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Hi AlexanderG,
Thank you for your response, it is very helpful.
One additional question, can you provide some insight about the formula in step 3? For example, what’s the meaning of formula like " System 1 currently trades 50k -> AutoTrade = (100k/50k)*0.25 = 2 * 0.25 = 50% scaling" ?
Thanks again！
Jinchao
@Aaa123, in your guide you’re writing (before Step 2), that winning rates over 80% are a warning sign and 90%+ are no go’s.
From my point of view you got to differenciate this. Systems which are trading stocks got usually winning rates between 50% - 70%. Systems trading options, like I do with Regular Income (https://collective2.com/details/107003652), typically got very high winning rates because of the fact that we’re selling options and collect premiums. Typically I sell options with high statistical chance of making profit (approx. 85%). So the most trades are winners returning “smaller” profits and in seldom cases there are losing trades with a bigger loss.
I think in general it is important to watch the winning rate in relation to the type of system. High winning rates are not indicators for grid or martingale systems by default.
It more important to look on the max. drawdown and the sharp ratio.
I’m sure every system has outliners and exception to the rule. After 2017 seeing 80%-99% win rate got pretty common. If you are trading vix or a system buying dips hard to see any losing trade in the calendar of 2017.
Heiko, you are absolutely right. On the flip side, I buy protective puts which mostly expire worthless and show as a “losing trade”. Are they “losing trades”? Not if they served their purpose. This just points out the fact that many factors go into the evaluation of a good versus bad system. At the end of the day, the numbers will speak for themselves.
It is much more important to manage the risk of a portfolio compared to each of its components. If we concentrate on the risk of the entire portfolio, we can include positions (strategies) that we would not consider individually.
Let’s not forget that some strategies work better than others, depending on market conditions. The success is in the construction of the portfolio.
If we had a portfolio with only one position, SPXL for example, the risk would be 38% and if the position were TMF, then the risk would be 39%. However, if the portfolio were constituted by these two positions in the same proportion, then the risk would be only 19%.
From my point of view, our effort should focus on risk management … of the Portfolio. There are numerous studies that show a series of ways to achieve this objective in the long term.
Great guide. Thank for writing this.
This is exactly how I use c2. Sub to 4-6 strategy. 1/3 high risk, 1/3 med risk, 1/3 low risk. Currently 1 strategy in high risk. 3 strategy med risk and 1 strategy at low risk. Reevaluate every 2-3 months.
@Aaa123 Thank you for good guide. You operated with %s which probably good for the systems that open trades for % of the available capital. On the futures/options trading they can go with one contract for the year and % dd and % profit will be decreasing. Can you advice something in this case?
@JITF that´s an inherent problem with instruments that scale poorly like futures or very pricy stocks. In this case I´d contact the system developer and ask what his approach on moneymanagement/position size is. If he stays with a fixed contract size for all time it´s probably recommendable to either scale up individually or just go with the fixed gains. But is difficult with futures, unless you have a big account. So if you trade 1 future then scale up to 2 after 100% gain to maintain same risk as when you started. If you trade with 4 futures you could scale up to 5 after 25% gain already. But yet again, the best would be to ask the developer about some key points of his strategy like historical maxDD per contract.
@Heiko I understand that option selling strategies usually have a high win ratio if they sell far OTM options. But actually this results in a very high convexity risk / tail risk if there is no hedge against strong movements. And if you have a hedge you automatically have a lower win rate because the hedge trades are loosers, just like @RFC-Agathos1 said. So my point remains, for me personally win ratio >80% is a warning sign and >90% is a No-Go.
I prefer Strategies that trade Futures with following criterion
**1. SHARPE RATIO**:
a. MINIMUM: 3
b. PREFERRED VALUE: OVER 4
**2. CALMAR RATIO:**
a. MINIMUM: 15
b. PREFERRED VALUE: OVER 20
**3. CORRELATION TO S&P 500:**
a. PREFERRED VALUE: LESS THAN 0.4Interesting criteria. Now I found only 3 strategies, all 3-7 month old.
Can you share your rules when to get out of such strategy to avoid big losses?
I found 20 though. But, some of the data isn’t showing right I think
. I think I need to play around a bit with this.
Easy, put in your own stop loss
So kind of trend following approach? Try every promising system and use trailing stop on their equity. Need to think about this.
I had TOS turned on. Shame on me.
Yeah. I know, stop loss may not work out during Black Swan type events. But stop loss is a must to prevent Black Swan Type losses during a non Black Swan Event such as losses that happened with a few strategies here on C2 lately.
Those are unrealistic sharpe/calmar ratios. I suspect you’ll tend to find systems without much history having a run of good luck. Then you’ll join just in time for the reversion to reality.
It is always good to revisit some concepts related to risk management.
I would like to share with you an interesting article related to diversification and risk management.
https://www.cfapubs.org/doi/full/10.2469/faj.v74.n3.3
