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C.V.: Recently, I prepared a report on a simple intermediate-term breakout system for my local trading group. The focus of the report was the importance of risk management in following a trading plan, but the system itself, based on historical testing, appeared to be tradable. The report is reproduced below. |
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· Trading offers exceptional returns as well as a high degree of risk. |
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· Concentrate on managing the risk. The returns will take care of themselves. |
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· All technical analysis is based on a study of market history. The study should have a high degree of replicability in real time. |
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· To assure historical studies can be replicated, trade liquid primary markets. You need at least six or seven for diversification. The 10 markets in my portfolio are ED, TY, US, DM, JY, CD, CL, NG, C, and CT. |
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· Trade a simple system with the same parameters for all markets. This protects against the situation of a system working well on historical data and failing in real time. |
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· Management of risk is achieved through proper sizing of each new position in terms of the system's risk profile and the risk-reward preference of the trader. |
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· The most important formula in trading is the Kelly formula. Kelly allows you to evaluate the amount of risk a system can absorb. |
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Where WP = winning percentage
W = average win
L = average loss |
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Kelly=((WP*W/L) (1WP))/W/L |
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