MONEY MANAGEMENT ALGORITHMS

The Money Management Algorithms also known as the Equity Curve Algorithms is a tool that we began developing in 2005 and finished the first revision in 2011. This is a tool that we continue to research and upgrade. It is a trading system for a trading system so that you can analyze the equity curve to manage the money you allocate to your trading systems. This tool is completely open code for user customization and requires a Non Disclosure Agreement.

This is the only tool that I know of that will allow you to extensively test ideas related to money management and trading the equity curve of your own system and then automate the exact setup that was tested. I have seen tools that offer basic money management ideas (although not as extensive) or the ability to back test but they do not offer the ability to automate the same setup, requiring manual processes or end of day analysis which are not efficient for short term traders or day traders or traders who need to make decisions intra-day.

WHAT IS THE PROBLEM?

The problem with writing an equity curve algorithm rule within your original strategy is simply the fact that once you turn the strategy off, based on your equity curve rule, it does not continue to generate an equity curve that can be tracked. We want to track the equity curve in it's purest form as a simple market analysis based strategy without equity curve rules so that equity curve rules can be applied separately.

The money management algorithms watch the original strategy trade in SIM mode and select which LIVE trades to take based on the criteria that it is given based on the research and method you have selected from back testing the setup before LIVE trading.

In the video we show a simple code set for stopping on a drawdown. Once we stop,, there is no way to know how the strategy is doing. We can blindly start the strategy after a certain period of time but that is "shooting form the hip". What if the strategy continued to under perform while it was turned off?

THE VERY FIRST REVISION

When I first started developing the Money Management Algorithms, back in 2005, I would export the trade information directly from the strategy for the Marketposition, Open Equity, and Closed Equity to a text file. I then imported this information into a new window that included my original strategy plus the text file and modified my original strategy code to look at the trade information that was setup as a sub data series.

This approach was a nightmare to implement when trading multiple strategies on an intra-bar basis. Updating 10+ strategies with exported data files and re-importing into a new window and then checking the signal was a slow process, which was too slow to work.

I could test the concepts to see that they were valid but implementing them on intra-day charts was not realistic.

HOW DO THE MM ALGORITHMS WORK?

The problem with writing an equity curve algorithm rule within your original strategy is simply the fact that once you turn the strategy off, based on your equity curve rule, it does not continue to generate an equity curve that can be tracked. We want to track the equity curve in it's purest form as a simple market analysis based strategy without equity curve rules so that equity curve rules can be applied separately.

The money management algorithms watch the original strategy trade in SIM mode and select which LIVE trades to take based on the criteria that it is given based on the research and method you have selected from back testing the setup before LIVE trading. 

In the video we show a simple code set for stopping on a drawdown. Once we stop,, there is no way to know how the strategy is doing. We can blindly start the strategy after a certain period of time but that is "shooting form the hip". What if the strategy continued to under perform while it was turned off?

THE MONEY MANAGEMENT ALGORITHM RULES

It is critical to understand that the Money Management Algorithm Rules are a tool that is used to analyze the equity curve of your trading system to help you manage your money. It is a trading system for a trading system. There are 12 basic rules that we discussed in detail below. The 13th Rule is based on the Martingale Rule for well capitalized traders.

These concepts may be new to you but they are fairly basic ideas that we have shared over the years. The actual setup is the real challenge and having the open code is the real benefit since you will be able to customize the Money Management Algorithms with any new ideas that you have once you understand the structure.

Each individual rule is discussed below. When you setup the Money Management Algorithms, keep in mind, you can select any combination of rules. While we do not recommend using more that 2 or 3 in most cases, there are literally 1000's of different solutions. An optimization algorithm is also included so that you can officially test the individual money management algorithm rules.

THE MONEY MANAGEMENT ALGORITHM OPTIMIZATION TOOL

The Money Management Algorithm Optimization tool is one of the tools that is included. It allows you to run an optimization so that you can test which rule works best for your strategy. You can simply optimize from Rule 1-13 (13 tests total) using the default parameters to get a quick idea. It will test each rule on its own and the results can be viewed in the optimization report.

The Optimization Algorithm only tests one rule at a time. The Money Management Algorithms can use any rule and any combination of rules so that more than one rule can be used. For this reason, it is not efficient to run an optimization in the Money Management Algorithms as optimizing Rules 1-12 from 0 to 1, would give you the best combination but would require 8,192 tests, which can be very time consuming. The Optimization Algorithm was created to provide a quick general answer.

THE COMBINATION ALGORITHM

This is an example of a custom money management algorithm that can be downloaded from the Members Area. The Money Management Algorithms are an open code product so there are an infinite number of customizations. This is an example of how the Money Management Algorithm code from two different strategies can be combined into one setup.

In this example, we look at Exhaust and Reverse E-mini S&P on 1 minute and 5 minute bars and use the Money Management Algorithm to trade this only when both strategies are doing well.

It is possible to continue to customize this so that it would "looks at" three or more strategies instead of just two strategies. The coding example is in the Members Area.

THE DEGRADATION ALGORITHM

The Degradation Algorithm is a setup within the Money Management Algorithm when combining rules that start trading your strategy when it is in a drawdown and exiting when it is in a runup. Rule 6 and Rule 12 as well as Rule 8 and Rule 9 (with varying L1's) are examples of how we combine the Money Management Algorithm Rules into a combination that we call the Degradation Algorithm.

We know that any good system works on some sort of market inefficiency and bias. These biases will change over time and your strategy will more than likely "degrade" and eventually hit a worse case drawdown.

Instead of trying to develop a strategy that will avoid this scenario, use the Degradation Algorithm to manage your strategy when it starts to under perform and allow for consistent trading when it goes into a draw down.

SECOND DERIVATIVE MM ALGORITHM

This is a trick of the trade. A small trader can create a Martingale equity curve (MM Algorithm) based on an original strategy by using the equity curve of the martingale money management algorithm to then trade a single contract.

Why do this? A martingale based equity curve, that doubles down after each loser, creates sharper equity curves that could be more clearly read by an indicator or money management algorithm.

This is a money management algorithm of a money management algorithm and why we call it the second derivative of the trading system.

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The lifetime license includes the open source code for the Money Management Algorithms as well as access to the Members Area.
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