A Different Approach To Money Management
Last Updated on July 7, 2022
Ever so often I read how important risk management is. Yes, it might be important but my experience has told me it’s of no use to predefine risk and AFTER make strategies based on your risk tolerance. In my opinion that is doing it backward. I have tested thousands of trading strategies (I test around 1-5 ideas each day!) and stop loss and profit targets, in general, deteriorate the systems. Yes, this might be against “conventional wisdom” but I recommend testing it yourself.
Personally, I couldn’t care less about money management. The reason why is that I trade a lot of different stocks, systems, and strategies. Any stock has an insignificant impact on my overall performance and any strategy will not ruin my account. This is the only holy grail in trading.
Sometimes my systems are correlated but in general not. I always have a balanced mix between long and short, never leaning too much in either direction. So far in 2013, I have lost an incredible amount on the short side. Fortunately, I have made more on the long side.
I trade more systems/strategies because I think it’s better to trade more than try to develop better but fewer systems. Most likely I end up curve fitting by implementing “better” systems. Many of my strategies have a very rough equity curve, to say the least. However, when adding 30 or so strategies the equity curve gets pretty nice. So far in 2013 I have day traded all 34 days and only lost money on 4 days. My EOD has had a hit ratio of 80%. Individually none of my systems have a higher win ratio than 60%.
I recommend trading more and diversifying instead of using conventional risk management.
I agree with you on that, Oddmund. I don’t use any stops on my strategies. Many of the worlds best hedgefunds uses the same strategy: Diversify thru multiple tradingsystems.
I have have come to the same conclusion with respect to targets and stops. Diversification is the only form of risk management I employ. Diversification is the holy grail of trading.
[…] you continue trading? Do you stop? I feel pretty confident when I say that most people would quit. This is especially true if you trade only one system/strategy. So in order to succeed for the long term you have to understand how drawdowns can change your […]
Well said! Can’t agree with you more.
What about position-sizing. Multi-strategy trading provides both risk reduction as well as higher frequency compounding (by using multiple lower frequency strategies).
How do you select size of trade? % of Equity?
Very nice site by the way. Going through it now. Do you really trade all these strats?
I usually trade a fixed size in terms of dollars based on my total equity, and then adjust a little bit by volatility. Yes, I trade more or less all I write about plus some more.
Thanks for your nice comments! I’m going to have a look at your site.
I found 2 publications in this subject. Maybe this research papers will be useful fo someone.
P.S. Great site Oddmund. I check your site every day looking for update. After your email I started using excel for research pattern in market.
Very good! Thanks.
Can I ask how many different trades you are able to make on average per day? How many different tickers do you buy/gets filled on a day for strategies that are not day trading.
Right now I have about 8 tickers each day overnight. Not that much. But as works progress I hope to have some more. I’m a strong beliver in diversification (after all amy research I have done).
I noticed that many of your strategies only trade a few times per year whereas a few strategies trade much more often. How do you allocate your capital with these mix of strategy frequencies? I can imagine some days you have tons of signals from different strategies and others very few.
Yes, you’re spot on. For example, my SPY strategies are often overlapping. I have somewhat ranked my strategies in importance. And yes, capital allocation is somewhat difficult. But as of now I try to use 100% on my pair trades (I have some other strategies that i haven’t publish, might do it later). The rest of the trades I use on margin. But it’s a work in progress, I didn’t trade any EOD before 2012 (at least not much). But it has gone a lot better than I thought it would. So far, so good. Somehow I need to automate some of it, it takes time to do all this manually. Damn, I’m so bad at programming!
You are the first person to say what my research has always supported, that is, stops and targets are deterimental to returns. I have an idea why this is true mathematically but I need to write it down to make sure it makes sense. Thanks for confirming my thoughts – we’re not alone!
I never use stops. Curtis Faith wrote about it in his book “The way of the Turtle”.
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