I have been having this conservative idea in the back of my mind for a while now but Im not sure how useful it would be.
When confronted with a new system that you have either backtested yourself or seen the past results of, it is still no guarantee that it will perform well in the future.
So I was wondering whether an approach of meritocratic based trading size adjustment would reduce risk whilst allowing a system or method to show its true colours. In other words, you reward a system for every point it gives in profit and punish a system for every loss. Anything above a certain target level of profit (e.g. 100 points) is given a maximum of 25% increase in trade size for the next trade. E.g. if you get half the target profit you can reward it 12.5% increase in trade size. The target profit must not be adjusted frequently. Also, you can only increase the trade size if it doesn't break your risk/money management rules!
For any loss it would be an automatic reducation of 5%. I chose 5% as I know that some systems give good signals less than 50% of the time but the profitability factor still makes it an overall winner. This would prevent a good system from being continually reduced but it would stalemate a system that was consistently failing to achieve its target profit per trade. This would either mean the system isn't very good, or you are expecting too much of it! A losing strategy would get wittled away to nothing in a very short period of time.
I haven't got any back testing software that could test this strategy out. So Im wondering if anyone would like to see if it would do a good job against protecting you from a dodgy system and letting you milk a good system for all its worth! Would it be a good strategy? What would be the results of changing the percentage adjustment and the profit target?
My only concern with this is that it might make it harder for profitable trades to counterbalance the bad trades. A string of 4 losses would reduce a compounded 20% of trading size. However, a string of only 2 good wins would swell the trade size by 50% (compounded), increasing the overall trading size even after a few losses.
I think this approach would also protect us from a system thats slowly going out of synch with the market. But it would be interesting to backtest this approach and see if it does a good job.
Maybe starting off really conservatively at 100 shares (or less) depending on your account balance. I wonder how many shares this would increase to and how fast, with some previously backtested systems?
When confronted with a new system that you have either backtested yourself or seen the past results of, it is still no guarantee that it will perform well in the future.
So I was wondering whether an approach of meritocratic based trading size adjustment would reduce risk whilst allowing a system or method to show its true colours. In other words, you reward a system for every point it gives in profit and punish a system for every loss. Anything above a certain target level of profit (e.g. 100 points) is given a maximum of 25% increase in trade size for the next trade. E.g. if you get half the target profit you can reward it 12.5% increase in trade size. The target profit must not be adjusted frequently. Also, you can only increase the trade size if it doesn't break your risk/money management rules!
For any loss it would be an automatic reducation of 5%. I chose 5% as I know that some systems give good signals less than 50% of the time but the profitability factor still makes it an overall winner. This would prevent a good system from being continually reduced but it would stalemate a system that was consistently failing to achieve its target profit per trade. This would either mean the system isn't very good, or you are expecting too much of it! A losing strategy would get wittled away to nothing in a very short period of time.
I haven't got any back testing software that could test this strategy out. So Im wondering if anyone would like to see if it would do a good job against protecting you from a dodgy system and letting you milk a good system for all its worth! Would it be a good strategy? What would be the results of changing the percentage adjustment and the profit target?
My only concern with this is that it might make it harder for profitable trades to counterbalance the bad trades. A string of 4 losses would reduce a compounded 20% of trading size. However, a string of only 2 good wins would swell the trade size by 50% (compounded), increasing the overall trading size even after a few losses.
I think this approach would also protect us from a system thats slowly going out of synch with the market. But it would be interesting to backtest this approach and see if it does a good job.
Maybe starting off really conservatively at 100 shares (or less) depending on your account balance. I wonder how many shares this would increase to and how fast, with some previously backtested systems?
