this are in the market for the long run and even if they suffering bad times from time to time, they have good chance to recover in the future…
I see here so many strategies which their developers are not respect their subscribers enough by not doing efforts to developing a good MM. They are vanished every day from C2 and leave their subscribers very disappointed.
This cause damages to everyone here and first of all to C2.
I have for C2 two ideas about this: 1.To open university( or school ) to teach the basics of MM. Everybody will benefit from this. I am sure of that. ** 2. To bring a medalion to each strategy with MM. C2 should stop giving stupid and un important medalions to any developer and concentrate only in the important things like MM.
I will be happy to see what are you thinking about this issue.
Hi Robert, in term of volatility strategies ur performance is doing very well, that’s include low risk n high return. Some other strategies, they are using option , hedge with other volatility ETF to protect unpredict big movements in any time frames. I don’t see u use those instruments to protect ur positions. You just did not have any open positions when disaster came in last month. It such a good timing for you to not to have open positions before disasters came in n entered the market when the market were ready to pull back. That’s the most important. I am not sure if you were lucky or not. Any other factors behind the scene? Your subscribers must be very lucky n confident with ur approach. That’s beyond MM.
I did not speak about my strategies in purpose…This is not the issue in this discussion…But I can not leave your post without any response, right?
If you think that not be exposed to the market in bad times is the MM, I think you have to go back to your books
MM is much much bigger than that…Not to be in the market when the market crash it is only a tiny part of my MM…The risk in the market is changing every moment and not only when the market crash…
BTW, bad times are also bring opportunities…hope next time to take the move up as well like VIXTrader Professional did in May 17…
The main point of this discussion is very important: Every strategy should has a good MM and as a developer I do care also to the potential subscribers which are trading at the moment other strategies in C2 and maybe suffer from bad MM or from strategies with no MM at all…
I think that most of us know what I am talking about… As a developers this is our interest that the subscribers will stay here and will not leave after short bad experience…
This is why C2 should mark strategies with MM in order to provide more confidence to the regular subscriber which sometimes does not capable to understand from the trading history or from the developer himself what is going on…
The terms “Money Management” (MM) and “Risk Management” (RM) are often used interchangeably when discussing trading and investing. When we look at MM in the trading education context it is very often about trade size or position size. This is about scaling orders and positions to balance the correct amount of market exposure for capital growth and compounding with risk as part of the consideration.
Risk Management is often described as methods of controlling individual trade risk such as stop-loss orders and hedging positions with other instruments.
It is not possible to say that talking about MM and RM interchangeably is wrong because they are related concepts.
It just helps to add context to the conversation to reduce confusion.
When you mention MM above in this thread do you mean risk controls or trade (position) size?
Both of course.
You described very well the MM and the RM principals
RM is part of MM…They are operating together but the MM take the last decision…What, when how and how many…
The MM receives many inputs like Buy, SellShort and Cash signals, Stop loss signals, Take profit signals, current risk level, interest rate, hedging position prices, leverage, compounding and maybe also twitter messages, currencies rates, special days (like election day) and more…
You really want to be sure that the strategy you trade has MM…
https://collective2.com/details/106247934 the Andrews Babson system uses Leading indicators. Do not sign up for it as it is closing down, due to the high C2 prices.
The tech has been used for over 50 years. It uses something called hidden geometry . Learning how to do it is not cheap money wise or time wise.By having a good system to trade with there is less of an emphasis on money management…other than keeping the margin used reasonable.
It would be great for subscribers if there was a decent way for either C2 or developers to mark each strategy as one of two broad categories. The two categories in my mind could convey that the strategy is intended to be used by itself or in conjunction with other strategies, similar to comparing a target date retirement fund versus a oil sector etf or a small cap fund etc. I think most subscribers already have the intelligence and ability of looking at a strategy and being able to categorize it themself, but it would be a great search criteria to add to the search grid etc.
Your trading system is like a piece of meat.
Your money management is how you cook it.
No chef in the world will be able to make anything edible out of a lousy or rotten piece of meat. No money management scheme will save a bad system.
But once you have a good fillet, turning it into a delicious stake requires skills too. No time on the grill at all, it will not be suitable for eating (for most of us), too much time and it will be burned or too hard. Same with your money management. Be too careful and you will not see the benefits of even a good system. Reckless trading and you’re wiped out. Ignorance of money management and your results will be random.
In this context, when saying money management, I mean Position Sizing, or “how much”.
Not entry or exit rules.
Not how you move or don’t move your stop.
No what you trade or how long you hold your position.
It’s how much capital you allocate. It’s how much dollar risk you take. Per trade. Per system. Per account size. It’s how you will change the size of your positions, depending on equity curve growth or decline. On profits, losses, drawdowns, win rate, sequence of winners or losers or any other metric.
That makes sense. I have recently agreed to manage a lot of money. My money management strategy is to trade one contract per unit. …a unit can be 50K for example and historically the margin used does not reach that and is typically under 30% of total.capital. This is rather simple but the idea is to keep stress to a minimum.
I will also have a model account, which is on my screen … which will trade only one unit…The other accounts will have multiple units, depending upon size.
You can do that. It is a simple money management scheme. I prefer to determine the size according to the expected max drawdown of the system.
If we take an account of $100,000, you may define your risk appetite as 20% max drawdown, that’s $20,000.
You then estimate what is the max drawdown per contract expected from the system.
You can do that by running Monte Carlo simulations on the actual trades and find the max DD with a confidence level you set, e.g. 95%. Typically the expected max DD calculated this way will be higher than the actual max DD that occurred.
Then you figure out how many contracts you need to trade. For example, if you find that the expected max DD of your system per contract is $6,000, this means you need to trade up to 3 contracts to stay within the $20,000 max drawdown you require. If the expected max DD is higher than $20,000, you can’t trade this system even with a single contract.
If the performance of your system improves over time, the expected max DD will decrease and you could trade larger. If the performance deteriorates, the expected max DD will increase and you have to reduce your size or stop trading the system altogether.
This means you need to periodically re-evaluate your system and size accordingly.
I know this goes against the more popular approach of increasing size during drawdowns to allow quicker recoveries. Doing that is a risky practice, if you keep in mind that every system will one day stop working and that every large drawdown starts with a small drawdown.
@GalBarak, I like your MM approach and I believe something along those lines is the best thing to do if one assumes the eventual failure of a given strategy.
However, if we look at “strategies” in a broad sense there are some that will not eventually blow up. An example is the S&P500 or any major stock index for that matter. Having an ETF of an Index like SPY is nothing else than trading/investing in a simple yet fully defined strategy. So if we look at index ETFs, volatility ETFs or even commodity ETFs we should be aware that they are nothing else than the equity curve of a particular, mechanical and simple investment strategy.
So if a strategy like investing in the broad market utilizing an index mechanism never goes to 0, then the point is proven that there are strategies that will not end due to an eventual failure.
So in terms of MM one has to first identify to what category the strategy at hand belongs - is it a complex, optimized high yield strategy or is it ment to endure the test of time, aka is it simple and robust?
Investing in those long term robust strategies means that scaling up into a drawdown makes sense whereas the contrary is true for the high yield/high risk strategies, just as you described. Your approach to do so sounds quite sophisticated.
~99,9% of strategies at C2 are high yield / high risk…
Technical Analysis as a term could be interpreted very broadly, in which case the answer is undoubtedly yes it works as proven by basically any longstanding profitable firm/fund who executes on anything not exclusively arbitrage or fundamental/macro-based (think Renaissance Technologies, Susquehanna International, Citadel, etc etc etc).
The term as used long ago meaning specifically “chart patterns” or the “indicators” based on historical price action… call me a massive skeptic with plenty of empirical (negative) experience on the topic… Although I do use “indicators” to look at non-price-based data, but that is a different story.
That said there are fundamental truths in the market that if one can reliably tie their “indicator” or pattern to, it may be of some value.
Good models that will stand the test of time are tied to fundamental truths about how markets work, they will not make huge amounts of money all the time, but they will be around forever as long as liquid markets exist.
The majority of models that are out there though, they are either being fooled by randomness/chaos, or are taking advantage of some sort of temporary structure due to large market participant(s) doing something that data mining can detect and exploit (like the volatility systems, having analyzed the model of how these work, they DO NOT work on data series prior to the financial crisis, they are a temporary phenomenon and when they stop working they may never work again in our lifetime, I would argue they are tied to CB liquidity/asset purchases creating a predictable vol crush over time).
There are really 2 potential business models for someone who knows what they are doing in terms of taking market risk:
Build model(s) that take advantage of fundamental market truth(s), returns will be lower but consistency / reliability will be high.
Hunt for what is working “right now”. Returns could be higher, but one must be aware of the fleeting nature of real edges found, and of course the very real possibility one is simply picking up random noise and thinking there is actually a whale to trade against. These make for sometimes spectacular boom/bust equity curves, and if one doesn’t have the “next big thing starting to work” lined up, it can be very painful to get any kind of consistency.
The older I get the more I vastly prefer approach #1, and then focus on risk management and compound returns. I find the younger/more inexperienced participants like #2 more because of the “get rich quick” attraction, the ego factor, and the misconception that activity = results.
I share very similar views. My experience showed me that there is a strong trade-off between stability and performance. Want a stable system that stands the test of time? This is possible, but don’t expect returns to be very much larger than 1-2% a month (say with expected DD of 15-20%). Trying to get higher returns? that is possible too, but don’t expect it to last very long. It can fail next year. Next month. Or next week.
I wouldn’t completely disparage such systems though. The market goes through regime changes and some systems can do very well over say 3-5 years, then stop working. It is, as you said, a decision of where you want to place yourself.
Personally I do prefer your approach #1, but I also carefully trade systems that obviously are right only for specific market regimes. Of course even in those cases you must have enough data to draw conclusions from.
Getting fooled by randomness and engaging in amateurish backtesting / optimization is a separate problem. If a trader does not understand how to design systems that are less prone to overfit, and is not willing to carefully test the system on out of sample data (testing many variations on OOS data isn’t a way to go either!), including through a live trading period, then he shouldn’t be in this business at all.
Generally I agree with your post, I would just stress that what I described doesn’t only apply to systems that may go down to zero or anything remotely close to it.
A system is only beneficial to the trader/investor if he can trade it. If a system “only” goes down 50% and the trader bails out, then it didn’t do him any good, even if the system quickly recovered and made new highs just a few months later.
If a system doubled down on a 25% DD, things would be very ugly when the DD goes to 50%.
Money management depends on specific objectives of the investor/trader and of his personal risk tolerance.
Before trading everyone needs to be very honest with themselves. What will I do if it goes down 20%? 30%? what about 50%-60%? this applies also to very simple investments as buy and hold the large indexes. Even that is too much to take for most people during long bear markets.
) to teach the basics of MM. Everybody will benefit from this. I am sure of that. **
