Drawdown simulation and trading systems selection

[Palm]

Method
Suppose i have a trading system A which has historical 100 trades data. I ran simulation 10,000 trials and look at the worst drawdown that this system A could have produced by chance alone. Let's say that
System A has max simulated Drawdown (DD) at -40%. Now if I set my maximum drawdown of my portfolio at -20%, i will be trading system A by only half of my portfolio to ensure that when the worst comes, i
won't be down more than -20%. By the same token, if system B has max simulated DD of -10%, i will be trading 200% of my portfolio on system B.

Questions:
Currently I set every system that i have equally at -20% max portfolio DD. Here's what i mean

System A B
Max Simulated DD -30% -63%
Portfolio Max allowable DD -20% -20%
Market exposure adjustment % 70% 33%
Annual Expected Returns 36% 24%

For example, if i have $100,000 portfolio, i will trade system A at 70,000 market exposue in a given trade. And i will trade only $33,000 worth of market exposure on system B. This also mean that my expected
returns will be geared down accordingly. So system A will now have expected returns to my portfolio of (36%*70%) = 25.2%. And system B will give me 7.9% returns to my portfolio.

Now here's my question, by setting each system max DD to -20% of the total portfolio, i am willingly allow each system an equal chance of damaging my portfolio. You would ask, why should i allow system B
which can generate only 7.9% returns to my total portfolio to have the same damaging effect on my portfolio. In other words, should i set B at -15% instead of -20%? How about setting A at -25%? What should
be my method in setting this Portfolio Maximum Allowable DD when i take into consideration the expected returns of each system?

Any comment is welcome.

Thank you

 

[burnsy]

you should definitely not allocate identical resources for each trade since you mentioned that some trades may be more profitable than others

therefore, try to position trades in terms of risk to total portfolio value
i would say to acknowledge the risk portion and not focus so much on potential returns as this is RISK/MONEY MANAGEMENT

if you decide to risk .5% per trade in relation to total portfolio value, then you would risk $500 (assuming original $100000 portfolio)
with risk expendable until $500, you should properly position your trade geared towards this risk
risk will be equal for ALL TRADES but position size wont
therefore, if you have plan to place a stop loss of $1 under current market value, you would trade 500 shares
500 shares times current market value would equal the position size

 

[Palm]

Thanks burnsy

Correct me if i am wrong. But doesn't risking x% of total portfolio value for each trade is the same as allocating identical resources to different trading systems? Say's system A and B ask you to buy 2 stocks. if you risk $500 on both stocks, then you are willingly risking the same amount eventhough you know that System A has less risk and higher returns per dollar invested than System B.

 

[burnsy]

Thanks burnsy

Correct me if i am wrong. But doesn't risking x% of total portfolio value for each trade is the same as allocating identical resources to different trading systems? Say's system A and B ask you to buy 2 stocks. if you risk $500 on both stocks, then you are willingly risking the same amount eventhough you know that System A has less risk and higher returns per dollar invested than System B.

you risk the same amount but your position size is determined by the risk which alters your profit
reread my post and you will find your answer there