Trading as a Business
If the mean trade profit is 0.5%, winning trades are about equal in size to losing trades, trades are 60% accurate, and there are 52 trades per year, then the annual percentage profit will be approximately:
(0.995 ^ 21) * (1.005 ^ 31) = 0.900 * 1.167 = 1.050. This is well below the required 1.78.
If there are 252 trades per year, the annual percentage profit will be ap- proximately:
(0.995 ^ 101) * (1.005 ^ 151) = 0.602 * 2.123 = 1.278. By using cor- rect position sizing, the goal can be successfully accomplishing if the drawdown remains within accept bounds.
managing The BuSineSS
As a trader planning to grow your account, you are running a busi- ness. Just as with any other business, you need office space, equipment, supplies, and personnel, all of which require funds – either directly expended or as lost opportunity. Calculate your monthly expenses and determine where that money will come from. Throughout this book, we will assume that the trading account has no withdrawals to meet business or living expenses.
Structure your business so that it can be run like a DVD. When there appears to be a problem, or you want to take a break, press Pause and go flat. Analyze and modify as necessary, then press Resume. You do not need to remain exposed to risks during the adjustment period.
You will need time. Time to generate signals, place trades, record and analyze results.
And you will need skills. In particular, you need to be enough of a statistician to understand the techniques used to determine the health of the system.
gamBling and Trading
We begin with some examples from gambling that illustrate some of these points, after which we will extend the examples to trading.
Copyright © 2011 by Howard Bandy All rights reserved This document is a chapter of “Modeling Trading System Performance” Published by Blue Owl Press, Inc. www.modelingtradingsystemperformance.com