Announcement

Collapse
No announcement yet.

Drawdown simulation and trading systems selection

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Drawdown simulation and trading systems selection

    Suppose i have a trading system A which has historical 100 trades data. I ran simulation 10,000 trials and look at the worst drawdown that this system A could have produced by chance alone. Let's say that
    System A has max simulated Drawdown (DD) at -40%. Now if I set my maximum drawdown of my portfolio at -20%, i will be trading system A by only half of my portfolio to ensure that when the worst comes, i
    won't be down more than -20%. By the same token, if system B has max simulated DD of -10%, i will be trading 200% of my portfolio on system B.

    Questions:
    Currently I set every system that i have equally at -20% max portfolio DD. Here's what i mean

    System A B
    Max Simulated DD -30% -63%
    Portfolio Max allowable DD -20% -20%
    Market exposure adjustment % 70% 33%
    Annual Expected Returns 36% 24%

    For example, if i have $100,000 portfolio, i will trade system A at 70,000 market exposue in a given trade. And i will trade only $33,000 worth of market exposure on system B. This also mean that my expected
    returns will be geared down accordingly. So system A will now have expected returns to my portfolio of (36%*70%) = 25.2%. And system B will give me 7.9% returns to my portfolio.

    Now here's my question, by setting each system max DD to -20% of the total portfolio, i am willingly allow each system an equal chance of damaging my portfolio. You would ask, why should i allow system B
    which can generate only 7.9% returns to my total portfolio to have the same damaging effect on my portfolio. In other words, should i set B at -15% instead of -20%? How about setting A at -25%? What should
    be my method in setting this Portfolio Maximum Allowable DD when i take into consideration the expected returns of each system?

    Any comment is welcome.

    Thank you

Top Active Users

Collapse

There are no top active users.
Working...
X