Entries and Exits Don't Really Matter

[Mathemagician]

Certain markets, especially futures, have limits on the maximum and minimum prices at which they can trade on a given day. Typically these limits are N points above/below the prior day's close. Because of this, there are days where the market will open at the upper limit and stay there all day, or at the lower limit and stay there all day. Days where this happens are called "locked limit days". There is very little volume on those days and no hope of getting an order filled, so a trading system must ensure that it does not count orders as filled on locked limit days in a backtest or its results cannot be reproduced in reality.

As an example, here is a chart of a series of recent limit up days in Minneapolis Wheat:

I cannot recommend a starting capital amount that would be appropriate for you, since this depends totally on your specific goals and constraints. FWIW, I set the minimum account size for a conservatively leveraged individually managed account in a program such as this in a restricted set of markets at $250k and the minimum for the full program is $2m. There are, of course, other avenues with a lower capital requirement which one could pursue if one were sufficiently motivated to trade a program such as this.

jj

 

[alexander]

There is very little volume on those days and no hope of getting an order filled, so a trading system must ensure that it does not count orders as filled on locked limit days in a backtest or its results cannot be reproduced in reality.
jj

I believe that you can probably sell a market that is locked limit up and you can buy a market that is locked limit down. Usually, nobody does that because there is expectation of continuing limits.

You cannot execute orders in the direction of the limit, of course. There are days when a market opens locked limit and then retreats.

Intraday drawdown is irrelevant at the levels of leverage we're discussing here. The margin requirement for this model right now is about 8%. That means if you've got a $1m account you need to post $80k for margin.jj

jj, margin is not scalable. So saying margin is 8% makes no sense. Margin in futures is an absolute value in currency terms per contract traded. Only when talking about notional amounts you can use percentage. But then it's like trading the spot commodity.

This is the reason I maintain my position about the importance of margin and max intraday drawdown in the system you talked about, which is very interesting if its realistic of course. I have never seen a better equity curve before in futures trading.

Alex

 

[Mathemagician]

Alex,

You are correct, of course, about selling limit up days and buying limit down days.

Hmmm... It occurs to me that we might be talking about the same thing and may be in agreement after all. When I say the "daily peak to valley drawdown" I am presenting and analyzing the marked-to-market daily equity curve of this model including the daily fluctuations of all open positions. This is the equity curve that can get you a margin call if your drawdown is sufficiently large. The only thing I'm ignoring is the intraday highs and lows in each market.

Many folks prefer to present the (always more attractive) "closed trade equity curve" which is built by only adding a trade to the EC once that trade is closed (i.e. ignoring fluctuations during a position), which is of course cheating and in fact prohibited by regulation. This equity curve hides the daily fluctuations that result in much larger open position drawdowns than would otherwise be apparent.

Am I on track?

jj

 

[Mathemagician]

This is the reason I maintain my position about the importance of margin and max intraday drawdown in the system you talked about, which is very interesting if its realistic of course. I have never seen a better equity curve before in futures trading.

Alex

Thank you very much... One thing to note is that this model is by no means unique or the best out there. (Heck, it's not even one that I use!) It's just a simple daily breakout system that was published long enough ago to provide a decent walk-forward of the original author's work, traded using a pretty good position sizing methodology, and applied to enough markets that one couldn't be accused of cherry picking the best handful. There are quite literally dozens of entry/exit methodologies that will produce similar results, some of which were published pre-1970. Which is, of course, actually the point of the thread... the risk management part is the key, not the entries and exits!

jj

 

[StratOpt]

I have seen better equity curves than what he showed earlier in this topic. The one he uses here is like he said just a basic published idea. You ought to see the real stuff he has

 

[mp6140]

Now gentle people ... tolerance to other's ideas please, lets explore rather than challenge (too) hard ... if I can only get one good thing from everything Mathemagician says I'll be happy. And I think I'll end up with more than one.

FWIW, IMO, you need a minimum in the 100k to 200k range to trade an end of day futures portfolio properly. 10-13 contracts will give good diversification and its hard to get much beyond that anyway because thinness, slippage, and in some cases a tendency to nasty locked limit days and rapacious floor brokers (may they all disappear) make them far less profitable than they appear on paper.

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whats being illustrated is an "investment" technique along with the compounding that technique uses.

What happens more with "trading" is that the money is being used for more "normal" and short term situations, such as buying hotdogs or paying your landlord or mortgage.

Forex, on a literal "investing" strategy, sure would suffer greater drawdowns than appears to have been illustrated, which makes it somewhat "iffy" on the investment scale.

anyway, everyone wants to get rich quick, and never thinks about 50 years down the line ! (most anyway LOL)

mp

 

[alexander]

Thank you very much... One thing to note is that this model is by no means unique or the best out there. (Heck, it's not even one that I use!) It's just a simple daily breakout system that was published long enough ago to provide a decent walk-forward of the original author's work, traded using a pretty good position sizing methodology, and applied to enough markets that one couldn't be accused of cherry picking the best handful. There are quite literally dozens of entry/exit methodologies that will produce similar results, some of which were published pre-1970. Which is, of course, actually the point of the thread... the risk management part is the key, not the entries and exits!

jj

I remember reading about a breakout system in a magazine years ago that produced really good results across many futures markets. I think it was a 23 day breakout.

I think you may have a good system there and please do not give it away because if there is some edge to it you will lose it right away. It's better to talk to a hedge fund and ask them to allocate some money to you for trading it. Some funds will go for something like 10 Million Euros, they got nothing to lose, their daily fluctuations amount to that much in most cases.

Good luck jj

Alex

 

[StratOpt]

If you read a bit closer you will see that the system used in the posting was published in a book in 1998 so it is already in the public domain for 10 years. The edge that JJ has is the edge of his wonderful money management methodology. He can take ANY system that has a decent equity curve and make it better. That is the point of this topic.

 

[Mathemagician]

Well, the point really is that people focus incessantly on entries, to a lesser extent on exits, and almost not at all on position sizing/money management, while there is actually a good bit of edge to be had if one reverses these priorities. Focusing on risk management first, exits second, and entries last can produce some pretty good results. The model illustrated is just there to make the point concrete.

jj

 

[StratOpt]

And does this management apply to those who can only afford to trade one eMini ES contract because they only have 10 or 20K in an account ? Would or should those people still care about money management and position sizing at all ?

 

[Mathemagician]

For several reasons...

1. It keeps the trader from trading so aggressively that the account can't get off the ground, thus ensuring failure no matter how good the underlying trading system is.
2. It encourages the trader to seek out what might be a more appropriate (i.e. smaller) instrument for their trading where sizing can be applied.
3. If one is successfull one will eventually move from 1 to 2 units and beyond. This is a more delicate process than most appreciate and should be done in a way that at once prevents catastrophic failure, minimizes the time spent in this "danger zone", and meets the specific goals of the trader. It is important to put this plan in place ahead of time, before the emotions associated with success cloud the trader's judgement.

There are other reasons, of course, but these are just a few off the top of my head.

jj

 

[LondonUSTrader]

Why is it that most traders spend nearly all of their time chasing after a better set of entries and exits? (Heck, most focus squarely on the entries!) In reality, you can use pretty much any modestly stable set of entries and exits and achieve results that would please any trader whose goals are properly aligned.

In order to illustrate this I've attached two equity curves. They both use an embarrassingly simple entry/exit methodology found in a book that was published in 1998 (just a daily breakout). It's literally a two-line system, one for long entry and one for short.

The first EC is just the plain old system applied to a portfolio of 65 global futures markets using 1 contract each. The second EC is the identical set of entries and exits on the identical set of markets but with a halfway decent position sizing method applied. (Costs applied are $115 per round-turn.)

You'll note that the testing period is 25 years long with the last 10 years having occurred after the publication date. Notice there is no degradation in performance after the publication date. With position sizing turned on, this is a 21% compound annual growth rate with a maximum daily peak-to-valley drawdown of just 25%. This result is definitely competitive with the top CTAs and money managers for this period!

Once you outgrow the B.S. presented by the make-1000%-a-month-with-95%-winning-days hypesters and work out what a 21% CAGR means to you, you quickly realize that this type of performance is more than you'll ever need and the drawdowns associated with it are quite comfortable. Why do I say this? Well, here's a VAMI table showing the results of a 21% annual return compounded over a career...

That's right, after 10 years you've got a 670% return on initial capital, and after 20 years you've got a 4500% ROIC. Best of all, during this time the worst drawdown you've endured is 25%.

Why aren't more people trading this way? Why are so many people chasing the perfect entries? It's a mystery to me, but I'd sure love to hear your reasons...

jj

It is a valid point, but most traders don't begin with capital of at least $100k, which this way of trading would require.

If you have the capital I agree a multi-market futures system is a good way to go.

 

[Mathemagician]

The same risk management concepts apply to all types of trading at all account sizes. Again, the particular system illustrated is merely an example and not to be confused with the core message.

jj

 

[LondonUSTrader]

The same risk management concepts apply to all types of trading at all account sizes. Again, the particular system illustrated is merely an example and not to be confused with the core message.

jj

You make a valid point. I once heard of a very successful forex trader based in Sydney who applied similar concepts.

His entire edge was his risk management model. In fact, he even made his entry decision by buying newsletter recommendations and then managing the positions. His thought was that anyone could come up with reasonable entry conditions, but the real edge was in the risk management.

 

[new_trader]

Why trade?

Why is it that most traders spend nearly all of their time chasing after a better set of entries and exits?

Yes, an interesting question... Why is it that most traders spend nearly all of their time chasing after a better set of entries and exits? Hmmmm.....very interesting......why do ‘they’ do that....

I’ll even go further than that and ask - Why would anyone want to trade in the first place? There is a better way of making money, it’s called EMPLOYMENT. Why not just get and job and actually work for a living! There is absolutely no risk to the money you’ve already earned, you get to keep what you make each and every month. That’s right, absolutely NO DRAW DOWNS. Not only that, you know exactly how much you will make each and every month so you can plan how you will spend it. Brilliant! I think I know why people don’t want to make money this way, it's because it involves effort and let’s face it, people are lazy, and so there is an even better system for lazy people who want to make money without putting in any effort. Anyone can use this system because there is no thinking involved, absolutely no emotions to worry about, there is very little risk to your capital and best of all the success rate is 100% without any draw downs! You make more money each year, every year for year after year. It’s called 'A savings account'. But you have to find one that pays compound interest. The more of them you have, the more you will make. Brilliant!

 

[temptrader]

and as for someone who use to be employed I can definitely vouch for what NT says:

1) unless you do something utterly unprofessional or deliberately set out to sabotage the business, you are guaranteed a fixed amount of money per hour worked as long as you are not caught slacking
2) there are absolutely no draw downs, unless you are in sales work where commissions can play a big part. For most jobs it's a set amount per hours - and no draw downs. Hooray....
3) you can plan in advance since you know how much money will be coming in and, more importantly, when it will be coming in . . .
4) as you get more and more experienced you can learn to screw the business for more money if you've worked yourself to a position that is instrumental in it's workings . . .

As Paul Whitehouse would say in the fast show: Brilliant!!! Lets all get employed shall we? And while we're at it let's play happy families . .

 

[mp6140]

And does this management apply to those who can only afford to trade one eMini ES contract because they only have 10 or 20K in an account ? Would or should those people still care about money management and position sizing at all ?

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LOL --- SURE AS HELL THEY SHOULD !!

Hurts more when its a huge amount they see disappear !

mp

 

[dcraig1]

Mathemagician,

Do you have any good references for position sizing / risk management of a portfolio of trading systems ?

Preferably something a bit better than van Tharpe type stuff. A bit of mathematics is OK.

Thanks

 

[Mathemagician]

Yeah, I never found much use for the Van Tharp stuff either. Unfortunately, as you've noticed, there just isn't much out there. Ralph Vince is about as good as it gets. His books are mostly repetitive, though, to the point where I can't really tell them apart without looking through them.

jj

 

[temptrader]

I've said this and I'll say it again: Mr Tharp does not trade. Listening to him about trading would be like listening to your grandad trying to talk like an expert about fishing despite the fact that he has only once tried fishing and he hangs around with a lot of fisherman during his life.

I never knew you could make so much money by charging people for advice that you never put into practice, because you failed at it before. There's an entire institute built because of this. If that's not sad then I don't know what is . . .