Posts Tagged ‘Risk vs. Reward’

Reality based expectations

September 4th, 2009

Recently I read a great piece of advise in a forum (I’m someguy over at Donnas forum) regarding what kind of “standards” we, as a automated trading community, should require before forking over hard earned dollar/euros/skulls for the latest and greatest piece of software that is being spammed to us from professional affiliates (I hate spammers and scamsters). It isn’t brain surgery of course, but now and then a EA comes along that actually looks promising and the developers are saying that they only will sell a few hundred copies (I like restricted releases, but hate when it isn’t enforced after the 100 copies are clearly already sold). That is when we need this “checklist”. Right now I think there actually is a few EAs for MT4 that live up to the standard, but even some of them use the marketing lingo of the scamsters (come on FAP and MD teams, redo your websites).

After this I started to think about my own expectations on the performance of my automated strategies. I think I need a better game plan. Right now I don’t think I am aware enough. I need to make a model for the risk I’m willing to take and base it on % risked per trade and also try to limit total exposure by limiting the number of concurrent open positions. I’ve just started thinking about it, so it is a work in progress. I think I will basically use my current model for my more “traditional” portfolio where I do monthly reviews and redistribute the funds according to previous months winners (basically what is sometimes called a rotation system, where you bet on your winners). For forex I’m thinking that I should demo trade a lot of different EAs and pairs and choose (on a weekly and monthly basis) the top 5 performers and just trade them. For example right now that setup would probably be: 1/ MD Pro EURUSD 2/ MD Pro USDCHF 3/ FAPT USDCAD 4/ Forex Shocker EURCHF and possibly 5/ Forex Shocker GBPUSD. I should bet on the proven winners (and perhaps even bet more on the # 1 strategy than the #5, say a ratio of twice the lot size for #1 compared to #5 and 2-4 somewhere in between.

I’ve also come to realize that I need to include my forex trading in my total portfolio. Right now I really treat it as a side project (that is taking more time than my “real” multi-asset portfolio, simply because I enjoy it more).  But as the correlation between my forex trading performance and the other asset classes in my portfolio strategy is basically zero of course it should be treated as a great addition and I think it should be a new asset class. I’m thinking even that it should be split up in sub-classes of scalpers and more long-term strategies. FAPT/MDPro/FS is a completely different case than RoboMiner.

As for the risk taking I think I should try not just to maximize my weekly/monthly gains of course. I have always tried to choose setups that take risks I can live with (IE to limit draw downs to levels I don’t feel sick about). But I need a better calculated model here also. I think I will base it on total exposure and historical draw down (in %), not on the gained/lost sum of money (if it is losing of course after some time it will be “rotated” out of the portfolio by the rules above) for the scalper class. For the more long term forex asset class (that right now only would include RoboMiner) I will just try to make the most and not risk margin calls I think. For RoboMiner that would mean that I would use a conservative lot size and just let it ride, it will make what it makes (the developers state 4-8% a month using default values I think). Other long term strategies could include systems like LMT or carry trades I think, but I’m not doing that right now.

I’m really looking forward to do some more math on this.