Summary. In this chapter we discussed key money-management ideas

In this chapter we discussed key money-management ideas. We began by examining the risk of ruin. Those calculations show that there is little incentive to overleverage a trading account. The risk-of-ruin calcula­tions assume that your bet size, payoff ratio, and fraction winners are fixed. However, you can vary bet size if you could identify an extraordi­nary opportunity in the markets.

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We then looked at the interaction between system design and money management. The design philosophy is for you to protect the downside and let the market take care of the upside. We then used the standard deviation of monthly equity to project future drawdowns at four to five times the standard deviation.

We finished by looking at how betting strategies affect the smooth­ness of the equity curve. The fixed-contracts per signal is a reasonable choice for most traders. You can get a smoother curve by reducing posi­tion size after a losing trade. Your other strategies, such as double-on-win or double-on-loss, greatly increased equity curve roughness. You should understand this material well, because each of these money-man­agement strategies can significantly affect future portfolio performance.

Chapter

Data Scrambling

There are never enough data of the kind you want.