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How Smooth Is A Realistic Performance Curve

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Small account traders gravitate to smooth perf curve as mosquitos fly to a source of light at night.

Usually smooth performance is either short-lived and not sustainable in long-term.  LTCM is example of very smooth performance curve in its early years.

What is realistic? In my experience, in futures markets one can obtain something like 1:3 risk/reward ratio. In other words, to make 30% annually, one must be ready to be down at least 10%. In forex markets which are more competitive and recently act as a poster child of random walk, 1:2 risk/reward ratio is more likely.

The most risky proposition is to start to use some system agressively after it has had high, say 1:100, risk/reward ratio. The chances are that the customer will get burned once the system “adjusts” to more sustainable, say 1:3, risk/reward ratio.  My suggestion is — trade the smooth-curve system, but do not overleverage it by blindly trusting past performance data.

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Written by A.S.

October 27, 2009 at 9:42 pm

Posted in trading systems

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