Kelly Criterion - Money Management on Steroids

0

This is an analysis of the Optimal Risk for my y48 system trades, calculated as per the Kelly Criterion.

I have been trading the y48 Trading System since May 28th. The details and statistics of the y48 trades are available on my Trading Stats page.

The chart below shows the continuously calculated values of Optimal Risk based on actual trades. There are 3 lines:

1. The Green Line shows how the Optimal Risk varied for Long Trades.
2. The Red Line shows how the Optimal Risk varied for Short Trades.
3. The White Line shows how the Optimal Risk varied for All Trades - both Long and Short.

Optimal Risk as per Kelly Criterion

 
The Optimal Risk as per Kelly Criterion is calculated based on 2 parameters - the Win Rate, and the Payoff Ratio. The Optimal Risk is percentage of capital to be risked to maximize capital gain. I had posted earlier about the Kelly Criterion.

The continuously calculated value of the Optimal Risk has varied drastically since May 28, as seen in the chart.

	Maximum Value	Minimum Value	Last Value
Long Trades	49.07% May 31	-1.92% Jul 23	11.69% Aug 03
Short Trades	69.65% Jun 15	2.10% May 31	28.00% Aug 03
All Trades	53.61% Jun 04	14.76% Jun 22	18.35% Aug 03

So, as of today, if I expect the performance of the y48 trading system to remain the same as since May 28, I should optimally be risking 18.35% of my capital in each trade. Ideally, if I had risked this Optimal Fraction for all my 64 trades from May 28 to Aug 03, with a 50% Win Rate and Payoff Ratio of 1.58, my Return on Capital would have been 426%.

Even better, if I had risked 11.69% of my capital on each long trade, and 28% of my capital in each short trade. So, if I had risked accordingly on the 37 long trades and 27 short trades done between May 28 and Aug 03, and assuming that the win rate and payoff ratio would have remained the same for the longs and shorts, my Return on Capital would have been 504%.

y48 is just an average trading system - profitable, but nowhere close to some of the better trading systems. However, when boosted by the steroid of Kelly Criterion, even an average trading system can give superlative returns. Are you ready to ride the highs (and the lows)?

Well, my returns with the y48 system have not been as good.... but though considerably lower, they have been very very good. That is because, I obviously did not risk this exact calculated percentage of my capital (obvious, since it is a hindsight calculation). Also, I did not actually compound my capital, since I use a slightly mellower version of Money Management. And, there is small matter that I have not considered brokerage and other costs for these calculations. Those costs would have brought down the value of Optimal Risk by a couple of percentages.

I actually risked between 15% to 35% of my ledger balance in each trade. My ledger balance is just one part of what I define as my trading capital. Currently, I work out my the balance to be held in my ledger based on a convoluted formula that also considers my total liquid funds. That really takes the edge off the Steroid - it mellows of the effect of Kelly Criterion to a tolerable level. But more on that later.....

Read Full Post »

Trading Stats Archive: 2016 Q1

0

I have decided to begin updating my Trading Stats page again. In this post, I am archiving the old data that was available on the Trading Stats page.

This data is of my trades during January to March 2016. During that period, I was almost exclusively trading the Range Compression Method. In that system, I used to wait for a visual discernible compression of price in the M15 and M3 charts. Then, I placed a Stop Loss Market (SL-M) order at either end of the range. Trailing was based on a mechanical formula.

With that system, I had a huge profit in the last 3 weeks of January. With the leverage that I was using, I made over 200% profit in January. After that, the exact same system went into a slump, and due to the same high leverage that I was using, I had lost all my gains by the end of April 2016. Note that with even with high leverage, it took me 3 months to lose the gains that I had made in 3 weeks in January 2016. That is the advantage of taking entries when the range compresses and the risk is small.

In the range compression system, I would trail my Stop Loss, only when I was able to lock in a respectable amount of profit. It meant that in many cases, I would book a loss, even on a trade that had moved decently in my favor. That would appear high on the Stupidity Index. In fact, this is what I was doing when I returned from my trading sabbatical. On Friday, when I did not move my Initial Stop Loss even once in 6 trades, I hopefully learned a good lesson about trailing Stop Losses sooner.

Profits by Individual Trade 

 

Profits by Individual Trade

 Profits in Points and Cumulative Profits

 Profits in Points and Cumulative Profits

 Profit versus Duration (Scatter Chart)

Profit versus Duration (Scatter Chart)

All Trades: Profits and Losses

All Trades: Profits and Losses

Trading Statistics: Summary Report

Trading Statistics: Summary Report

Daily Trading Summary

Daily Trading Summary

Details of Individual Trades

 

Details of Individual Trades

Click here to go to my Trading Statistics Page

Read Full Post »

Princess Trading System Performance till date

0

Unusually, for a system hopper, I have been trading the Princess Trading System since August 30, 2016. I have been evaluating other trading systems off-and-on in the hope of finding something better. A few evaluations have identified systems that are probably good, but I continue to stick with the Princess.

I am ok with the system performance so far, and I am hopefully ready for the perils of this system when it hits me.... that is unless I shift to another trading system before that.

Here is the chart of the ledger performance, trading only Nifty Futures with the Princess Trading System....

Princess Trading System Performance - Ledger View

The Princess system is an intraday system that doesn't trade every day. But when it trades, it trades with maximum leverage. For this trading system, Kelly Criterion allows me to risk 15-20% of my capital in each trade. Consequently, the ledger balance is volatile. I have psyched myself up, and am hopefully prepared to handle even a 90% drawdown, in the hope that the remaining 10% will recover back to the peak in a short time. (Naive??)

The maximum drawdown so far has been 34.84% of the peak ledger balance. As with any highly leveraged trading system, the system trades more lots as it travels drawdowns from peaks to troughs. Recovering from the drawdowns is a slower process, because only fewer lots can be traded with the lesser cash available at troughs.

As this is a volatile system, I periodically take out some money (my dividend), to buffer the psychological impact of drawdowns. But I also add to the capital, when I see the account dipping, so that.... well, I am as stupid as that.

The chart only shows the EOD value of the ledger balance. If we consider the intraday swings in the ledger balance, the system is actually way more volatile than what the chart shows.

Read Full Post »

Last week's trades - Day Trading: Feb 22-26, Intraday

0

Finally, updated the stats and charts of last week's trades. It is a pain to mark these up at the end of the week. Going forward, I shall try to update the trades daily.

Monday's trades:

I tried trading mechanically of the constant volume charts. Didn't do well - the day did not have enough range.

Tuesday's trades:

Shifted to discretionary trading, and continued for the rest of the week. While trying discretionary trading, I am still trying stick to the motto of Range Compression Trading, to the extent possible. Day could have been much better, if I had focused on Decision Points.

Wednesday's trades:

Continued with discretionary trading. I think that my entries were great, but in trades 2 and 4 I lost out because I tightened the SL and got hit by bad luck.

Thursday's trades:

Expiry day. Did not do well. Trade 2 exit was unlucky. In Trade 4, I held off exiting at the peak, and then turned it into a loss.

Series Performance:

The performance in the February Series was very bad. The Trading Stats speak for themselves. Here's a comparison with the January Series.

January

Days Traded: 19
No. of Trades: 50
Win %: 38.0%
Average Win: +36.8 points/trade
Average Loss: -9.6 points/trade
Average Result: +8.0 points/trade

February

Days Traded: 20
No. of Trades: 81
Win %: 27.2%
Average Win: +28.2 points/trade
Average Loss: -10.8 points/trade
Average Result: -0.2 points/trade

Friday's trades:

The first 2 trades were positive (exits could have been better though), and the last two were negative, though all of the trades were based on the same entry logic. In hindsight, could have tightened Stop Losses a bit.

Read Full Post »

Falling Knife ⚔ Stalling Knife - Day Trading: Feb 12, Intraday

0

I am so done with this Momentum Lagging Trading System..... (for now). The intention of this Trading System was to catch the falling knife when it had momentum, and ride it to profit. What I had not bargained for, was the number of times that the falling knife would stall right at my point of entry.

This was probably the wrong time for me to switch from the Range Compression Trading System. If I had traded the Range Compression Trading System on Friday, then I would have had 2 Short winners in the down move and 2 Long winners in the up move.

One of the reasons for the Momentum Lagging Trading System doing so bad is the tighter Stop Loss rules that I have used for this system. However, at this point, I do not want to test that system with a wider Stop Loss. Momentum moves are volatile, and the risk of slippage is huge. And it is difficult to backtest whether a tight Stop Loss would hold, since the entry is during a volatile period, and I wouldn't know if the Stop got hit in the same bar unless I have tick data.

Number of trades was going through the roof. With the Momentum Lagging Trading System, I have 24 trades in 4 days averaging 6/day. In comparison, with the other Trading Systems this year, I had 67 trades in 26 days, averaging 2.6/day. With the Momentum Lagging Trading System, 33% (8 trades) hit the Stop Loss with 5 minutes. In comparison, with the other Trading Systems this year, only 6% (4 out of 67) hit the Stop Loss with 5 minutes. So, though the Momentum Lagging Trading System did not cause me a loss, I have to drop it just for the jitters it caused....

Read Full Post »

House Money Effect and Intra-Trade Drawdown

0

I have been (officially) trading the Range Compression Trading System since January 6.... but I have been trading the system even earlier. In November, I was mechanically trading this very same system, but with somewhat different rules. Even in the first few days of January, when I was not trading the Range Compression Trading System, I was still marking possible entries on the charts.

This system does have a major flaw, if I may call it that... at least psychologically, and even mathematically, I view it as a handicap. With the current mechanical Trailing Stop rules that I use for the Range Compression Trading System, it is given to huge intra-Trade Drawdowns.

I have written about this earlier, and my rough estimate for intra-Trade Drawdown in January was about 15% of the Nifty scrip value. What is the problem and why is it affecting me? If it is a problem, why am I not fixing it? If I am not gonna fix it, then why am I worrying about it?

If I had the answers to these questions, then I would have already fixed it (obviously... probably?). Right now, I can only think of one reason - House Money.

House Money Effect

House Money Effect is the tendency of people to spend/risk income and profits from unexpected or recent sources more easily than other money. Though this term is generally relates to gambling casinos, where gamblers are more inclined to risk gambling gains on bigger or riskier bets, it is also common to see the general public spend a new bonus/windfall money more easily - on treats for friends or gifts, because they still have to get used to the fact that it is their own money, or even because of social expectations.

In terms of trading, this results in the tendency of a trader to take bigger or riskier trades with profits. In my specific case, it even means giving up profits - and additionally booking a loss in its place. How crazy is that?

Click here for the motto/reasoning that drives me to do this

Data and Analysis

The data of all intraday trades that I have done using the Range Compression Trading System in 2016 indicates my proclivity to give away House Money. Here, I am referring to unbooked Profits - that which is not mine, but is mine at the same time. (The term is unbooked Profits, as opposed to notional profits, since I could easily book them at or near the peak.)

The average MFE (Most Favorable Excursion) per trade is about 31 points, and I generally book 9 points out of that. The peak intra-Trade Drawdown is -23 points per trade - which means that in every trade, I watch the trade lose 23 points and do nothing about it. Around 10% of the time, I watch it lose over 40 points, and 27% of the time I watch the trade lose over 30 points and do nothing about it. Again, let me stress that I am day trading, and 30 points is about 0.4% of the scrip value.

Psyching about House Money

When this happens, and I, as a day trader who does not know what tomorrow brings, watch myself giving up a large part of my unbooked Profits.... then there is a lot of psychological pressure to do things differently - to attempt to capture the Profits at or near the peak. However, as a Systematic Trader, I am constrained to do what my System Rules tell me. In case I did not mention it earlier, let me tell that this Trading System has not been backtested.... so the only thing that keeps me at it are the live results. And that becomes really difficult when I hit a bad losing streak like the one which I am in right now.

When on a winning streak, it is easy to justify the House Money Effect, since money comes in anyways. But when you are on a losing streak, giving up the House Money, and then giving up some more, things are different.

So, again, why do I have to stick to a non-backtested system, giving up significant amount of unbooked profits, day after day, and week after week? Because I don't know better. Because the results until the current losing streak were good. When I have tighter Stops, I tend to be shaken out of big moves. Also, waiting for the wide Stops to be hit also keeps in a trade longer, and hence prevents me from overtrading.

Ok, enough psyching about this. I have put forward my justifications to myself to treat intra-Trade Drawdown as House Money. Time to watch how the Trading System psyches me tomorrow....

Read Full Post »

The other side of the Hill - Day Trading: Jan 28, Expiry Day Intraday

0

Today was the expiry of the January series. Took 4 trades - all losses today. This series has been good overall. I have been able to earn 402 (gross) points from 50 trades in this series. For most of the series, I followed the Range Compression Trading System on the M15 charts. In fact, I have not done any changes to this system since January 8. Trade entries are discretionary based on small M15 bars. Stops are mechanical, and are deliberately wide.

That is a kind of a record for a System Hopper. In fact, I also attempted to capture the spirit of the system in Trading System Rules. All that's only because the Trading System hasn't had a major drawdown yet. Now, that we are on the other side of the hill, things could be different.

Look at the profits per trade - it was increasing until the middle of this month, and then kept decreasing and has been negative for the last 2 days.

The major crib about the Range Compression Trading System is the mechanical exit. Since January 8, the average intra-Trade Drawdown has been approx. 24 points per trade, including the 34 point Trade Drawdown in today's Trade 4. That means on the average, in each trade, I exited 24 points (0.30 %) away from the MFE (Maximum Favorable Excursion) of that trade.... and remember, this is an Intraday system, and 50x0.30% = 15 % ☹ 

There seems to be some problem in getting the interactive data in the Trading Stats page. For now, I have pasted a few screenshots on the Trading Stats page.

Read Full Post »

Sankranthi - The account travels north - Day Trading: Jan 15, Intraday

0

Today is Sankranthi, the day (incorrectly?) believed to be the day the Sun starts its northbound journey. My account started the northward journey earlier this week. Here's how my trading performance chart for 2016 looks:

I stuck to trading the same Trading System for the whole week (a mini-record for me) - Discretionary Trading entries based on Range Contraction in the M15 Candlestick Chart, and Mechanical Stop Loss Placement with very slow trailing. That's because I haven't hit a big drawdown with this trading system yet.

Intra-Trade Drawdown and % Booked

 

On an average, in a winning trade, I had a Maximum Favorable Excursion (MFE) of +69.90 points, and I booked only +42.23 of those points. That is a profit booking of 60% of MFE. For large moves, that's a lot of potential profits given up. The average Trade Drawdown (TDD) was -34.14 points. That is 49% of the average MFE, and 81% of of the average profit booked. A very inefficient trading system. This has been the characteristic of the system this week. During my visual backtests, it was not so. In the backtests, I would enter a trade and exit it and the end of day on most days, leaving very little profit unbooked...

But the weeks other Trading Stats - a Win Rate of 82% (9 out of 11), and a Payoff Ratio of 3.28 are quite impressive.

Date	Position	Result	MFE	TDD
01/11/16	Long	23.50	39.35	-15.85
01/11/16	Long	46.30	74.20	-28.80
01/12/16	Short	21.00	41.35	-20.35
01/12/16	Short	5.30	33.70	-40.70
01/13/16	Long	-9.80	1.40	-11.20
01/13/16	Short	75.35	125.90	-50.55
01/13/16	Short	19.95	50.00	-30.05
01/14/16	Short	-15.95	15.95	-31.90
01/14/16	Long	95.00	127.10	-32.10
01/14/16	Short	20.00	40.00	-41.95
01/15/16	Short	73.70	97.50	-46.90
Total		354.35	646.45	-350.35
Average		32.21	58.77	-31.85

Today's trades

 

Today's trade was a long grind - the longest of my trades since I started this blog. I entered the trade on the second M15 bar with a 20 point Stop Loss. Ideally, I should have entered on the third M15 bar with a tighter Stop Loss - in which case I would have made a loss. The market ranged and the trade dragged on for a long time - I had to wait for exactly 255 minutes before I could move my Initial Stop Loss according to the Mechanical Stop Loss trailing rules. In the interim, I was the proverbial 'Bakre ki Amma', expecting my trade to be slaughtered any moment. The trade ended well... the price went South, and the profits went North. ☻

Read Full Post »

Partial Day Trading Statistics of Q4 2015

0

This page contains the day trading performance statistics that I had recorded from October 30 to December 9, 2015. It is to archive the data that I had already collected and updated on the Trading Stats page.

This data is not very useful for the following reasons:

1. I was trading a mishmash of trading systems during this period - both mechanical and discretionary... just the compulsive System Hopping that I do. Initially, the number of daily intraday trades were few, but later on increased in number. So, this data does not help much in evaluating or even comparing different trading methodologies and systems.
2. Crucially, I stopped collecting data when I hit a bad losing streak, and had a huge drawdown. Probably, the most important focus of such stats is to identify and fix the weaknesses of the systems, and in that regard this data is useless. The Ostrich Syndrome of trying to ignore losses does not help. ☹

I hope to be updating the Trading Statistics page with fresh data in 2016...

Day Trading: Profit by Trade and Cumulative Profit

Day Trading: Profit and Loss by Long and Short Trades

Day Trading: Statistics by Intraday Trades

Day Trading: Profit and Loss by Intraday Trades

Day Trading: Trendline - Profits vs. Holding Period

Day Trading: Consolidated Performance Statistics

Day Trading: Performance Report by Day

Click here to go to my Trading Statistics Page

Read Full Post »

Data Analysis: Holding Period and Profit Locking

0

Here's some analysis of the holding period of my trades vs. the actual and potential profits.

31 trades so far in this series, 9 of them profitable.

Relation between holding period and profit:
Of the profitable ones, only 1 had a holding period of less than 60 minutes - trade 3 on Tuesday.

94% of the trades held for less than 60 minutes resulted in losses. So, is it anything of significance? I guess not. I think it is just that I did not get into any trades that zoomed into profits and reversed significantly within an hour. Lazy Nifty!

Amount of profit locked:
For the profitable trades, the average MFE is 63 points, and on average I have booked 45 points out of them. Not bad!

For losing trades of less than 60 minutes duration, the average MFE is 8 points, and on average I have made a loss of 9 points on them. That's nearly OK for the kind of system that I am trading.

But for losing trades of more than 60 minutes duration (there were 6 such trades), the average MFE is 21 points, and the average loss is 7 points. This is certainly a concern. On the average, here I am giving up 28 points to book a loss. I hope that the aggressive profit locking that I adopted this week will improve this statistic. As usual, this aggressive profit locking will also have negative impact in terms of shake outs, and probably increase the number of trades.

The system will continue to be modified (and over-analyzed) or may even be discarded to balance out all the pros and cons. Never ending process...

Glossary: MFE stands for Most Favorable Excursion, which means the most profitable point during the duration of a trade. See the definition at    MyPivots.

Read Full Post »

20151110 - Losing streak continues

0

1 win and 2 losses. The smallest of all wins in this series, and biggest of all losses in this series. From the data, I can see that the max. MAE of winners has been -7.1 points, so keeping 15 points initial SL may not be worth it... but the data set of trades so far is small.

Time to make changes to the system....

Read Full Post »

20151105 Shorting Season

0

It's shorting season. I shorted 3 times today for 2 losses and 1 win.

I have done 12 trades in this series so far. Out of these 10 (83%) have been shorts. Both my longs have been losers. Of the shorts, 4 (40%) have been winners. 4 (80%) of the daily bars are red and one is doji. So, it's good that my entries are in sync with the market. (I always have a tendency to attribute these things to luck.) If only the win rate was better....

 

Read Full Post »