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Xiao si

Equity Stops and 'system Switches'

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I am interested in implementing a switch on my systems to stop trading when 'x' drawdown(s) occurs. I am thinking of using an equity stop to preserve capital and switch the system from the live account to the simulator again until the system equity overtakes the account equity (where the stop was activated) again. I know that there are index traders that use this type of stop but i am interested in ideas as well as templates in Excel to save me re-inventing the wheel so to speak...

 

Many thanks in Advance.

 

Attached is an example of how they might work....

 

Cheers,

 

 

XS

5aa710d2a6d9b_Estop.thumb.PNG.f8336790019fee8e948374cc5a5df302.PNG

Edited by Xiao si

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I am interested in implementing a switch on my systems to stop trading when 'x' drawdown(s) occurs.

XS

 

Hello,

 

Equity-curve trading is an interesting topic that remains fairly esoteric - it doesn't seem to be mentioned much on here.

 

One very simple approach, rather than an 'x' drawdown in fixed dollar terms, is to cease trading when the equity curve crosses below a moving average. Obviously this MA could also be optimised, although I am not aware of any software for doding so - maybe some of the more sophisticated portfolio analysis programs may be capable of this?

 

Here's another point you might like to consider: a strategy that is profitable will have an equity curve that is mean reverting. This means, in theory, that you would want to increase trading following a drawdown, as you can shortly expect a renewal of the upward equity curve. This is only true in so far as you can be certain that your system will continue to mantain a positive expectancy. If, on the other hand, you had doubts about this, then an 'x drawdown' type rule for cessation of trading can provide an objective way to define 'system failure'.

 

I hope that's of some help to you - good luck researching a complex and seldom discussed topic!

 

Bluehorseshoe

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I do not like the idea of switching to simulation when it reaches a certain level of losses. The best trade will always occur when the system is in simulation mode!

 

The best solution I've found is to link directly the size of the positions and the maximum level of risk assumed by each trade to a certain percentage of capital available in the account.

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As a follow-up to this i found a product called Market System Analyzer that can help you decide when to trade your system depending on whether or not the systems equity curve is mean reverting or not. Alos on selecting position sizes according to risk, account size etc. Interesting....I think i will look at this further before i start to trade my own systems live.

 

XS

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