I found that quite interesting too, i am going to do some tests tomorrow. Will let you know what i find.

Are you using ROC as the longer term stock filter instead of a MA?

Julian are you using roc as a filter for individual stock trades or as your index filter?

Inital testing is looking good Julian. What’s interesting is that my current system is sitting at around 8%dd over the last 4 months and the ROC has added +15%!

That’s the bit that freaks me out in the other MOC post where people are posting 400% leverage…on the walk forward testing I did over 2008 even 200% leverage produced some nasty days

Agreed. But with the caveat that you can allocate to the MOC system (or any system) based on your actual risk tolerance, not on a strictly % drawdown basis, and then you can deploy excess funds elsewhere.

E.g. – I have 100k. Of that 100k, I want to give a 10% “risk weight” to an MOC system, meaning that I want my max historical DD for my MOC system to equal 10K. I can size my account and use leverage any way I like, but I don’t want that 10K on a historical DD basis exceeded (not saying that a worse than historical DD couldn’t happen).

Now say that my max historical DD = 10% for my MOC system. So in order to get that 10% risk weight, I can choose the size of my account and the leverage.

-Option 1: Size the account at 100k and use no leverage. No capital to allocate elsewhere.
-Option 2: Size the account at 50k and use 200% leverage. 50k to allocate elsewhere (note – this doesn’t need to even be a trading related allocation – it could sit in cash in a safe, a bank, a high quality interest bearing gov’t bond if those ever exist again, whatever)
-Option 3: Size the account at 25k and use 400% leverage. 75k to allocate elsewhere.

It doesn’t matter what my account size is and margin %, what I really care about is my risk threshold in USD terms. Once I’ve decided that, if I want to “work my funds as hard as possible,” it makes sense to use as much margin to achieve that goal, thus leaving capital free for other purposes.

One could even go so far as to argue that Option 3, despite using the most margin, is the “safest” route, because then you don’t necessarily need to hold as much cash with your broker – MF Global risk reduced.

Leverage is dangerous if misused, but if you control your risk based on an absolute loss amount (conservatively and with the consideration in mind that a future drawdown could be larger than any historical drawdown in testing), it can be a really neat tool when used to its extreme.

I’d be curious if anyone sees any flaws in that logic.

I’m reading Bandy’s book at the moment and he talks about very similar capital allocation & risk, though he states the unused capital should remain part of the system and parked in a risk free account.

In regard to black swans he suggests that they can be ESTIMATED by the %DD distribution. So my take on what he is suggesting is as follows (if anyone else has read that part, please correct me if I am interpreting wrongly):-

Using AB’s built in monte carlo as perhaps a crude way to look at it, a single run non-compounded gave a max %DD at 7.11%, but an estimated black swan event could be more like around 15% (circled)