Reinvesting profits on Z1/2 strategies?

Posted By: TankWolf

Reinvesting profits on Z1/2 strategies? - 01/28/13 09:43

I've noticed that these strategies don't seem to incorporate reinvesting profits. What chance is that there could be versions that do or maybe a slider that allows you to select a percentage of your profits to reinvest?
Posted By: jcl

Re: Reinvesting profits on Z1/2 strategies? - 01/28/13 10:25

It can be mathematically proven that investing a percentage of your profit, as most traders do, will eventually cause a margin call with 100% certainty. This is especially a danger of automated systems that you don't observe permanently. You need to invest instead an amount that grows slower than your profit, such as the square root of a profit percentage.

Reinvesting is not implemented in Z1/Z2 due to the $7000 limit. That's not enough for properly reinvesting. The "Zorro S" version will have different Z1 and Z2 systems that reinvest.
Posted By: TankWolf

Re: Reinvesting profits on Z1/2 strategies? - 01/28/13 11:35

Every trader I've ever seen or heard professionals even always talks pretty much about using fixed percentages of their account balance in each trade. Also have read a lot of people have used the Kelly criteria to bet or invest with to great success which in some cases can mean betting huge amounts of your account each bet/trade. While I don't dis believe you about your claim about reinvesting profits it would be really interesting to see your theory behind this and why using an amount slower than your profits is the best method to use.
Posted By: jcl

Re: Reinvesting profits on Z1/2 strategies? - 01/28/13 12:41

Traders do certainly not belong to the people you should listen to when it comes to trading. laugh

Drawdown depth increases over time. You can make this yourself plausible by considering that the more you trade, the higher is the probability of a long loss streak. That's why a system, tested over 10 years, produces a higher max drawdown than the same system tested over 5 years.

When modeling drawdown mathematically, you'll find that with a break even system, the drawdown depth increases with the square root of the number of trades, which is in turn proportional to the trading time.

Drawdown also increases with the invested amount: When investing twice the lots you'll get twice the drawdown. When you reinvest a percentage of your profit, the drawdown depth increases with the profit, which is also proportional to the trading time.

When you sum up both effects, you'll get an overproportional drawdown increase with a time exponent of 1.5. The 1 comes from the reinvested profit, the 0.5 from the square root of the number of trades. The exponent 1.5 means that your drawdown grows faster than your profit and account balance. It is inevitable that at some point the drawdown will be higher than the account balance, causing a margin call.

That's in a nutshell why you should not reinvest a percentage of your profit, regardless whether the percentage is calculated with Kelly factors or - better - OptimalF factors.

The same, by the way, applies to a system of which you regularly withdraw all your profits. This method will also eventually cause a margin call with 100% certainty.
Posted By: GlennR

Re: Reinvesting profits on Z1/2 strategies? - 05/26/13 04:03

Is there a safe method to increase your equity, either from profits or from outside sources, that doesn't cause problems?
Instead of reinvesting regularly from a percentage of profits, is it okay to add money from another account randomly?

Also, are there any differences between someone trading 1K mini's vs someone trading 100K standards. Will Zorro function basically the same, at various scales of trading sizes? Or will Zorro diversify more with the increased availability of funds?
Posted By: jcl

Re: Reinvesting profits on Z1/2 strategies? - 05/26/13 08:58

Depends on how you add the external money. When you do a large investment at one point, you can increase the margin in proportion. When you however add the external money step by step, like some small amount every month, the rule to increase the margin only by the square root of the account growth also applies for adding money from outside sources.

I believe you can not trade standard 100K lots with the free Zorro version. The $7K account limit is too small for standard lots.
Posted By: GlennR

Re: Reinvesting profits on Z1/2 strategies? - 05/26/13 15:00

Yes, I understand the free Zorro limits, but I assume everyone that finds it to be successful will all upgrade to the "S" version.

I'm still trying to learn about trading and about strategies. So, the question I'm trying to understand is "if" large amounts of capital is available (hopefully eventually), how is it best to manage? Say, is it better to let one Zorro instance control the entire amount, or would it be wiser to run a number of Zorro instances (each with a different set of strategies) and assign a portion of the money to each of them. Perhaps, over time as one proves more successful it will receive a larger percentage of future accumulated profits.

Are there advantages (or disadvantages) to working with larger sums? I guess the pip spreads are tighter on larger trades, which would make it easier to make profits.
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