WHAT YOU MUST KNOW
BEFORE USING ARMAGGEDON
- Good trading system.
- Good awareness of its statistical behavior.
- Good awareness of our personal capability to tolerate
- drawdown in terms of depth and duration.
- Money management configuration consistent with BOTH the previous 2 points.
- Follow the system and give it room and time to work at least until it is inside his statistical behavior parameters.
An example of a typical situation where people even when they have good trading systems still will lose money is:
- People see a trading system able to generate an average yearly profit 4 times the maximum drawdown.
- They want to make 200% profit every year, so they set the parameters according to this target. This means that the trading system, even when it works well, can generate a drawdown of 1/4 of the profits = 50% of the capital. But these people’s emotions and actions are driven by profits and they don’t consider drawdown andthe psychological effect of the drawdown on themselves.
- The trading system starts working on a 2000 USD account but, after one month the account loses 800 USD and is at 1200 USD. They get very upset, and believing the system is not working they remove it.
- In the following month, the system could have recovered all the losses and started to make money, but as they removed the system they are left with 1200 USD in the account.
Where is the bug in this example? Not in the system, it was working exactly good both in the first and in the second month because it was still inside his own statistical parameters. The problem here is that these people want to see only the profit potential of a trading system, they don’t want to see the drawdown (which is normal for all good trading systems.) They also don’t want to see in advance the psychological effects of drawdown on themselves. With ARMAGGEDON we give you a unique good trading system portfolio with a very strong, flexible and safe portfolio money management system but if you want to make money you MUST:
- Look carefully at the following statistical analysis and understand the statistical behavior of the system in terms of possible profitability variations between months and between years, drawdown depth, drawdown duration.
- Try to imagine how will you feel seeing your account losing money for 5%, 10% ... 40% for the double time of the maximum showed in the statistical analysis. Select the Capital protection money management mode of the portfolio and select the level of maximum drawdown you are confident you can tolerate keeping sleep well in the night.
- Use it and don’t remove the system until:
- You earned enough money and you don’t want to keep earning more or
- The system is still behaving inside his statistical parameters
- Never interact with the system e.g.: never close trades manually. Let it run his own statistical flow.
PLEASE REMEMBER VERY WELL THE FOLLOWING SIMPLE EXPLANATION ABOUT THE FOREX BUSINESS:
FOREX trading is a legal serious business not very different than any other legal serious business. In any legal serious business, it is normal to have costs. What counts at the end is that your income will be higher than your costs, even if the income typically coms after you take the costs. It is very important to know that the business reality is not so much different than the business plan. With the same approach, you need to consider FOREX trading losses as a business cost and winnings as business income. The business plan here is the trading system statistical behavior, your analysis on your risk tolerance, your decision to select the risk level and your ability to seriously follow all the aspects of this plan.
NOTE
- Armageddon supports GBP/USD, EUR/USD, USD/JPY and AUD/USD currency pairs. All four currency pairs show very good back test performance.
- Armageddon is compatible with all MetaTrader 4 brokers, as well as with brokers that use ECN-type order fulfilment. You do not need to change any settings.
- Armageddon automatically recognizes whether your broker offers four- or five-digit quotes. You don’t need to change any settings. If your broker offers five-digit quotes, you don’t have to multiply Take Profit and Stop Loss values by 10.
- Avoid launching and closing your trading terminal too often. Ideally, it should work without interruption from market opening on Monday to closure on Friday.
- For problem-free operation, use a computer with a minimum configuration of: 1.5 GHz processor, 1 GB RAM, and Windows XP, Windows Vista, Windows 7 or Windows 8 operating system.
- A stable internet connection is essential to ensure that Armageddon operates reliably.
RISK MANAGEMENT
Risk management is of fundamental importance in attaining
optimum trading results. It pays to think carefully before deciding
what percentage of your account to expose to risk in each
transaction.
Armageddon opens a maximum of 9 trades at a time (up
to 3 trades for each strategy). Having nine open trades
at the same time is quite a rare occurrence, and some
of the trades will be hedged, but 3-6 trades at a time is
normal, so in this context, the risk values below are lower.
To have good Trading Systems is not enough to make money if
we are not able to manage the related risk and to protect our
money in the periods where the market goes against our trades.
TWO IMPORTANT ELEMENTS
Risk (*): The lot size invested in a trade is calculated in a way where, if the market goes against the trade, the money lost will be very close to the specified percentage of the account. On top of this, there is also a Maximal Drawdown protection feature where Lot Size is decreased even more if the already achieved Drawdown of the specific Trading System profit is closer to the worst case found in the Trading System backtest.
THIS CAN PREVENT US FROM SEEING A WORST SPECIFIC TRADING SYSTEM DRAWDOWN THAT THE ONE MEASURED IN THE BACKTEST FOR EACH TRADING SYSTEM.
Capital Protection (*): The principle is similar to the previous point but in this scenario there is a stronger “cooperation” between the different Trading Systems in order to secure not only a precise Maximum Drawdown of each Trading System but also a maximum Drawdown in the account Capital. THIS CAN PREVENT US FROM SEEING A WORST OVERALL CAPITAL DRAWDOWN THAT THE ONE MEASURED IN THE BACKTEST FOR EACH TRADING SYSTEM. The main differences with point 3 are:
- The Risk for each trading system is selected automatically according with the configured maximum allowed Capital Drawdown.
- The weight of different Risk for each Trading Systems is based on the statistical results of the backtest on how they can cooperate better to minimize the impact on the overall Capital and, at sometimes, burst the profit.
- Anyway, an active mechanism reduces the Lot Size even more if the already achieved Drawdown of the overall Capital is closer to the worst case found in the portfolio backtest.
- As result of this mechanism, each Trading System invests more if it is in the right market situation and is winning. On the other side, the trading system decreases the risk taken per trade if it is in the wrong market situation and it is achieving losses (even if there are is a lot of money in the account and the other Trading Systems are winning).
- The risk taken on the “gained profit” is typically higher that the risk taken on the “Capital”. This allows us to keep excellent profitability even if we use very strong and very safe capital protection mechanism.
- At the beginning of the Account life, the “Capital” is obviously the amount of money founded on the Account. Considering that ARMAGGEDON takes more risk on the achieved profit than on the Capital, once the account starts to make money, we can define different criteria how to move achieved profit to the Capital asked:
- We can decide and see capitalization rules in a way that once any profit is achieved, if it remain for nn days it becomes Capital. From that moment, it is also protected by the Maximum Capital Drawdown mechanism.
- We can decide to use a capitalization rule in a way that once a profit of X% is achieved, and Y% of this become Capital, from that moment it is also protected with the Maximum Capital Drawdown mechanism.
- The previous rules can also be used together.
- Using capitalization, the overall achieved profits will be less than if we don’t use capitalization. We can see this situation like an “insurance cost”, meaning that when we achieve a profit we reinvest part of it on an “insurance mechanism” that prevents us from seeing huge drops in the future of our already achieved profits.
In the following figures, you can see an example of capitalization impact. The blue line is the equity curve, and red line is the current capital. Both figures are related to the same trading system with
a starting capital of 100.000 USD with a capital max drawdown protection of 5% max loss on the current capital. In the figures, N.1 no capitalization mechanism is present, in the figures N.2, 50% of the achieved profit become capital every time the achieved profit reach 10% of the previous capital.
(*) These mechanisms work better when the account size is enough compared to the broker allowed Minimum Lot Size.
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