OTHER PROFITPROTECTING MEASURES

I stated that proper money managementcould (1) be mathematically proven and (2) dealt with both riskand reward issues. The following methods are not considered puremoney management techniques because they do fall under these twocategories. None of the following can be mathematically proven, andthe only issue they attempt to address is the downside. Therefore, youshould consider these methods carefully before implementing any ofthem in your personal trading.CONSECUTIVE WINNERS/LOSERSIt has been long thought that somehow, someway, consecutive losingor winning trades provided additional opportunities to traders.These opportunities come in all shapes and sizes. The most commonbelief is that several consecutive losers actually increase the probabilityof the next trade becoming a winner. Others believe that if amethod or system has generated several winning trades in a row, itbecomes more probable that a losing trade is about to occur. As a result,they cease taking trades until the method or system suffers atleast a few losing trades.This theory has come from several areas of life, none of whichhave any mathematical proof as far as trading is concerned. Somesubject areas are valid in these assumptions of consecutive outcomes.However, certain conditions must be present for the theory tohold any mathematical water. This chapter deals with a few areaswhere the statement is true and why. It then explores the mathematicalvalidity of these beliefs in the trading arena. Finally, the chapterpresents possible relationships between markets and this theory. Althoughthere is not any mathematical substance, there are nonethelesssome interesting thoughts on how to approach this in a few realtrading situations.I surmise that most of the consecutive winning and/or losingtrade theories have made their way into the trading arena from thegambling industry. Gambling is a game of streaks. Any professionalgambler will tell you that there is no way to turn the odds in yourfavor. Therefore, the money management schemes gamblers use comefrom managing the winning and losing streaks of the method. Earlierin the book, I gave an example of coin flipping and betting where theexpectation was negative. There were times that manipulating the betsizes according to streaks could increase the profits from betting accordingto those streaks. However, in other instances the outcome wasworse as a result of the streaks. I do not profess to be an expert atgambling games and statistics. I do not gamble for the potential tomake money from it nor for the sheer fun of it. I am not the kind ofperson who experiences a “fuzzy feeling” from doing something thatis guaranteed to take my money over time. I find nothing excitingabout playing a rigged game. Suppose you enjoyed boxing, but werenot a professional or even, for that matter, an amateur; you just enjoyedgetting into the ring with any other inexperienced boxer who enjoysgetting beat upside the head senselessly. Would you enjoy theactivity if you were to get into the ring with say . . . Mike Tyson? Ifthe winner of the fight received $25 million, who do you think wouldwin? What would be the probabilities of you winning? This is what Iwould call a rigged fight. Rigged as in unfair. I wonder what the bettingodds would be. Quite honestly, not even knowing who you are, Iwould unequivocally, without a doubt, put my money on Mike Tysonand call it an extremely safe investment.Likewise, casinos stake an enormous amount of money on whatthey consider to be an extremely safe investment. Regardless of mylack of expertise in the subject of gambling games, rules, and statistics,I do know a few things; and they are exactly why I don’t chunkcoins into those slot machines or play roulette tables. There are nomath guarantees in streaks.148150 OTHER PROFITPROTECTING MEASURES THE THEORY OFSTREAKS... 151THE THEORY OF STREAKS.. .Streaks in coin flipping are interesting. It is believed that if I were toflip a coin in the air and it were to land heads up six times in a row,that the probability of the coin landing tails up on the seventh fliphas increased significantly. The erroneous math support for thiscomes from dividing the number of flips (including one more) into 100percent and then subtracting that from 100 percent.If there are three consecutive tails, the probability of the nextflip landing heads up is 75 percent:100%/4=25%100% - 25% = 75%Hence, the more flips, the smaller the number subtracted from100 percent. With this logic, 100 consecutive flips means that thenext flip being opposite is lOO/lOl = .99; 100 - .99 = 99.01 percentchance of the next flip being opposite.If this were truly the case, we could all get rich at thecasinos . . . but it isn’t.We start out by flipping a coin in the air with a 50 percent shotof the coin landing heads up and a 50 percent shot of the coin landingtails up. We flip and the coin lands tails up. The assumption isthat since the coin has landed tails up, there is a greater possibilitythat the next flip will land heads up. The math used to support thisis the probability of the next two flips will yield one heads upand one tails up. Since the first was a tails up, the probability of thesequence of the next two will be heads and then tails. The flip ismade and tails lands up again. Now the math is 50% x 50% x 50% =12.5%.This line of thinking erroneously assumes something that is notin existence: a state of dependence of outcomes. This means that theoutcome of the next flip of the coin has some sort of dependence onthe outcome of the previous flip of the coin. The definition of dependencyis simply an area subject to the rule by an outside power or influence.Independence is an area free from the rule of an outsidepower or influence. For the number of consecutive outcomes to increaseor decrease the probability of a following outcome, dependencyhas to exist. It does not exist in coin flips. Each coin flip is a completelyindependent result unrelated or influenced by any number ofprevious results.On the surface, this seems impossible. For example, how manywould bet that the next flip of the coin is going to be tails if the previous999,999 flips were all heads? Provided that the coin is notrigged in some way, that it is legitimately 50/50, regardless of theprevious 999,999 flips landing heads up, the probability of the nextcoin landing tails up is and will always be 50/50. The following illustrationproves this point.We will flip a coin two times. No more, no less. There are fourpossible outcomes of these two flips:1. Heads, heads2. Heads, tails3. Tails, tails4. Tails, headsThese are the four possible outcomes. Each outcome has an equalchance or probability of occurring. If there are only four possibilities,then each one has a 25 percent chance of occurring.The first flip lands tails up. There are two possibilities where thefirst outcome is a tails. As a result, the two possible outcomes wherethe head is the first outcome are ruled as impossible outcomes. Thatleaves two possible outcomes. Either the sequence will be tails, tailsor tails, heads. In other words, there is a 50/50 chance of the next flipof the coin being heads or tails. The previous outcome did not affectthe next probability. This is the rule regardless of the number of flipsincluded in this illustration. If we were to flip the coin four times,there would be 16 possible outcomes of sequences:1. h, h, h, h2. t, t, t, t3. h, h, h, t4. h, h, t, h5. h, t, h, h6. t, h, h, h7. t, t, t, h8. t, t, h, t9. t, h, t, t10. h, t, t, t11. h, h, t, t15212. t, t, h, h13. t, h, t, h14. h, t, h, t15. h, t, t, h16. t, h, h, tOTHER PROFIT PROTECTING MEASURESThese are the only possible outcomes. Prior to flipping the coin,each possible outcome has an equal 6.25 percent chance of occurring(100/16). As soon as the first flip is through, eight of those possibilitiesare automatically eliminated. If the first flip of the coin is a tails,it eliminates all possibilities that start with the first flip landingheads up. Therefore, only the following eight possibilities now exist:1. t, t, t, t2. t, h, h, h3. t, t, t, h4. t, t, h, t5. t, h, t, t6. t, t, h, h7. t, h, h, t8. t, h, t, hEach possibility has an equal 12.5 percent chance of occurring(100/8). Four of these eight possibilities have a 12.5 percent chance oflanding tails up and four of these possibilities have a 12.5 percentchance of the next flip landing heads up. Therefore, the possibility ofthe next flip being heads or tails remains at 50/50 (12.5 x 4 = 50).The next flip eliminates four more possibilities. If the next flip landstails up again, four of the possibilities that remained are immediatelyeliminated. The remaining four possibilities are:1. t, t, h, h2. t, t, t, h3. t, t, h, t4. t, t, t, tOut of the four possible outcomes, two have an equal 25 percentchance of landing heads up while two have an equal 25 percentINCREASING PROBABILITY WITH DEPENDENCY 153chance of landing tails up. Therefore, the next flip of the coin has anequal chance of landing heads or tails up. It remains 50/50. The nextflip of the coin is a tails again. Therefore, two possibilities remain: t,t, t, h or t, t, t, t. These are the only two possible outcomes, and theyhave an equal 50 percent chance of occurring simply because the previoustrades did not take away or diminish the ability of the followingtrades to land heads or tails up.This is why a sequence of 999,999 landing heads or tails up doesnot increase the probability of the next flip landing heads or tails up.Even with 999,999 landing tails up, there are only two possibilities forthe outcome of this 1 million flip sequence, it will either be 999,999tails and 1 heads or l,OOO,OOO tails. One or the other and they bothhave an equal probability of occurring.INCREASING PROBABILITY WITH DEPENDENCYDependency is the flip side of independence (no pun intended). Thefollowing illustration shows how dependency does in fact increaseprobabilities. Suppose we have a deck of 20 cards. In that deck is oneace of clubs. What is the probability that the first card turned overwill be that ace of clubs? %O = 5% chance. The first card is flippedover and it is a 10 of diamonds. The card is removed which brings thetotal cards in the deck down to 19. Therefore, there is now a 5.26315percent chance that the next card will be the ace of clubs (%9 =.0526315). The next card is a 2 of hearts. It is removed from the deckand the probability of the next card being the ace of clubs is 5.5555percent. The next 8 cars are flipped over, none being the ace of clubs.There are now only 10 cards left. One of those 10 cards is the ace ofclubs and each has an equal chance of being that card until anotheris removed from the deck. The chances have increased to 10 percenton the next card. If 8 more cards are taken from the deck and none ofthem were the ace of clubs, only 2 chances remain. Either the nextcard is the ace or the card after. Therefore, the probability has increasedfrom 5 percent to 50 percent. If the next card is not the ace,the probability of the last card is 100 percent. The probabilities increasedeach time a card was removed from the deck. Therefore, theprobabilities were dependent on the outcome of the previous cards.Dependency exists here because each card that was turned overbut was not the ace influenced the number of possibilities that remained.This is why card counting is illegal at casinos. (It is legalfor them to devise ways to rig the probabilities to take your money154 OTHER PROFIT PROTECTING MEASURES INCREASING PROBABILITY WITH DEPENDENCY 1 5 5but illegal for you to devise ways to rig the probabilities to taketheirs!) If a card was turned and then placed back into the deck andthe deck shuffled, the probability would always and forever remainat 5 percent.In trading, the only possible scenario is the coin-flipping example.If you believe that the math proves an increased probability inwinning trades after consecutive losers, simply substitute a winningtrade for each tails and a losing trade for each heads. It will come outthe same every time.The question then arises what if the method or system has provenover the long term to be 75 percent accurate in winning trades? Whatthen? The answer is that the same logic applies. Suppose there is agame where we could bet on sets of three flips in a row. The only twosets that we would lose would be the sequence of flips h, h, h to t, t, t.If the sequence landed any other way, we would win. Remember,there are only eight possible outcomes. Two of those outcomes arelosing outcomes while six are winning outcomes (6/8 = 75%). Each timewe get through flipping the coin three times, the sequence eitherwins or loses. After that, the three flips are repeated and all eightpossibilities exist again. Therefore, each set of flips has an equal 75percent chance of producing a winning sequence regardless of theprevious outcome of sequences. The logic remains the same.This leads us into the subject of historical trade records. How dependableare historical track records in accurately relaying to us theprobabilities of any given system or method? Much of the time, trackrecords are relied on too heavily in the leveraged trading world. Theanswer does not lie in the track record itself, but rather the ability ofthe logic that produces the trades to uncover or isolate a bias in themarket(s). If the previous 100 trades had an outcome of 75 percentwinners and 25 percent losers, do the numbers themselves give us theprobability that the next 100 trades being winners will be 75 percentas well? Here is a shocking statistic that I think most will find eyepopping.Barring any existing bias in the market, there is only a31.25 percent chance that the next set of 100 trades will be 75 percentwinners or better.You say, “How can that be?” Unless a true bias in the marketscomes into play, there are 126 + 30 zeros of possible outcomes of thenext 100 trades. There is only one chance that all these 126 + 30zeros possible outcomes will be winners! As soon as the first trade isa loser, there are zero chances that all 100 trades will be winners.Therefore, at least one possibility is removed. We could do the samecount as before, but that would take up entirely too much time andspace, so we will jump to something shorter.If there are 4 trades, there are 16 possible outcomes. By requiringthat 3 out of 4 of those trades be winners, we are eliminating 11possible outcomes. That leaves only 5 outcomes, or 31.25 percent. Toillustrate this, refer to our previous example with the 4 flips of thecoin. There are 16 possible outcomes. Total possible outcomes with atleast three tails in the sequence (or more) are 5 out of the 16.This can be figured for any number of trades. Every additionaltrade doubles the number of possible outcomes. If there is one flip,there are only 2 possible outcomes. If there are two flips, there are 4possible outcomes. If there are three flips, there are 8 possible outcomes.Each time the flips increase by one, the possible outcomes doublein number. That is why there are so many possible sequences for100 trades. However, no matter how many possible outcomes, the percentageof sequences that will yield 75 percent of the trades winnersremain constant. Therefore, there is only a 31.25 percent chance that75 out of the next 100 trades will be winners barring any market bias.Compare this with a track record of 100 trades that has only 30percent winners. Barring any bias in the market that would lead tothose statistics, the probability that the next 100 trades will have atleast 30 percent winning trades or better is over 89 percent. If weflip a coin in the air six times, there are 64 possible outcomes. Towin at least 30 percent of the time, there has to be at least two tails(wins) within the sequence to win 33 percent of the time. Onlyseven sequences do not have at least two tails (wins): 7/64 (possibleoutcomes) = 10.9 percent, 100 percent - 10.9 percent = 89 percent.This assumes that there is no bias in the markets influencing therate of winning trades.This brings up the question of exactly what is market bias? Thereare two sides of a cat. If the cat is thrown into the air, what is theprobability that the cat will land belly up or back up? Two possibilitiesexist. If the cat is thrown into the air, it will either land with theback up or belly up (side landings require a rethrow). Because twopossibilities exist, is there automatically an equal chance of each possibility?Of course not. There is a bias with this example. If I were abetting person, I would lay my money on the cat landing back up everytime regardless of what the preceding statistics show-unless the catwas dead, at which time I would refer to such statistics.This is an example of a bias in the outcome. The bias is that itmust be a law of physics somewhere that live cats land with their feetOTHER PROFIT PROTECTING MEASURES TRADING THE AVERAGE OF THE EQUITY CURVE 157on the ground, thus belly down. Biases in the markets are not so easilyseen. They can simply exist as more buyers in the market thansellers, or as an imbalance in the supply and demand of a commodity,or as any one or more of innumerable possible catalysts. Therefore,when looking at the track record, instead of seeing a 75 percent winingsystem and automatically assuming that the next sequence oftrades should yield 75 percent winning trades, look at the underlyinglogic of the method. The numbers themselves will not tell you anythingin this area.DEPENDENCIES IN MARKET RESULTSIn discussing possible dependencies in market results, I want tostate up front and very clearly that at best I am skeptical about thistheory and only include it for additional thought. There might be(and I stress the word might) a dependency in the outcome of futuretrades to the outcome of previous trades. No math will ever provethis statement. Only logic and caution can be the ruling guides onthis theory.For dependency to exist, there must be a diminishing of possiblelosing or winning trades within the next sequence of trades. Like thecard-counting illustration, if there are 20 cards and 10 are turned overwithout turning over the ace, the probability of the next card not beingthe ace has diminished from 95 percent to only 80 percent. For dependencyto exist in the sequence of outcomes in trading, there must bea related (not identical) diminishing of continued losers as a result ofmarket action. For example, as I write this chapter, the heating oilmarket is very close to 30-year lows. The price of heating oil closedaround 36 cents today. The 30-year low is right under 30 cents. Logicwould conclude that if a method or system continues to buy heating oil,that eventually, it will stop moving down and actually go up therebygenerating a winning trade. The closer to zero heating oil moves, thegreater the probability that heating oil has reached its short-term ofintermediate-term low. Therefore, buying the market becomes a moreprobable winning trade than does selling the market.This example does not really show a dependency in trades butrather a dependency in trade outcomes to market action. It can beproven that dependency does exist in mark.et action. Recall blackMonday in 1987. The Dow Jones Industrial Average plummetedmore than 500 points in one day. Today, a 500-point drop would beconsidered rather large but nowhere near the magnitude that it wasback then. The drop represented more than a 20 percent drop in oneday. If you go to any chart book, you will see that on the followingTuesday, the market bounced more than 150 points back to the upside.Such a bounce was directly related to and depended on thedown move of the previous day. Had the market moved up 10 pointson Monday, rest assured, the market would not have moved up 150points on that Tuesday. Dependency exists in market action becausethere is knowledge of previous action. Action tomorrow is not free ofoutside power or influence. That outside power is exactly whatmoves the markets. The only way some type of dependence can existin trade sequences is if the dependency in the markets is somehowtransferred to the trades that are being taken. This is no easy taskto accomplish.TRADING THE AVERAGE OF THE EQUITY CURVEHere is a subject with almost as many possibilities as there are beliefson how it works. Trading the average of the equity curve can assumemany shapes and forms. The idea of this method is to take the equitypoint of the previous 10 days, add them together and divide by 10 (or byany other arbitrary number). This is the average of the equity curve.As a general rule, when the equity is moving up, the average will beunder the actual equity. If the equity curve is moving down, the averagewill normally be above the equity. Therefore, the trader relying onthis system only takes trades when the equity curve is above the averageof the equity curve and then stops taking trades when the equitymoves below that average. Even though no trades are being taken, thetrader continues to plot the equity curve and when it moves back abovethe moving average, the trader resumes taking trades.This is the most popular use of trading an average of an equitycurve. This chapter deals with this method and many more possiblemethods. It also examines the validity of the method, how it should orshould not be used and then offers some other ways to implement themethods.First, the question must be answered, is trading a moving averageof the equity curve a type of money management as defined inthis book? Trading an average of the equity curve does not address the158 OTHER PROFIT PROTECTING MEASURES TRADING THE AVERAGE OF THE EQUITY CURVEsize of the investment being made, which is included in that definition.It addresses whether the next trade should be taken or not. This is aform of trade selection. Trade selection has no mathematical substanceto prove the effectiveness, or for that matter, disprove the effectivenessof the method. Therefore, it cannot be viewed as a true form of moneymanagement. And, if not money management, then what. I would classifythis method as a form of risk management. The two are not thesame. Risk management simply takes steps to attempt to curb risk exposure.Risk management is a safety step. It is an extra step traderscan take in addition to money management.As stated previously, trading the average of an equity curve simplymeans that if the equity is above the average of the equity curve,trades will be taken. If the equity is below the average equity curve,trades will not be taken. The single purpose in attempting to apply astrategy such as this to trading or investing is to minimize risks. Atno time should this method be seen as a profit-enhancing method.This does not mean that it cannot or will not enhance profits; attimes, it very well may. This is a side benefit if it happens. Equitycurve trading attempts to remove a trader from the risk of largedrawdowns, while placing the trader in a position to benefit when themethod or system begins to draw back up.Trading is about one thing: Risk versus reward. There are tradeoffs.A trader risks X dollars to make Y dollars. Before taking thetrade, the trader must believe the potential reward is worth the risk.Equity curve trading does exactly the opposite. The risk is the dollarsthat potentially will not be made while the reward is potentially thedollars that will not be lost. The trader must believe that it is worthrisking potential gains to protect existing capital.To apply average equity curve trading to your account, you musttake the X day average of that equity curve and plot it on the samechart as the actual equity curve itself. Figure 11.1 shows an equitycurve of a hypothetical track record produced from a system I developed.The actual equity curve is the bold line while the equity curveaverage is the thinner line that is below the equity curve about 80 percentof the time. The graph below is the equity curve that is producedfrom taking out the trades immediately following a drop below the averageequity curve.In this example, there are 132 trades without trading accordingto the average equity curve; 47 percent of these trades were profitableyielding over $61,000 in profits with a largest drawdown of$7,625. After applying a g-point moving average of the equity curveFigure 11.1 The curve that results from taking outthetradesimmediately following a drop below the average equity curve.and taking only trades above the g-bar moving average, the netprofit dwindled down to $39,500 and 105 trades. The winning percentageremained relatively the same but the drawdown was actuallyover $8,400 . . . more than without trading the average equitycurve!But, before you completely throw in the hat on this method,there was a reason I gave this example. This is one system applied toone market. This is about the worst performance drop you shouldsee on any single system and market. The moving average that waschosen was picked completely out of the blue. There was no optimizationwhatsoever to this example. I chose it to show that thereare risks in trading this method. The risks are not necessarily inwhat you could lose, but in what you might not make. You will alsonotice that the method is currently in a drawdown and trades arenot being taken. If we were to extend this drawdown, you would seethat you are protecting the account from two things that seem tohappen when they are least expected. The first thing the account isprotected from is complete and total system failure. If the systemsuffers complete failure, the account will not be partaking in mostof the trades that make up that failure. I know of one particularsystem traded by many clients that would have benefited greatlythis year from avoiding a massive $30,000+ drawdown. This wouldhave also protected peace of mind.160 OTHER PROFIT PROTECTING MEASURES ANALYZING THE AVERAGE EQUITY CURVE 161The number one reason for business failure is undercapitalization.I would also deem that it is the number one cause of tradingfailure. Trades are undercapitalized to withstand the large drawdownsthat occur with the leveraged trading arena. They may havethe capital to withstand it, but the don’t have the risk capital towithstand it. By taking the risk for the extended drawdowns awayfrom the account, the capital should have a much longer life span.ANALYZING THE AVERAGE EQUITY CURVETaking a deeper look at trading the average equity curve, problemswith the logic of the method begin to arise. In the previous example,the performance record shown actually decreased by trading accordingto the average of the equity. Table 11.1 is a trade-by-trade breakdownof the original set of 132 trades, the g-point moving average ofthose trades and then which trades were taken and why. If there is a‘5” beside the trade, the following trade was taken because the equitywas greater than the average. If there is a “<” beside the trade, thenext trade was negated because the equity had dipped below the average.Notice on row 21 the drawdown had extended the equity lowenough that the next trade was not taken. Row 22 was a winningtrade of $1,718.50. This is the trade that was not taken. As a result ofthat trade though, the equity curve moved back above the moving averageand trading resumed. This happened again on rows 43 and 44.By the time you get to rows 63-72 this same situation seems to repeatitself several times with the equity curve moving above and below themoving average every few trades. Every time the moving averagemoved below, which signaled the method to stop taking trades, itseemed a winning trade would immediately follow. The equity wouldmove back over and the next trade would be a loser, which would movethe equity back below.This is another reason that this method, as a general rule, cannotbe considered as pure money management. There is no dependency inthe trades and therefore there is no way of predicting the outcome ofthe following trades as soon as the equity moves below the moving average.There is a popular notion out there that this type of trading isexactly what will keep you from coming out of the drawdown. It isbased on the theory that drawups beget drawdowns and drawdownsbeget drawups. If you quit trading as soon as a drawdown really getsmoving, you are stopping at the worst possible time. Once again, theTABLE 11.1 Trade by Trade Breakdown of an Equity CurveP / LAccountBalance9 PointAverage <>New AccountP/L Taken Balance$(1,406.25)(1,406.25)1,750.oo(1,406.25)(468.75)(1,406.25)(1,406.25)(937.50)62.502,125.OO(750.00)4,406.252,656.25(1,406.25)1,718.75687.502,312.50(1,406.25)(1,406.25)1,562.50(1,406.25)1,718.75L50.001,750.oo4,406.251,250.OO(687.50)(156.25)0.00343.753,187.504,343.754,ooo.oo0.00562.50$(1,406.25)(2,812.50)(1,062.50)(2,468.75)(2,937.50)(4,343.75)(5,750.OO)(6,687.50)(6,625.OO)(4,500.OO)(5,250.OO)(843.75)1,812.50406.252,125.OO2,812.505,125.OO3,718.752,312.503,875.OO2,468.754,187.504,437.506,187.5010,593.7511,843.7511.156.2511,ooo.oo11,ooo.oo11,343.7514,531.2518,875.OO22,875.OO22,875.OO23,437.50$(3,788.19) <(4J31.94) <(4,402.78) <(4,378.47) >(3,902.78) >(3,531.25) >(2,812.50) >(1,861.11) >(548.61) >600.69 >1,357.64 >2,371.53 >2,739.58 <3,003.47>3,451.39 >3,902.78 >4,767.36 >5,513.89 >6,340.28 >7,305.56 >8,097.22 >9,083.33 >10,232.64 >11,836.81 >13,690.97 >15,055.56 >16,343.75 >$(1,406.25)(1,406.25)1,750.oo(1,406.25)(468.75)(1,406.25)(1,406.25)(937.50)62.502,656.25(1,406.25)1,718.75687.502,312.50(1,406.25)(1,406.25)1,562.50(1,406.25)250.001,750.oo4,406.251,250.OO(687.50)(156.25)0.00343.753,187.504,343.754,ooo.oo0.00562.50(2,187.50)1,875.OO218.75(1,406.25)$(1,406.25)(2,812.50)(1,602.50)(2,468.75)(2,937.50)(4,343.75)(5,750.OO)(6,687.50)(6,625.OO)(3,968.75)(5,375.OO)(3,656.25)(2,968.75)(656.25)(2,062.50)(3,468.75)(1,906.25)(3,312.50)(3,062.50)(1,312.50)3,093.754,343.753,656.253,500.oo3,500.oo3,843.757,031.2511,375.oo15,375.oo15,375.oo15,937.5013,750.oo15,625.OO15,843.7514,437.50(Continued)162 OTHER PROFIT PROTECTING MEASURESTABLE 11.1 (Continued)P/LAccount 9 Point New AccountBalance Average <>>>>>>><>>>>>>>>>>>>>>>>><<><<<<><>1,687.50 16,125.OO1,687.50 17,812.50(1,406.25) 16,406.25(1,406.25) 15,ooo.oo968.75 15,968.752,062.50 18,031.252,906.25 20,937.50937.50 21,875.OO(1,406.25) 20,468.754,437.50 24,906.250.00 24,906.254,750.oo 29,656.25(1,406.25) 28,250.OO2,ooo.oo 30,250.OO(1,406.25) 28,843.751,718.75 30,562.502,937.50 33,500.oo1,812.50 35,312.50(1,406.25) 33,906.25(1,406.25) 32,500.OO(1,406.25) 31,093.75(1,406.25) 29,687.50(1,406.25) 28,281.25(1,406.25) 26,875.OO1,687.50 28,562.505,437.50 34,ooo.oo1,437.50 35,437.50(31.25) 35,406.25(1,625.50) 33,781.25(1,406.25) 32,375.OO(343.75) 32,031.25(1,406.25) 30,625.OO(1,406.25) 29,218.752,812.50 32,031.25(1.406.25) 30.625.00ANALYZING THE AVERAGE EQUITY CURVE 163TABLE 11.1 (Continued)P/LAccountBalance9 Point New AccountAverage c or 5 P/LTaken Balance(1,406.25) 39,625.OO 39,302.081,687.50 41,312.50 39,333.335,437.50 46,750.OO 40,125.OO1,437.50 48,187.50 41,232.64(31.25) 48,156.25 42,368.06(1,625.OO) 46,531.25 43,312.50(1,406.25) 45,125.OO 43,902.78(343.75) 44,781.25 44,611.11(1,406.25) 43,375.oo 44,871.53(1,406.25) 41,968.75 45,131.94(1,406.25) 40,562.50 45,048.613,906.25 44,468.75 44,795.142,656.25 47,125.OO 44,677.08(1,406.25) 45,718.75 44,406.252,812.50 48,531.25 44,628.47(1,406.25) 47,125.OO 44,850.691,156.25 48,281.25 45,239.58(1,843.75) 46,437.50 45,579.86(1,406.25) 45,031.25 45,920.143,750.oo 48,781.25 46,833.335,093.75 53,875.OO 47,878.47(1,406.25) 52,468.75 48,472.222,375.OO 54,843.75 49,486.110.00 54,843.75 50,187.50C&406.25) 53,437.50 50,888.89(1,406.25) 52,031.25 51,305.563,156.25 55,187.50 52,277.78906.25 56,093.75 53,506.94(1,406.25) 54,687.50 54,163.19(1,406.25) 53,281.25 54,097.22(1,406.25) 51,875.OO 54,031.254,781.25 56,656.25 54,232.64C&406.25) 55,250.OO 54,277.781,250.OO 56,500.OO 54,618.063,687.50 60,187.50 55,524.31>>>>>>>><<<<>>>>>><>>>>>>>>>><<>>>>1,156.25(1,843.75)(1,406.25)5,093.75(1,406.25)2,375.OO0.00(1,406.25)(1,406.25)3,156.25906.25(1,406.25)(1,406.25)(1,406.25)1,250.OO3,687.50(1,406.25)(1,406.25)(1,406.25)3,312.50(1,406.25)718.75(1,406.25)(375.00)2,531.25625.000.005,437.50(1,406.25)1,187.501,843.75375.00(1,406.25)(1,406.25)(1,406.25)31,781.2529,937.5028,531.2533,625.OO32,218.7534,593.7534,593.7533,187.5031,781.2534,937.5035,843.7534,437.5033,031.2531,625.OO32,875.OO36,562.5035,156.2533,750.oo32,343.7535,656.2534,250.OO34,968.7533,562.5033,187.5035,718.7536,343.7536,343.7541,781.2540,375.oo41,562.5043,406.2543,781.2542,375.OO40,968.7539,562.50(Continued)164 OTHER PROFIT PROTECTING MEASURES AVERAGE EQUITY CURVE TRADING 165TABLE 11.1 (Continued)AccountP/L Balance9 PointAverage 4 or zNew AccountP/L Taken Balance(1,406.25)(1,406.25)(1,406.25)1,218.750.00(1,406.25)(93.75)1,906.253,312.50(1,406.25)718.75(1,406.25)(375.00)2,531.25625.000.005,437.50(1,406.25)1,187.501,843.75375.00(1,406.25)(1,406.25)(1,406.25)(187.50)(1,468.75)(1,500.00)58,781.25 55,923.6157,375.oo 56,065.9755,968.75 56,208.3357,187.50 56,642.3657,187.50 57,232.6455,781.25 57,135.4255,687.50 57,184.0357,593.75 57,305.5660,906.25 57,385.4259,500.oo 57,465.2860,218.75 57,781.2558,812.50 58,097.2258,437.50 58,236.ll60,968.75 58,656.2561,593.75 59,302.0861,593.75 59,958.3367,031.25 61,006.9465,625.OO 61,531.2566,812.50 62,343.7568,656.25 63,281.2569,031.25 64,416.6767,625.OO 65,437.5066,218.75 66,020.8364,812.50 66,378.4764,625.OO 66,715.2863,156.25 66,284.7261,656.25 65,843.75>><><<<>>>>>>>>>>>>>>>><<< P/L Taken Balance$(1,406.25)(1,406.25)1,750.oo(1,406.25)(468.75)(1,406.25)(1,406.25)(937.50)62.502,125.OO(750.00)4,406.252,656.25(1,406.25)1,718.75687.502,312.50(1,406.25)(1,406.25)1,562.50(1,406.25)1,718.75250.001,750.oo4,406.251,250.OO(687.50)(156.25)0.00343.753,187.504,343.754,ooo.oo0.00562.50(2,187.50)$(1,406.25)(2,812.50)(1,062.50)(2,468.75)(2,937.50)(4,343.75)(5,750.OO)(6,687.50)(6,625.OO)(4,500.OO)(5,250.OO)(843.75)1,812.50406.252,125.OO2,812.505,125.OO3,718.752,312.503,875.OO2,468.754,187.504,437.506,187.5010,593.7511,843.7511,156.2511,ooo.oo11,ooo.oo11,343.7514,531.2518,875.OO22,875.OO22,875.OO23,437.5021,250.OO$(3,788.19) <(4,131.94) <(4,402.78) <(4,378.47) >(3,902.78) >(3,531.25) >(2,812.50) >(1,861.ll) >(548.61) >600.69 >1,357.64 >2,371.53 >2,739.58 <3,003.47>3,451.39 >3,902.78 >4,767.36 >5,513.89 >6,340.28 >7,305.56 >8,097.22 >9,083.33 >10,232.64 >11,836.81 >13,690.97 >15,055.56 >16,343.75 >17,465.28 >$(1,406.25)(1,406.25)1,750.oo(1,406.25)(468.75)(1,406.25)(1,406.25)(937.50)62.502,125.OO2,656.25(1,406.25)1,718.75687.502,312.50(1,406.25)(1,406.25)1,562.50(1,406.25)1,718.75250.001,750.oo4,406.251,250.OO(687.50)(156.25)0.00343.753,187.504,343.754,ooo.oo0.00562.50(2,187.50)1,875.OO218.75$(1,406.25)(2,812.50)(1,062.50)(2,468.75)(2,937.50)(4,343.75)(5,750.OO)(6,687.50)(6,625.OO)(4,500.OO)(1,843.75)(3,250.OO)(1,531.25) 1(843.75) 11,468.75 162.50 1(L343.75) 1218.75 1(1,187.50) 1531.25 1781.25 12,531.25 16,937.50 18,187.50 17,500.oo 17,343.75 17,343.75 17,687.50 110,875.OO 115,218.75 119,218.75 119,218.75 119,781.25 117,593.75 119,468.75 119,687.50 1(Continued)i . .168 OTHER PROFIT PROTECTING MEASURESTABLE 11.2 (Continued)Account 9 Point New AccountP/L Balance Average c or r P/L Taken Balance1,875.OO 23,125.OO 18,812.50218.75 23,343.75 20,184.03(1,406.25) 21,937.50 21,361.111,687.50 23,625.OO 22,371.531,687.50 25,312.50 23,086.81(1,406.25) 23,906.25 23,201.39(1,406.25) 22,500.OO 23,159.721,187.50 23,687.50 23,187.50968.75 24,656.25 23,565.972,062.50 26,718.75 23,965.282,906.25 29,625.OO 24,663.19937.50 30,562.50 25,621.53(1,406.25) 29,156.25 26,236.114,437.50 33,593.75 27,156.250.00 33,593.75 28,232.644,750.oo 38,343.75 29,993.06(1,406.25) 36,937.50 31,465.282,ooo.oo 38,937.50 33,052.08(1,406.25) 37,531.25 34,253.471,718.75 39,250.oo 35,322.922,937.50 42,187.50 36,614.581,812.50 44,ooo.oo 38,263.89(1,406.25) 42,593.75 39,263.89(1,406.25) 41,187.50 40,107.64(1,406.25) 39,781.25 40,267.36(437.50) 39,343.75 40,534.721,687.50 41,031.25 40,767.36(1,406.25) 39,625.OO 41,ooo.oo(1,406.25) 38,218.75 40,885.42281.25 37,937.50 40,413.1993.75 38,031.25 39,750.oo1,781.25 39,812.50 39,440.97(1,406.25) 38,406.25 39,131.942,625.OO 41,031.25 39,270.83(1,406.25) 39,625.OO 39,302.081,687.50 41,312.50 39,333.335,437.50 46,750.OO 40,125.OO1,437.50 48,187.50 41,232.64>>>>>><>>>>>>>>>>>>>>>>><<><<<<><>>>>>(1,406.25) 18,281.25 11,687.50 19,968.75 11,687.50 21,656.25 1(1,406.25) 20,250.OO 1(1,406.25) 18,843.75 11,187.50 20,031.25 1968.75 21,ooo.oo 12,062.50 23,062.50 12,906.25 25,968.75 1937.50 26,906.25 1(1,406.25) 25,500.OO 14,437.50 29,937.50 10.00 29,937.50 14,750.oo 34,687.50 1(1,406.25) 33,281.25 12,ooo.oo 35,281.25 1(1,406.25) 33,875.OO 11,718.75 35,593.75 12,937.50 38,531.25 11,812.50 40,343.75 1(1,406.25) 38,937.50 1(1,406.25) 37,531.25 1(1,406.25) 36,125.OO 1(437.50) 35,687.50 1(1,406.25) 34,281.25 1(1,406.25) 32,875.OO(1,406.25) 31,468.75 12,625.OO 34,093.75 1(1,406.25) 32,687.501,687.50 34,375.oo5,437.50 39,812.501,437.50 41,250.OO 1(31.25) 41,218.75 1(1,625.OO) 39,593.75 1(1,406.25) 38,187.50 1(343.75) 37,843.75 1(1,406.25) 36,437.50 1(1,406.25) 35,031.25 1AVERAGE EQUITYCURVE AFTER 2 CONSECUTIVE CLOSESTABLE 11.2 (Continued)169P/LAccount 9 PointBalance AverageNew Account<>>>><<<<>>>>>><>>>>>>>>>>><>>>>>><><<(1,406.25)2,812.50(1,406.25)1,156.25(1,843.75)(1,406.25)3,750.oo5,093.75(1,406.25)2,375.OO0.00(1,406.25)(1,406.25)3,156.25906.25(1,406.25)(1,406.25)(1,406.25)4,781.25(1,406.25)1,250.OO3,687.50(1,406.25)(1,406.25)(1,406.25)1,218.750.00(1,406.25)3,312.50(1,406.25)718.75(1,406.25)(375.00)2,531.25625.000.005.437.5033,625.OO 136,437.50 135,031.25 136,187.50 134,343.75 132,937.5036,687.5041,781.2540,375.oo 142,750.OO 142,750.OO 141,343.75 139,937.50 143,093.75 144,ooo.oo 142,593.75 141,187.50 139,781.25 144,562.50 143,156.25 144,406.25 148,093.75 146,687.50 145,281.25 143,875.OO 145,093.75 145,093.75 143,687.50 147,ooo.oo 145,593.75 146,312.50 144,906.25 144,531.25 147,062.50 147,687.50 147,687.50 153,125.OO(Continued)L.:170 OTHER PROFIT PROTECTING MEASURES TREND LINES AND THE EQUITY CURVE 171TABLE 11.2 (Continued)P/LAccount 9 PointBalance AverageNew Account4 or 5 P/L Taken Balance(93.75) 55,687.50 57,184.031,906.25 57,593.75 57,305.563,312.50 60,906.25 57,385.42(1,406.25) 59,500.oo 57,465.28718.75 60,218.75 57,781.25(1,406.25) 58,812.50 58,097.22(375.00) 58,437.50 58,236.112J31.25 60,968.75 58,656.25625.00 61,593.75 59,302.080.00 61,593.75 59,958.335,437.50 67,031.25 61,006.94(1,406.25) 65,625.OO 61,531.251,187.50 66,812.50 62,343.751,843.75 68,656.25 63,281.25375.00 69,031.25 64,416.67(1,406.25) 67,625.OO 65,437.50(1,406.25) 66,218.75 66,020.83(1,406.25) 64,812.50 66,378.47(187.50) 64,625.OO 66,715.28(1,468.75) 63,156.25 66,284.72(1,500.00) 61,656.25 65,843.75<>>>>>>>>>>>>>>>><<<<(1,406.25) 51,718.751,187.50 52,906.25 11,843.75 54,750.oo 1375.00 55J25.00 1(1,406.25) 53,718.75 1(1,406.25) 52,312.50 1(1,406.25) 50,906.25 111111111111amount for the drawdown to exceed. After the drawdown exceeds thislevel and trades have ceased, require that the dollar size of the drawdownbe retracted by 30 percent before starting to take trades again.For example, if the largest hypothetical drawdown was $8,000, wecould set a rule that states once the drawdown surpasses $9,000 wewill stop taking trades. If the drawdown goes to $12,000 and thenbegins to come back up by 30 percent, we will begin taking trades’ This means the drawdown would have to decrease fromi?i’onbO to $8 400. Whatever the $ amount used for this method, itshould be at least the size of the hypothetical track record.The same example of the bond trade with this method appliednever stopped taking trades and therefore maintained the full$61,000 in profits and will still be out of the market long before thedrawdown goes to $20,000 or even more.TREND LINES AND THE EQUITY CURVEUsing trend lines on the equity curve is another way of cutting thelarger losing streaks of any method or system down to size. Trendlines can be used with the equity curve by drawing a line betweenthe two most recent low points of the equity and extending it into thefuture. If the equity breaks the line, trading is halted. Once the equitymoves back above the line, a new line is extended into the futureand the cycle starts all over. This can be coupled with the requiredtwo consecutive closes below the line requirement as well.From the previous illustrations, there are many potential tools tohelp the overall performance record of our trading. However, the illustrationsand methods in this chapter cannot be proven to mathematicallyincrease that performance. There are instances whereapplication of some of these strategies will keep us from being blownout of the markets during unexpected drawdowns and trading failures.Based on the logic, it is best to use these strategies for that purposealone.