Trading the Equity Curve
Modified on 2010/02/24 12:13 by Eugene — Categorized as: PosSizers
"Trading the equity curve" as a risk management method is the process of acting on trade signals depending on whether a system’s performance is indicating the strategy is in a profitable or losing phase.
You have the choice between the Wealth-Lab's three standard position sizes: fixed dollar, percent of equity, and max percent risk. After sizing the position, the PosSizer will apply the "equity curve" filter accordingly.
The point of managing equity curve is to avoid trading when the equity curve is in a downtrend. This PosSizer has two modes to determine the equity curve downtrend:
By creating two simple moving averages of a portfolio's equity curve - a short-term and a longer-term one - and acting on their crossings. Should the fast SMA cross below the slow SMA, equity downtrend is detected (SMA1/SMA2 crossunder).
By using the crossings of equity itself with the longer-period SMA (equity/SMA2 crossunder).
When "Reduce size by %" is active, the position size will be reduced by a specified percentage if the equity is "under water" according to a selected rule. If you're a risk seeker, select "Increase size by %" - for some robust systems, it could help overcome their small drawdowns quicker.