The purpose of this thread is to propose a dynamic risk allocation technique. Your input is greatly appreciated.
After gathering risk management techniques from Aparsai and Fijitrader, I have experienced first hand the value of VAR and R%.
I want to push the topic a bit further. My latest experiments show that although my system is profitable, it experiences inevitable drawdowns from time to time.
How do I deal with that?
Most traders are content to trade a fixed percent of their capital at any point in time. IE) Risk 2% of their capital for each trade. Suppose the capital drops down to 60% during a very slow period.... the rollercoaster effect is gut wrenching.
In dynamic risk allocation, we do the following:
We always know the highest capital we have achieved in trading. IE) I started my account with 10K, and eventually reached 20K, so my new highest capital achieved is 20K.
Dependent my account's current capital vs. highest capital achieved, my risk is as follows:
90% - 100% of highest capital achieved, I risk 2% per trade
80% - 89% of highest capital achieved, I risk 1.5% per trade (I will increase risk to 2% once the account recovers to 90%)
Below 80% of highest capital achieved, I risk .5% per trade (I will increase risk to 1.5% once the account recovers to 80%)
The idea here is that during drawdowns, I do not jeoprodize my capital by risking large when I am already in the hole. Eventually my system will pull out of the slump, and I will bet large again. This technique allows for large gains, but limits the dips in my equity curve.
After gathering risk management techniques from Aparsai and Fijitrader, I have experienced first hand the value of VAR and R%.
I want to push the topic a bit further. My latest experiments show that although my system is profitable, it experiences inevitable drawdowns from time to time.
How do I deal with that?
Most traders are content to trade a fixed percent of their capital at any point in time. IE) Risk 2% of their capital for each trade. Suppose the capital drops down to 60% during a very slow period.... the rollercoaster effect is gut wrenching.
In dynamic risk allocation, we do the following:
We always know the highest capital we have achieved in trading. IE) I started my account with 10K, and eventually reached 20K, so my new highest capital achieved is 20K.
Dependent my account's current capital vs. highest capital achieved, my risk is as follows:
90% - 100% of highest capital achieved, I risk 2% per trade
80% - 89% of highest capital achieved, I risk 1.5% per trade (I will increase risk to 2% once the account recovers to 90%)
Below 80% of highest capital achieved, I risk .5% per trade (I will increase risk to 1.5% once the account recovers to 80%)
The idea here is that during drawdowns, I do not jeoprodize my capital by risking large when I am already in the hole. Eventually my system will pull out of the slump, and I will bet large again. This technique allows for large gains, but limits the dips in my equity curve.