Here’s a second trader question on the subject of evaluating trading system performance test results.
Is there a way to optimize for position sizing during systems development, using software or otherwise? Or am I supposed to work it out on a trial-and-error basis?
Optimization in this context refers to the impact of position size on system expectancy and standard deviation.
Optimization is one of those things in trading that can be very, very tricky. There are definitely ways to do it, but before we even get to that point we need a set of contraints. Specifically, we need to know the absolute risk parameters. By that I mean we need to know things like how large a drawdown we are willing to accept, how much of a single trade loss we can mentally/emotionally tolerate, and things of that sort.
Now, if you’ve not done much real money trading it can be difficult to sort out those risk parameters. We can all come up with objective ideas like, 10% per trade and 50% for a drawdown, but we may find out when it’s real money at stake that taking losses that large give you sleepless nights and ulcers.
When you have your risk/loss parameters sorted out there are indeed system trading applications which can help you with optimization so that you don’t have to do it via trial and error by hand.
One of those applications which just about everyone has access to is Microsoft Excel. You can use the Goal Seek functionality. You’ll have to do some reading up on it for yourself because this is not the place for a lengthy discussion on Excel. If, though, you have the ability to set your system up in the spreadsheet, you likely won’t have too much trouble with Goal Seek. I’ve done a great deal of system testing with Excel because it’s extremely flexible.
As for other programs, they vary in capability. I know that MetaStock definitely has the functionality, and I’m sure others do as well. I’m not an expert on all the different packages, however, so if you want to know about any specific one I suggest you look to the manufacturer and/or check with other traders on a forum site like Trade2Win.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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