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Even a blind squirrel finds a nut sometimes - Anon

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True progress, whether on a personal, societal or material level, is achieved by pushing the boundaries ... by seeing how to make a better mouse trap so to speak.  It is so easy, and hence so common, to rest on one's laurels and be satisfied with a result.  I am more than happy to put my hand up and plead guilty to that at times in my own journey.  They were times that went on to create a period of stagnation in my life, albeit at a higher material level.  This is akin to water that no longer flows or moves ... after a while it no longer supports life.

So how does this fit into trading I hear you ask?  Let me explain using the results of a RBT.  By any measure, most people would be more than happy to achieve the sort of results that you see below.  In one 6 month period turning 25,000 into just shy of 90,000 and then in the following 6 month period starting afresh with 25 k again and ending up with just over 70 k.  The R was set at the 'mantrified' 2%.   In terms of R, the total for the year was 201 R.

By now your imagination has probably already run amok and played the 'what-if' game .... what would be the end result if the second 6 month period had started at where the first one finished ... just shy of 90,000!  I will leave that up to both your imagination and your spread-sheeting skills.

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The chart below shows you the market and phases of the market that this RBT was applied to.  One question that is important to address when back-applying your RBT is 'how much data should be used'?  One year or 6 months or what?  The real question is what phases of a market should the RBT cover!

Any market evolves over several distinct phases.  The obvious ones seen by most are:

Trending and non-trending.

This is far too simplistic in my view.  There are many more subtle phases.

Steady (sine-wave'ish *) trend up versus parabolic trend up

Steady (sine-wave'ish) trend down versus vertical trend down

These have very different characteristics and hence very different results.

(* L.I.V.E. students will relate to FM movements)

Similarly, non-trending phases come in different flavours.

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Hence, the number of bars or number of months is not the important aspect.  What is vital with any back-app is that all the various phases of a market's evolution are included.  Otherwise the results may be very skewed and not be statistically valid.  Additionally, there needs to be a significant number of instances of an event for the results to be statistically valid.  Yes, it means work!  Perhaps even extra work to bridge the another great divide (aka the Grand Canyon) between your goal and the eventual outcome.

I have mentioned in previous articles ways of changing and/or improving your results from a RBT without changing the entry or exit rules.  This is to work on the MM side of the equation ... the Money Management side.  This involves, in part, position sizing.

Before you can move to this stage, you must have a RBT that meets your goals and requirements.  Should MM alterations change your RBT from being unprofitable to profitable, then the RBT itself becomes very questionable.  Generally MM routines should provide incremental changes to the overall outcome of a RBT.  A bit like adding spice to a lobster or some ambience to an already great sunset!

I have said many times that not all setups are created equal.  Based on your back-app you will find that some setups lead to larger R returns than others.  This would, or should, impact on how they are managed, the Campaign Management side of this four dimensional cube.  It can also impact on your MM routines.

In this section, I am going to look at a general tinkering with the MM side, not with individual setups.  I am indebted to a L.I.V.E. student who took up the baton and created a spreadsheet to 'play' with the results of a RBT.  I am sure that in time, should this path be as positive as it appears, he may incorporate these MM routines into his own personalised RBT.

The general idea is to validate the concept of altering the size of exposure (the R value) depending on where an RBT is in its own equity curve.  This came from inspecting the equity curve of many different RBT's over time and seeing the obvious.  And what is that?  Hmmm.  Hidden in plain view as most things are.

As simplistic as it may sound, the observation was that after a new equity high is achieved there will be a drawdown (at some stage), as inevitably as sunrise follows a sunset!  The second part was that, more often than not, there is a clustering of losses.

This became the working hypothesis with the aim of using the observation to improve the results from an already rather profitable RBT.  The RBT, in its original format, always used 2% as the R value ... whether at new equity highs or in a drawdown.   A very plain vanilla approach as used by many ... perhaps it can be improved and hence progress on both a personal and a material level!.

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The starting point was to dramatically reduce the exposure (R level) by half (to 1% instead of 2%) after the first loss following a new equity high.  This is in recognition that losses tend to be clustered.  Additionally, after the first loss, rarely does the RBT attain new equity highs on the very next campaign.

The second tweak was to raise the R value to double the standard (to 4%) after 2 losses in a row (whilst still in a drawdown).  This makes it easier for a valid RBT to bounce back to new equity highs from the inevitable drawdown, or two or three.

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The results of this Variation # 1 (the blue line) are quite remarkable.  Compared to the ending equity for the first six months of the sample (the red line), this iteration was an improvement of 28,940 ... an improvement of 32%.

The improvement over the second six months of the sample was similar ... 19,579 more profit or a 28% better return!  Logically this seems in line with the fact that the overall results for the second 6 months (without the MM tweaks) were not as stellar as for the first 6 months.

Variation # 2 only changed the requirement regarding the number of consecutive losses from 2 to 3 before doubling the R value.  The dramatic reduction in R after 1 loss following a new equity peak remained the same.  In other words, you had to wait longer before being able to double your bet size when in a drawdown.  Logic again dictated that the resulting improvement would not be as dramatic, if at all.

Variation # 2 (the blue line) on the chart on the left spent most of the six months being slightly below the red line (the basic RBT results) for most of the time.  It was only at the final stages that it managed to outperform the RBT.  And even then, the improvement was less dramatic than with Variation # 1 ...  as expectable in many ways.  Expectable because there were far fewer large drawdowns ( in terms of number of campaigns not depth) than there were in the chart on the right.

On the other hand, because the RBT on the second 6 months had many multi-campaign losses and hence longer drawdowns, Variation # 2 spent most of the time outperforming the base RBT.  However the improvement was only 13,678 or 19%.

This trend was continued and reinforced with Variation # 3 when the requirement for losses in a row was increased from 3 to 4.  In this case, the MM tweak under-performed the base BBT in both 6 month samples ... again in keeping with the logic behind it.

From my perspective, logic is an imperative ingredient underpinning any venture.  Logic is far more important that statistics.  In my very early trading days back in the 80's a brokerage house in Australia raised several million dollars from clients to trade a 'statistically proven' concept.  Alas, whilst the numbers were accurate, the logic behind the concept was not-existent.  The inevitable outcome was that those millions were lost.  This was not dissimilar to the LTCM experience of the late 1990's.

What I have demonstrated in this article is that Money Management routines can play a dramatic role in the overall performance of your RBT.  It is a way of creating a better mouse trap and hence potentially being able to earn more from the markets.  As a direct consequence, you are in the position to leave a greater imprint on the world than simply the number of zeros at the end of an account.  After all, anyone reading this already has far more in a material sense than the majority of the world!

Why not check your own RBT to see if you can benefit from this idea!

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Roulette wheel news

As if there were not enough ways to separate people from their money already, another one has just been approved.  The existing ways already number in the hundreds.  To mention but a few:

Fees and charges levied by governments and companies
Taxes and fines
Inflation
Currency devaluation
Casinos and lotteries

Back in the year dot when I stumbled upon trading the financial markets in the early 1980's, the smallest FX contract size was 1 million dollars, and spot FX trading was only available to legitimate hedgers.  Now FX trading has been degraded down to a 'nano' lot size being US$ 100 contract size.  Talk about catering to the lowest common denominator!

As from March 18, 2013 a number of USA exchanges will allow you to trade options on 10 shares, instead of the current 100.  The companies that will be covered are Amazon, Apple, Google, the Spider S&P 500 ETF and the Spider Gold Trust.  All this is right in line with bull market mentality (aka a major top).  As an aside, futures on Real Estate were introduced in London around 1990, right in line with the, then, upcoming top in real estate prices.  All these innovations are naturally justified at the time!

The Experiment Update
after 14 weeks
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Equity Chart (above) - this week was only the second losing week out of 14
and the first losing week after a string of 11 winning weeks

Distribution Graph - shows the second occurrence of back to back 1R losses

Stats

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Make it a week that really counts

All comments/questions to:        Ivan@ProfitFromPatterns.com