http://www.trade2win.com/boards/ Take control with stop and limit orders, and knowing your risk/reward. en Fri, 20 Nov 2009 22:34:39 GMT vBulletin 60 http://www.trade2win.com/boards/images/misc/rss.jpg http://www.trade2win.com/boards/ http://www.trade2win.com/boards/planning-risk-money-management/79870-drawdown-simulation-trading-systems-selection.html Fri, 20 Nov 2009 08:02:08 GMT Method
Suppose i have a trading system A which has historical 100 trades data. I ran simulation 10,000 trials and look at the worst drawdown that this system A could have produced by chance alone. Let's say that

System A has max simulated Drawdown (DD) at -40%. Now if I set my maximum drawdown of my portfolio at -20%, i will be trading system A by only half of my portfolio to ensure that when the worst comes, i

won't be down more than -20%. By the same token, if system B has max simulated DD of -10%, i will be trading 200% of my portfolio on system B.

Questions:
Currently I set every system that i have equally at -20% max portfolio DD. Here's what i mean

System/ Max Simulated DD/ Portfolio Max allowable DD/ Market exposure adjustment % / Annual Expected Returns (100% market exposure)
A -30% -20% 70% 36%
B -63% -20% 33% 24%

For example, if i have $100,000 portfolio, i will trade system A at 70,000 market exposue in a given trade. And i will trade only $33,000 worth of market exposure on system B. This also mean that my expected

returns will be geared down accordingly. So system A will now have expected returns to my portfolio of (36%*70%) = 25.2%. And system B will give me 7.9% returns to my portfolio.

Now here's my question, by setting each system max DD to -20% of the total portfolio, i am willingly allow each system an equal chance of damaging my portfolio. You would ask, why should i allow system B

which can generate only 7.9% returns to my total portfolio to have the same damaging effect on my portfolio. In other words, should i set B at -15% instead of -20%? How about setting A at -25%? What should

be my method in setting this Portfolio Maximum Allowable DD when i take into consideration the expected returns of each system?

Any comment is welcome.

Thank you ]]> palm http://www.trade2win.com/boards/planning-risk-money-management/79870-drawdown-simulation-trading-systems-selection.html