Predicting the future maximum drawdown...

Yamato

Legendary member
9,840 245
Thanks for the chart, donaldduke. I understand what you say. If you trade systems on futures and have a low capital however, position sizing is not possible. In my case, I'd need about 200k for position sizing. Silver requires 30k of capital for example. To do position sizing with that one, even without considering the drawdown, one would need at least 200k.

Regarding the book, earthling, I feel most books have a tendency to show off knowledge rather than teach useful things, but in this case he might be worth a shot, and he might teach me to think in terms of probability, a bit more than I do now. I know how to find .pdf files for free, but this idea of audiobooks is appealing as I don't like to read. Maybe I'll listen to it when I am trying to fall asleep. I might look for it on emule one of these days.
 
Last edited:

Earthling

Junior member
14 3
Travis you can borrow audio books from libraries. If you know how to find .pdf files or movies for free, try looking in the same place for audio books. I just googled emule, yes, that looks like exactly the sort of site. Be careful of viruses though, that’s my fear about the free sites.

I know what you mean about not liking to read, especially because it requires specifically allocated time to do it, and reading books off a screen makes me sleepy. Audio books are great, you can take time off from chart watching and still be ”working” by listening to your ipod while you exercise or cook or whatever.
 

Yamato

Legendary member
9,840 245
Ok, when I get on emule, I will use the string "audio taleb" and similar. Yeah, viruses is a big concern on emule, but with .pdf and audio files the risk doesn't exist. It happens instead with maybe even the majority of .exe files.

Yes, audio book is a great concept.
 

Sidekicker

Well-known member
407 11
... of a system, or a portfolio of systems.

It's a very interesting argument, because you can read how many books you want (I read some by Ralph Vince) on Money management, but all of them are based on the fact that you know, with reasonable certainty, the amount of the future maximum drawdown, i.e. how much you're gonna lose before you make new profits.
This is necessary because it affects your risk of ruin. How many shares to buy? How many contracts to sell? These are all questions you can't answer if you don't have a method to estimate the future maximum drawdown, even if you read Vince's "opera omnia".

I don't have an answer, but I'm trying to find one, and just today I made some good experiments that show how relying on the maximum drawdown found in tests, be it backtests or out-of-sample tests, is just not enough. Doubling that number just to stay safe (the future is always worse than the past) is as well arbitrary, and could be too prudent (not efficient) at times, and too risky other times.

I'll try to explain my experiments here (give me some hours) and would like to receive some feedback, and hopefully some contribution.
Look up to concept of variance.
You simply can't know this with 100% accuracy but you can give yourself a rough idea if you keep stats and you measure win ratios, reward, MAE, MFE, etc.
 

zentrader22

Member
62 1
@all,

for estimating a possible maxDD (premise: the market conditions in the simulation runs are like in the past and the system functions...) it's enough to have the backtest results, the system report etc. It's even not necessary to have the price or trades list to realize a profound MCS stress test.

Specially for the premise of changing market conditions and/or concerning the development of "many markets - many time frames"-systems MCS methods can also be use for the generation of synthetic data (based on the original historical data feed) for additional backtesting.

More Info here:
www.zentrader.de - trading system development and monte carlo simulation methodology ...

bye
Volker
 

Yamato

Legendary member
9,840 245
Yes, I have seen your website. Congratulations on all your work. I have a very weak theoretical background in probability and I don't know anything about Monte Carlo Sampling/Simulation, but I have a lot of experience with trading systems nonetheless. From what I understood on my own about probability, I took the trades by the systems in my portfolio, multiplied them by ten times, and I mixed them up several times (on excel, by assigning the "rand()" function to each trade, and then re-ordering them according to the random number generated).

What came from such resampling (cfr. this post) was very consistent results (from running several such random samples), which for example estimated at about 20% my probability of blowing by trading the selected portfolio with a given capital. And that was twice as bad as the backtested data was telling me, which was a 10% risk of blowing out. As i said, I did that "resampling" several times and it returned very similar results. I hope I can call it "resampling" and that I am not misusing the term.

Seeing that my back-tested results for drawdown were actually better than if those same trades had happened randomly, i figured these worse values would be closer to reality than my original backtested results, which might have suffered from curve-fitting of the portfolio (by discarding those systems that caused the combined drawdown to be too high).

Indeed, what more could I expect from my systems than to produce trades in a random order? It would be a dream if they were all uncorrelated. So, i figured, how can I be getting results that are better than if they were uncorrelated? This would mean they're inversely correlated, but this is more likely to be caused by curve-fitting (enabling only the systems that produced trades that fit well together, out of randomness, and therefore not likely to happen again), than by the quality of the systems, so I should rule that possibility out.

So I think this method I devised might have something good, but I have no idea if and how it's related to Monte Carlo Sampling. Also, I am not likely to buy any software, because I never buy anything, but also because I don't like to use anything unless I understand exactly what it's doing. I'd rather do it myself on excel, even if it is simpler and less powerful, because I believe it's better to have something limited and simple, that I understand, than something very promising, but that I can't understand.
 
Last edited:

zentrader22

Member
62 1
@Travis,

you're right. Monte Carlo Simulation concerning trading system backtests in the the case of (a)system simulation (stress test) can be reduced to a kind of "trade sampling". In the case of (b)data simulation this is a resampling of data time series under specific conditions and rules.

So Monte Carlo Simulation methods are not complicate, they are instead easy to implement (if you know your genre - here: development of trading systems) and they serve the purpose of simulating scenarios which cannot be analyzed using existing data (or scenarios which are to be far to expansive to model in reality).

In the case of trading system backtesting we only have proved data for max. 80 years (e.g. Dow Jones Index), normally far fewer. So it makes a difference to get a time period of more then 1 million years thru MCS simulation methods...

bye,
Volker
 

Yamato

Legendary member
9,840 245
Thanks for the information.
 

Similar threads