sluggo,
First off - thanks for sharing this blox (on other thread) and study. Had some fun with it and it generated quite a few good thoughts...
I have to say I would intuitively lean towards your friend's Tommy' opinion (ie that one of Trend Following's main mantra is to let winners run and therefore breaking that fundamental rule might break the TF system as well).
Of course, we can always find exceptions to any rule (Never say never...)
If I may, isn't your comparison dependent on your choice of how to apply leverage to normalize both system returns (ie identical MaxDD)?
You chose to change position size in order for both systems to match on MaxDD and by doing so I feel that you are altering more than the "profit target" parameter in your test.
There's a very interesting chart (enlightening even) on the forum (that you posted actually: thanks!) which shows the evolution of various ratios plotted against position size:
http://forum.tradingblox.com/viewtopic. ... 2169#32169
Basically, up to a point the MAR ratio keeps increasing along with position size (meaning for a given level of MaxDD, CAGR increases with position size).
As the position size for the profit target system is more than double the non-target one, it will inherently benefit from that increase in position size (and that's potentially the reason for its over-performance as opposed to the assumed inclusion of Profit Targets).
I am quite interested in that topic of profit targets, so I ran both systems at identical position sizes (1.25% - I had to raise it to get closer to 32% MaxDD as my own "kitchen sink" portfolio contains about a third of your number of instruments) to compare the results:
Code: Select all
WITH PTs: CAGR = 20.70%, MaxDD = 32.2%, MAR = 0.64
W/OUT PTs: CAGR = 29.41%, MaxDD = 41.6%, MAR = 0.71
If one decides to use the concept of notional funding to normalize the results (or rather "reverse notional funding" in that case, to reduce the volatility of the "Without PTs" system to that of the PT one), the performances become:
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WITH PTs: CAGR = 20.70%, MaxDD = 32.2%
W/OUT PTs: CAGR = 22.76%, MaxDD = 32.2%
The WITHOUT PTs system comes on top (as was shown by the higher MAR figure for that system).
I then decided to run the test for various position sizes (so easy with TB) and the chart seems to be a good illustration/parallel to the enlightening chart you posted: MAR increases along with position size up to the optimal point where it starts to drop (note that this 3 D chart only displays profit-taking at 1.6R: front border of the 3D "sheet" and no profit-taking, aka 9999R, at its back border - all points in between are just interpolations).
The last chart is a plot of the ratio between the MAR ratios of both systems (W/OUT TP MAR divided by WITH TP MAR) plotted against the position size: this is to show of the under/over-performance of one system evolves with the choice of position size
Funny thing is that I was just working on comparing position size leverage vs notional funding leverage as you posted this...
I think it makes a good point of showing that there are 2 options to increase/decrease leverage, which are dependent on the system's characteristics.
One of my approach for a system's money management is to "loosely" optimise the position size wrt MAR ratio and further leverage up and down using a "notional funding slider" (of course if you want to leverage up you also have to start taking into account interest on margin...
PS: apart from the position size and different portfolio, all other parameters were identical to sluggo's runs