get out of a situation that at a first glance only looked like a situation that needed
“just a few good trades.”
This shows that trading is a very deceiving business, and that we’d better make
sure that we know what we are doing. Obviously, one thing that could speed up
things considerably is to trade the system on several markets. Using three
markets, the system will spend approximately 90 percent of its time in the market
(3 * 6 / 20) in one system or another, and the time to get out of the same drawdown
will be 50 days (45 / 0.9). To get out of a $7,200 drawdown in only three days
requires that the system is applied to a total of 50 markets [(45 / 3) * (20 / 6)]. Of
course not all of them will be traded, but that’s how many markets it takes, on aver-
age, to produce the 15 trades needed to get out of the drawdown in three days, con-
sidering how often and for how long the system is in a trade per market.
Obviously then, it becomes very important that the system works equally as
well in all markets, on average, and at all times. And how do we assure that? By
testing the system on as many markets as possible, covering as many different mar-
ket conditions as possible, striving to make the system work equally as well, on
average, at all times, no matter the trend or price of any individual market. The way
to avoid fitting the system parameters to any specific market or market condition
is to measure its performance in percentage terms on a one-contract basis. Have
we stated this enough times now?
Note also that with 15 trades needed to get out of the drawdown in three days,
and with the average time per trade also being three days, we need to be in all 15
trades simultaneously. Unfortunately, however, given the initial assumptions for this
situation, being in 15 markets simultaneously is impossible for most of us.
Remember that earlier we needed to tie up $100,000 in each trade, which means that,
to be in 15 positions at one time, we need to have at least $1,500,000 on account.
But what if we only have, say $500,000, and never want to tie up more than
40 to 60 percent of that amount? Well, then we can only be in three trades at a time
(500,000 * 0.6 300,000), which means we can only apply the system to 10 mar-
kets (20 * 3 / 6). If we apply it to more markets than that, we will have to start sec-
ond-guessing the validity of the signals produced by the system and exclude some
of the trades according to our own whims—something we most definitely do not
want to do. Fortunately, there is a way to ease this dilemma, which we will get to
in Parts 3 and 4. For now, however, we can only conclude that we also need to keep
numbers and equations like this in the back of our minds so that we don’t fool our-
selves into trading a system that isn’t suitable for us.
Note also that, in this example, we are working with fixed dollar amounts
invested under the assumption that the market levels will stay approximately the
same. In Part 4, where we start working with dynamic amounts, depending on both
the market level and the account equity, an ever-changing number of shares will
be traded on a wide variety of both markets and systems, which makes this matter
even more complex.CHAPTER 2 Calculating Profit 33