Several of my preferred systems seem to perform better and better (higher and higer reward/risk ratio) as I increase heat, using a constant-percent-risk betsize protocol. Unfortunately the drawdowns get bigger than I can psychologically stand.
That's an interesting observation, and one of the few examples of the elusive "free lunch." It indeed seems to be the case that when strong systems are traded more aggressively, max drawdown increases at a slightly slower rate than does reward. You also pointed out the catch: you have to be able to psychologically withstand the higher absolute drawdown - regardless - in order to benefit from the free part of the lunch.
I think this phenomenon is related to the issue of contract resolution. As the risk per trade is increased, you come closer and closer to trading the actual number of contracts specified by your position sizing routine, and given a system with a strong positive expectation, traded more aggressively, this process occurs at a faster and faster rate.
...So I've begun to try increasing my AVERAGE heat without increasing my MAXIMUM heat....Voila: improved reward/risk ratio!
Ted, have you found that this technique improves risk/reward ratios other than MAR, such the Sharpe Ratio, which is more sensitive to overall volatility?
