my journal 3

This is a discussion on my journal 3 within the Trading Journals forums, part of the Reception category; Ok, hold on... the "major breakthrough" was only partial, and basically, as it was yesterday, I had it wrong without ...

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Old Jan 6, 2012, 8:49pm   #97
 
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Re: my journal 3

Yamato started this thread Ok, hold on... the "major breakthrough" was only partial, and basically, as it was yesterday, I had it wrong without realizing it:
http://www.trade2win.com/boards/trad...ml#post1760076

The problem was in using those percentages I used:
Click the image to open in full size.

In fact yesterday I got lucky and that addition of one system improved the absolute number of starting dates that would cause me to blow out my account, going from 134 to 122. So I could indeed say that by adding one system and even increasing the absolute drawdown you might actually reduce your chance of blowing out your account. But today i was about to make a mistake which I probably made yesterday with previous portfolios comparisons (not with this example below):

snap1.jpg

If you compare the days in eight years that would have "blown out" a 4000 account (simply by bringing it below 2000, which is IB's minimum to trade), it's clear that the new combination on the left is worse than the previous combination on the right: 152 vs 126.

However, if, as I did yesterday, you compare percentages, you will get deceived into thinking they're the same, in that there's almost an equal percentage of dates on which you'd risk blowing out your account (if you started, randomly on those dates).

But these percentages are totally useless here, because they're just telling us how many starting days, out of those causing a drawdown, would be lethal. But we want to know how many days out of all starting days would be lethal. So I have to do it all over again now. And either create a percentage for that ratio, or get rid of this percentage column altogether...

[...]

No no, wait. I did well to worry but i was wrong now and right yesterday. In fact, since the "0" row is there on those tables, also the days with no drawdown are counted, and therefore all the trading days appear (days in which there are no trades are not counted: that is why with more systems there's more days). And so the percentage values are correct and provide important information.

[...]

But then I just checked and it's an interesting finding. If I trade the best ("best" considering my needs: profit, low drawdown, low margin) system all alone, I am more likely to blow out (19%) than if I trade my best seven systems together (13%). Furthermore, if I trade them I have a probability of 88% of having made at least 6000 dollars within the next six months, whereas if I trade the best one all alone, I only have a 17% chance of making it happen. Considering that time is money, and that I have to pay 300 dollars each month for the server, then it's clear that the best choice is to invest in a bunch of systems.

I think this can be explained with the fact that by trading a lot of systems I am not actually summing up all the drawdowns, because the trades are taken in a sequence (one system, then the other), and therefore I add diversification and at the same time I distance myself faster from the low initial capital. So it is still a surprise, but after all these tests, it seems that, paradoxically, investing in a bunch of volatile systems with big drawdowns is safer than investing in one system with a small drawdown.

Yeah, I get it. The systems don't have the time to reach their full potential in terms of risk. There's one trade by one of them, then there's another trade by another one. It's not like trading them all at once means adding up all the maximum drawdowns. In theory it does: but that is one day in one hundred years, and before it happens you'll have so much capital that you'll be ready for it to happen. The big premise is that I am not saying you're safe with a capital of 4000 to trade all these systems. I am saying you're safe to start with it, without withdrawing anything afterwards. Otherwise of course you won't be ready for the drawdown which sooner or later will happen.

Ok, so I am going to adopt this new combination with 7 systems in it, and expecting (judging from the past) a 13% chance of blowing out, expecting to not have enough margin to trade them all on some rare days, and expecting, if I don't blow out within the first six months, to have an 88% chance of having made more than 6000 dollars, and therefore be farther from the risk of blowing out.
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Old Jan 6, 2012, 10:45pm   #98
 
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weekly update

Yamato started this thread
HTML Code:
system    $ per contract potentially traded
CL_ID_01    -393
ZN_ID_06    -66
NG_ID_02    104
ZN_ID_03    -269
ZN_ID_03    28
GBL_ID_02    234
Ok. Good, not having started yet, I have missed an unprofitable week. This is the combination with the seven selected systems (cfr. previous posts).

This is how the last few weeks look for the present portfolio of systems:
snap1.jpg

If it keeps going like this, it will alert me as to the risks of portfolio optimization, because this is my final portfolio.

Oh, look! By randomly reporting the last few weeks, I have an example of a potential blowing out situation. In the attached picture above, modified here below, with red mark, there's a clear example of what I mean with my statistic:

snap3.jpg

If I had started right before the 47th week of the year, I would have blown out my account (by losing more than 2000, I would not have had the 2000 necessary to keep trading). You look at that, and you say: hey, this danger is very close... I need to be prepared for a 3000 dollars loss or I won't survive. But the truth is that if you had started 10 days earlier or exactly one week later, you would not have blown out the account. Only if you had started on that one day of the year you would have incurred the 3000 dollars loss, so the chance is minimal, 1 out of 240. Ultimately, the probability is always the same, 13% of blowing out the account, by starting to trade on any given date. This happens because I am not planning to withdraw money in the first few months, because if instead I constantly kept withdrawing all the profits, and leaving 4000 dollars on the account, then yes, absolutely: I would blow out the account within the first year.

Since the portfolio is final or at least getting closer and closer to it, let's do one more statistic and see the money you can make in 1 month, starting on any given date of the back-tested period (relativized data by today's prices):

snap2.jpg

All outcomes surround 4000. As I have learned today, this looks like a bar chart (because there's space between the columns), but is a histogram:

snap5.jpg

Yeah, because here's what it says:
AP Statistics Tutorial: Bar Charts and Histograms
Quote:
Here is the main difference between bar charts and histograms. With bar charts, each column represents a group defined by a categorical variable; and with histograms, each column represents a group defined by a quantitative variable.
Anyway, after one month, if I still haven't blown out the account (13% probability, if the past repeated itself, but I know that it is likely to be somewhat worse), I am most likely to have made several thousands dollars.

[...]

Since I keep talking about "relativized" back-tested data, what I mean by that is:

1) given that we expect prices (and thus profit/loss) today to move as much as they moved yesterday, so they'll go from 100 to 102 as fast as they went from 50 to 51,
2) I have adjusted yesterday's profit/loss according to today's prices, by multiplying all trades' profits/losses to the ratio of price of yesterday over price of today.

Like this:
relativization.jpg

Profit of yesterday is to yesterday's price (value of underlying, which is the same as the value of the future) what the unknown new price is to the price of today. And then we obtain the new adjusted profit/loss by multiplying the old one by the ratio of price today / price yesterday (and by price once again I mean the price of the future/underlying). That way we know that if we get a drawdown of 10% of the underlying when price was half of what it is today, we'll come up with an adjusted drawdown for then. Otherwise all drawdowns when the price was lower than today will appear smaller by today's standards. The only small question would be: are we sure that when, say, CL is at 120, it is as likely to fall/rise as when it is at 50? But there's no way, with my limited tools, to measure this across all futures, so I am assuming yes (more or less).
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Old Jan 7, 2012, 6:31pm   #99
 
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Re: my journal 3

Yamato started this thread Done daily math review at khan.

Doing the course on probability, which turned out to be more interesting than the statistics one, at least so far. From what I've covered so far, on these two subjects/courses/websites, probability is more about reasoning and statistics is more about memorizing notions. Not totally like this, but for the most part.

With probability, things have been interesting, as I said, and at the same time easy until today, because I had read something on probability before, because the material is not too much, but also because she is very good at simplifying things. Maybe I would have known the answers without reading the material, but she's good at showing you the right way to approach problems and, only later, you are given a formula. You feel like you came up with the formula, almost, which is the way it should be. Unlike in my awful education, where I was force-fed notions, everything on this website starts from a simple probability problem/example, which gets solved, and then you are shown there's a general rule, and the formula is stated and explained, like here:
Conditional Probability
Quote:
Summary: The conditional probability of an event B in relationship to an event A is the probability that event B occurs given that event A has already occurred. The notation for conditional probability is P(B|A), read as the probability of B given A. The formula for conditional probability is:
Click the image to open in full size.
The Venn Diagram below illustrates P(A), P(B), and P(A and B):
Click the image to open in full size.
I remember a couple of idiots writing posts on "my journal 2" and berating me because, given that I was doing highschool math, according to them, I never would have been able to achieve anything with my trading systems ("you're up against the quants" or something like that). First of all, I can study what I want and write what I want on my journal, and obviously I shouldn't have to deal with such disrespectful posts (I don't see the point/contribution of a series of posts telling me "I think that you'll never make it"). Second of all, I don't want to be bothered by their stupid thoughts, so that is why I started a new journal with the setting "only posts from contacts", and it's working great. And finally, I don't care that this website is primarily meant for teenagers or even children. It's very well made, and its content is very useful. Besides, children are more intelligent than adults. Or rather, adults teaching children are smarter and much better teachers than adults teaching adults, because the academics are not trying to teach anything to begin with. They are just writing books to show off and to impress other academics. Whereas the unknown highschool teachers are really trying to teach something. Unlike the academics, the highschool teachers, when they're good, make an effort to explain things as clearly and logically and concisely as possible.

Now, I'd like some good highschool teacher to teach me portfolio theory, and instead I am stuck with this academic crap: http://www.math.ust.hk/~maykwok/cour...rkowitz_JF.pdf.
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Old Jan 8, 2012, 3:59am   #100
 
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Re: my journal 3

Yamato started this thread
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Old Jan 8, 2012, 5:31pm   #101
 
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Re: my journal 3

Yamato started this thread The message box, both in "advanced" and "quick reply" modes, is not working properly on internet explorer. Fifty percent of what I type doesn't show, every other key I press doesn't produce a character on the message box. It's very frustrating. Instead it works on opera, firefox, chrome. Also, I checked if similar message boxes work on yahoo and google mail and they do. The only thing left to do is if the message box works on internet explorer in another computer, which would surprise me, because it would mean I have a problem on trade2win's message boxes only on this computer and only on internet explorer. Which would make me reinstall internet explorer, which is a pain in the ass. Let's see.

Ok, I just checked and damn me. It works perfectly fine. So I basically screwed up something on internet explorer that only affects this box on this web site. I can't even double-check by registering another t2w account, because I might get banned, like last time.

Ok, let's try to reset internet explorer's settings to default first, before having to reinstall it.

snap1.jpg

Ok, done. Let's see if it works now.

Damn. Still not working.

Now I will reboot my computer, and if it still doesn't work, the next step is to try system restore, to yesterday or the day before.

Ok, rebooting doesn't solve it either. Now I will try a system restore to 2 days ago.

I have to remember I just had an idea about starting the systems after a loss. It might not help at all, and it might be incoherent probability thinking: I know it doesn't make a difference on random events, such as dice and the roulette. But, hey, even on those betting on black after a red came out does not hurt. If anything it leaves your chances of getting it right to the original 50%.

And, if instead there's some probabilistic reason that enabling those seven systems one at a time, each one after a big loss/drawdown, puts the probability on my side, then why not do it? Being wrong about this hypothesis won't hurt me for sure, because if it's totally random like for coin tossing and dice and roulette, then I won't affect the next outcome either by waiting one outcome. If instead I am right and it's not random, and after a loss or big drawdown, it is less likely to happen another one, then I will benefit from it. So now my idea is to enable those 7 systems, but one at a time and each one after a loss or drawdown. If I am wrong, it won't hurt, and if I am right, I will benefit from it.

So now i'll do the system restore.

Oh, good. Now it finally all works. As to the culprit, the only two possible causes are:

1) I installed hotspot shield, a proxy software, in order to watch some SNL episodes on hulu.com and vidcube.com, which would not stream to italy, but then, once i did that, it was useless, because they only streamed for free for 1 minute and a half. Anyway, I later found out that for most episodes the videos can be found at good places and not just these two paying websites. So this is the link anyway, if anyone cares:
Watch Saturday Night Live online (TV Show) - on 1Channel | LetMeWatchThis

2) I was trying to get rid of google search autocomplete feature, and i followed the instructions in this video:




But then today the mother ****ing autocomplete (google is getting worse, just like windows, office and a lot of other software lately) came back anyway, and maybe it also caused, out of revenge, this problem on trade2win's message boxes.

Yesterday, among the other things, while browsing on letmewatchthis.com, which is my favorite and only movie website, I discovered this very good tv show:
Watch Mob Wives online (TV Show) - download MobWives - on 1Channel | LetMeWatchThis

Mob wives is quality stuff. I haven't reasoned on why yet, but it's very engrossing. First of all, I think it's well-made (good editing of the interesting parts). And second of all, I am Italian, lived in the states for a few years, so this is related to things I both know and also am curious about. But then there must be other reasons. Some brainstorming, in random order:

1) there's action, because the husbands are in jail or go to jail during the movie
2) among my favorite movies are mafia movies such as goodfellas (the mob wives are just like ray liotta's friends and wife in that movie), the godfather, and so on.
3) I've always liked documentaries, and in many ways a reality show is a documentary (at least for the way these women talk, and think)
4) among the things that make me say that it's well-made there's the fact that this show doesn't just show the daily life and behaviour of these women, but also some moral dilemmas, such as "should I leave my husband now that he's in jail?", "should I cheat on him?", "is it ok for my husband to kill people?".

Speaking of reality shows and documentaries, yesterday I always watched this good movie:
Watch Cinema Verite online - on 1Channel | LetMeWatchThis

[...]

So, I was saying about the enabling of the seven systems, one at a time, after they have drawdown or a loss. Does it make sense? As I said, if it doesn't make sense, it still will not hurt, so I'll do it anyway. But let me see if there's a way to test this. [...]

No, I don't know of a scientific way of testing this. There is for sure, but I don't know and can't think of this. Not now. I have other worries and I am distracted. Tomorrow the roommate is coming back, and it's going to be unpleasant as usual. He'll be a clown all day long. Not as bad a clown as vito, but close to it. Even half as much a clown as vito is too much for me.

But I will proceed by rule-of-thumb, because I can't wait too long. I am gonna do it this way. I will enable them, as i said, one at a time, not after a drawdown, but after a big loss.

Let's at least analyze how they've been doing lately.

snap2.jpg

Ok, I am reasoning week by week, even though there might more than one trade per week, and then I'll have to apply this according to the same reasoning (week by week, rather than trade by trade). But usually there's just one trade per week.

Ok, system by system (this is just to help my reasoning, by no means a reliable statistic):

CL_ID_01: by waiting for a losing week (rather than starting from the first week), I would have missed a bunch of profitable weeks, and incurred in more losses. Bad outcome.
EUR_ID_05: same as above
GBL_ID_02: same as above
NG_ID_02: this would have saved me a big loss
ZN_ID_03: irrelevant benefit ( would have avoided a small loss)
ZN_ID_06: it would have worked (avoiding loss, without missing profit before)
ZN_ON_02: I would have avoided a big loss, but would have missed even more profit before it, so overall a bad outcome.

I noticed a few things:
1) the losses are sometimes clustered together, which would speak against the hypothesis of waiting till there's a loss to start trading.
2) waiting for a loss, obviously always gets you to avoid that loss, but makes you miss all the profit before it, which is often more than what you lose

So, all in all, I can conclude (by guesstimates) that it doesn't make sense to wait for a loss, because, even when losses are not clustered together (which would be like looking for trouble), for a profitable systems (and those I use are highly profitable), waiting around, as a rule, causes you miss more profitable trades than losses.

So I am concluding that it doesn't make sens to wait for a loss or a drawdown, but I am still thinking that it is favorable to start after a long drawdown, such as the one I am seeing right now on many systems (yellow-shaded cells). I don't know if I can keep my reasoning going, because so far it's been good, but I sense that there's something to be gained from starting after a long drawdown.

Indeed, "max drawdown" means the maximum fall from a previous peak, and statistically we all assume it will hold or not be exceeded by much. This is true for the same reason that we do not have the concept of "max drawdown" in dice or coin tossing, where everything is random, and you cannot have the expectation of "max drawdown" (the max drawdown recorded on a sample of coin tosses). If we do have the concept of "max drawdown" is because we think that it won't be exceeded (or close to it). Whereas in coin tosses, whatever happened is irrelevant. But if we're building trading systems, it means we believe the market is not random walk, and therefore we believe previous drawdown helps us predict future drawdown.

And if we believe that, then we could also say that it makes sense to start trading after a big drawdown, since a big drawdown is LESS likely to be followed by more losses.

But then there's these two guys, Ralph Vince and pecas, who say otherwise and say each trade is like a coin toss and drawdown is meaningless:
Portfolio management formulas: mathematical trading methods for the futures ... - Ralph Vince - Google Books
http://www.trade2win.com/boards/plan...ml#post1691624

So, my final conclusion, regardless of what these guys say, is this:
1) it doesn't make sense to wait for a loss because it could be followed by more losses but especially preceded by a lot of wins, which could outbalance the future losses, but which you'd miss by waiting for that loss
2) it doesn't make sense to waiti for a big drawdown, because with profitable systems, such as those we should be trading, you're more likely to waste profit (same as above) while waiting for that drawdown, profit which could make up for the future drawdown
3) it seems ideal to enter after a big drawdown has happened, if you're lucky enough to start at that point...

...But then would it not make sense to wait for that drawdown? Well, no, because time is money, and time is wasted profit as a rule. So it's good to start after the drawdown but not good to wait for it. It's not making total sense to me, and maybe those two guys above are right, but this would in turn mean that the concept of drawdown is meaningless. But if this is the case, then the whole idea of predicting the future based on the past is also meaningless, and therefore trading systems are meaningless.

I'm gonna need a lot more math than I've covered so far. But at least now I have a better assessment of what I don't know.

It will help to read this goddamn book, The Mathematics of Money Management by Ralph Vince, even though it's too heavy for me right now. I need to do less, in my own way, and better, before starting to fill up my head with his notions. Actually you know what? Since he has a chapter on Markowitz, I will now remove Markowitz, which is hard as hell, and replace it with Ralph Vince. I mean on my signature, at the end of each post.

[...]

Here's a thread totally focused on my previous question of when to start trading (randomly or after a loss/drawdown):
http://www.tradingblox.com/forum/viewtopic.php?t=8980

Not much is concluded, even though the forum has got users with great expertise on these subjects.
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Last edited by Yamato; Jan 8, 2012 at 9:10pm.
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Old Jan 8, 2012, 9:27pm   #102
 
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Re: my journal 3

Yamato started this thread Today I've done only the khan review exercises but no statistics nor probability because my eyes are hurting from not sleeping enough and from spending too much time looking at the screen. I still need to record here every time I do or not do math, because otherwise I disrupt my schedule and discipline. Today it's the day i did less math in the last 2 months. But I still did something.

On the other hand I am watching Mob Wives, which requires more reasoning than doing math (crossing and double-crossing calculations, calculating which wife can boast the most crimes committed by the husband, etc.). Fascinating documentary. So far I've liked the most the fourth and last episode I've watched:
http://www.1channel.ch/tv-2720873-Mo...on-1-episode-4
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Old Jan 9, 2012, 12:51am   #103
 
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Re: my journal 3

Yamato started this thread This thing about prices being random or not is really bugging me, and I feel I should read much more about it because it's the foundation of my testing and probabilities of blowing out in the future, but before reading any books about it (Vince or others), since many also disagree with each other, I need to study the basics of statistics and probability. So, despite not having slept, and since I can't sleep anyway, I am going to do some of the work I was going to postpone.

What I was thinking was this for example. If I start on a random day, my probability of blowing out is about 0.1, given my capital. But if I then withdraw the profits two months later, isn't it like restarting again, and wouldn't then that probability increase, or would it be just 0.1 all over again (given that I already got away the first time)? I would say that the chance of blowing out will then be 1 - 0.9 * 0.9 = 19% , which is equal to 100% minus the probability of not blowing out multiplied by itself... damn. It confuses me, each time I think about it. If I start today, and plan to withdraw in two months, then I have 19% of blowing out. But if I start after I already did not blow out the first time, then, given that outcome has already happened, my chance of blowing out will be, once again, 10%.

Ok, let me think about rolling dice and coin tosses. If, after tossing a coin and getting a head, you toss it again, the probability of getting a tail is not 75%, but again 50%. So in that case, too, if you toss in a sequence, your probability of surviving the drawdown is again 0.5 to the power. In all cases it is to the power, because, even with coin tossing, one thing is to say "after ten heads, at the tenth toss we bet there's going to be a tail" and another thing is to say "we bet from the start that out of ten tosses there will be at least one tail". In the first case you have just 50% in your favor, whereas in the second case you have 1-0.5^10=99.9% on your side: chance of no tails in 10 tosses - Wolfram|Alpha.

But something still escapes me. I am definitely confused about this, but let's adopt the attitude of "a little by little I'll understand more of it" rather than "the hell with this", as I've done in the past. At any rate, this doesn't affect my trading right now.

Also, I still wonder what Vince means when he says that drawdown is an irrelevant value (cfr.previous posts).

[...]

Ok, I did some probability exercises and stats and now i'll try to sleep.

[...]

Ok, here's another one (from the mentioned pecas' thread) talking about how previous trades are irrelevant:
http://www.trade2win.com/boards/plan...ml#post1696278
Quote:
Also, it is key that you realize that what someone above said about picking a piece of paper and then writing down trade result and then PLACING THE PAPER BACK is absolutely CORRECT. Your prior trades DO NOT effect subsequent trades. If I flip a coin 10 times and the first 4 are all heads does that influence the 5th time I flip a coin....NO....I still have a 50% chance of heads or tails. You can have as many as 10 heads or all 10 tails and obviously any combo in between. So ech coin flip (think trade) has NO bearing on future coin flips. You just know that if you flipped a coin say 2 million times that ON AVERAGE you would have 1 million heads and 1 million tails but there could be strings of each interspersed.
So let me get this straight. I can agree that past trades do not have an impact on future trades. All right. But with one important remark: we're talking about long and short trades. If instead we were talking only about long trades or only about short trades and on futures, the fact that your, let's say long trades keep being losses means the future is falling lower and lower and this will certainly affect the future likelihood of rising/falling (it would be more likely to rise). So let's get back to this: we're talking about a long/short system, and its previous success/failure doesn't affect the subsequent one. So then can we say, like I read on the title of a chapter in Ralph Vince's book, that drawdown is meaningless? According to the concept of trades being like coin tosses, we should, because you can't say that after 10 coin tosses, they're unlikely to continue. Wait. You can. You can say that it's not likely that you'll see x heads in a row. You can say that you'll see it happen once every 1000 tosses. And in the same way you can say that it's unlikely that a given system will have 20 losses in a row for x dollars. So we're talking probability again, finally it's starting to get clear. But then drawdown is NOT meaningless, neither for trading nor for coin tosses.

If we're saying that, out of 1000 trades, we've seen 50% of wins and 50% of losses, this is just like for a coin. They both a probability of 50% of coming out one way or another. And if we say that the past max drawdown is 15k dollars, then it's still similar to the stats for coin tossing. The difference is that we know the probability model for the coin, being that there is a fair coin with one head and one tail. But we do not know what causes the outcomes of a trading system. In one thing, we go from theory to practice (coins) and in the other case we have to do the opposite and find the theory and probability model behind the statistics. With coins we go from proabability to statistics and with trades we go from statistics to probability.

Let's say I am studying the coin tosses but I do not know they're coin tosses. This is similar to what I am doing with a trading system. Let's say there's only 10 outcomes available. I'll see 6 heads and four tails and say this has a 50% chance and so on... what I am getting at, which is not much anyway, is how do we know how to estimate the future based on the past for trading? Ok, let's say we have 200 trades, and we have profit/loss of each trade. After all the analysis is done, how do we know how much that data can predict the future? Is there a formula for it? How do we know how much past drawdown can help us predict future drawdown?

With coin tosses we know that it is impossible to predict the future max drawdown. And so the same way is for trading. But then how do we go about it? We don't really care to predict future max drawdown anyway. We care that, while we're living, we're likely to make money from a system.

Now, let's say that we're still back on coins. You're given this possibility: you want to bet that we're going to get at least one head out of ten coin tosses? Yes, by all means. It is convenient to bet. Are we sure that we'll make money? Not at all. We could get unlucky. Then if we're given the opportunity to keep on betting on this event (that out of ten outcomes there'll be at least one head), we should keep on doing it, because, as I said earlier, there's each time a 99.9% chance of winning:
http://www.wolframalpha.com/input/?i...s+in+10+tosses

But still we would not be sure that we won't blow out our account and go into debt forever by betting our money, dime by dime, on this almost certain event.

What i am getting at is that, both with coin tosses as with trading systems (which I now agree are equivalent, in terms of probability theory, provided we're not, as mentioned, trading just long or just short), we CANNOT predict max future drawdown, so this thread is misleading in its title:
http://www.trade2win.com/boards/plan...rawdown-4.html

The title is like "achieving immortality". It should have at least a question mark.

How should we title a useful thread like that? "Appraising probabilities of future drawdown" and also "optimizing portfolio to reduce most likely drawdown". I am not saying that it's not useful. Then how to answer these threads with a different title is an entirely different matter, and I could barely write a post in a thread title like that.
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Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

Last edited by Yamato; Jan 9, 2012 at 5:21am.
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Old Jan 9, 2012, 4:04am   #104
 
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Re: my journal 3

Yamato started this thread I thought about it, and I felt I wasn't being careful enough so I got rid of the two riskiest futures in the portfolio: CL_ID_05 and ZN_ID_06. They require too much margin and have the lowest forward-tested sharpe ratio of the former seven of the portfolio, which are now only five:

snap1.jpg

With these five guys I feel a bit safer. From the table above, I can quickly notice that, out of the 56 weeks or so, I would have blown out my account only by entering in one of them. But then again, the again from week to week (friday to friday) is not as bad as the falls that could take place from one day to the other. Despite this, it is clear that, given that i chose these systems for their great performance in the forward-tested period, the back-tested sample is not as good, in terms of sharpe ratio. It seems to be better in terms of profit. I can't delve into it too much right now, but it seems that the adjusted drawdown (with today's prices) is lower than the absolute drawdown, so this could mean a lot of things, such as the higher underlying price and profit of one system offset more the losses of another, or that the lower underlying price of another system caused its losses to weigh less on the overall drawdown. Or that there's a mistake, but I can't check it right now. Not worth it anyway given that I am proceeding by guesstimates, and the overall approximation is much higher than this detail.

Also, I am going to try and wire a few hundreds more at the end of this month, and make the initial capital 4600 instead of just 4000. The expected chance of blowing out is about 14%, which is 1% more than the previous one, but it required more margin, so that exact portfolio would have stopped trading sooner. Also, with a lower forward-tested sharpe ratio for those two futures, that portfolio was less promising and more likely to underperform relative to the back-tested sample (in my opinion), on which i do all the statistics.

Back-tested performance (2002 to early 2010):
snap2.jpg

Forward-tested performance (last 13 months):
snap3.jpg

It all looks very healthy. Now I will wait one more month to see what happens to this portfolio.

I hope the euro will rise, so my wire transfer in euros will mean a larger capital. In fact by not transfering my money earlier it's as if I were long on the euro.

[...]

Damn. I can't sleep. I am gonna turn my alarm off. I am drinking Lambrusco at the moment. I'll probably go late.

In the meanwhile, while getting drunk, I am doing a search on "appraising future drawdown":
https://www.google.com/search?q=appr...uture+drawdown

Here's one good link I found:
http://www.aetheling.com/MI/MaxDrop.html

I don't understand much but it is right on target.
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Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

Last edited by Yamato; Jan 9, 2012 at 7:29am.
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