MSA enables you to set several different trade dependency rules, which alter the position size either by skipping trades or by adding to or subtracting from the position. If a trade is skipped, it will still appear in the chart window and in the Equity Table, but the position size will be zero.
To apply one of the dependency rules, select Dependency Rules from the Analysis or Portfolio menu. This opens the Dependency Rules window, shown below for portfolios. The same rules are available for individual market systems.
The dependency rules are grouped into three categories: basic rules, consecutive win rules, and consecutive loss rules. The basic dependency rule choices are as follows:
No dependency. All trades are included. This is the default.
Positive Dependency: Skip trades after a loss until a skipped trade would have been a winner. This rule can improve trading performance if wins tend to follow wins and losses tend to follow losses.
Negative Dependency: Skip the next trade after a win; take the next trade after a loss. This is intended to be used when wins tend to follow losses and losses tend to follow wins.
The consecutive win rules are as follows:
After X wins in a row, skip the next Y trades. Here, X and Y are entered by the user. This rule is intended to be used in conjunction with the results of the dependency analysis, which calculates the average length of runs of wins and losses. For example, if the average winning run is 3 trades, and average losing run is 2 trades, you might try skipping the next two trades after three wins in a row.
After X wins in a row, increase/decrease position size by Y shares/contracts/units. In addition to entering values for X and Y, the user selects either “increase” or “decrease.” Select “increase” if the trading record indicates that wins occur in runs. Select “decrease” if the trading system or method tends to produce losses after a run of wins. The change in position size applies to the next trade only.
After X wins in a row, increase/decrease position size by Y%. This is a variation of the preceding rule. For example, if fixed risk position sizing is currently selected, X is 4 trades, “increase” has been selected, and Y is 50, this rule would increase the position size 50% (relative to the fixed fractional equation) after four consecutive winning trades. The higher position size would apply to the next trade only. After that, the position size would be calculated according the fixed fractional equation without any additional increase.
The consecutive loss rules are as follows:
After X losses in a row, skip the next Y trades. X and Y are entered by the user. As with the analogous rule for consecutive wins, this rule can be tailored to the results of the dependency analysis. If, for example, there is positive dependency (meaning losses tend to follow losses) and the average length of the losing runs is 4 trades, then you might try skipping the next three trades after 1 loss in a row.
After X losses in a row, increase/decrease position size by Y shares/contracts/units. In addition to entering values for X and Y, the user selects either “increase” or “decrease.” Select “decrease” if the trading record indicates that losses occur in runs. Select
“increase” if the trading system or method tends to produce wins after a run of losses. The change in position size applies to the next trade only.
After X losses in a row, increase/decrease position size by Y%. This is a variation of the preceding rule. For example, if margin target position sizing is currently selected, X is 3 trades, “increase” has been selected, and Y is 50, this rule would increase the position size 50% (relative to the standard margin target equation) after three consecutive losing trades. The higher position size would apply to the next trade only. After that, the position size would be calculated according to the standard margin target equation.
After X losses in a row, add Y shares/contracts/units after each loss until a win. Subtract after each win until a loss or back to baseline. This method was developed by Larry Williams and described in his book “The Definitive Guide to Futures Trading, Volume II,” Windsor Books, New York, 1989, pp. 187. The idea is that after a streak of losses, you expect a winning trade, so you start increasing the position size after X losses in a row. If you continue to have losses, you increase the position size by Y after each loss. If you get a win, you decrease the position size by Y. If you continue to get winners, you keep subtracting Y from the position size until you get back to the baseline value of position size. If a loss is encountered, you wait until X losses in a row before adding Y shares/contracts/units. The baseline value of position size is the position size calculated using the currently selecting position sizing method without any other rules applied. If either of the basic dependency rules is selected, no other rules can be selected. However, if neither of the basic dependency rules is selected, one rule can be selected from each of the consecutive win and consecutive loss rule categories, for a total of up to two dependency rules. For example, you might select the rules “After 4 wins in a row, decrease the position size by 100 shares” and “After 3 losses in a row, increase the position size by 100 shares.” As shown in the figure above, the Dependency Rules window for portfolios includes an option at the bottom of the window to deactivate all dependency rules in individual market systems. Checking this box will turn off any dependency rules that have been selected in the individual market systems comprising the portfolio. In this case, the only dependency rules that will affect the portfolio trading results will be those selected for the portfolio. These rules are
applied to the trade sequence for the portfolio, which includes all market systems taken together. The trades in a portfolio are ordered according to their exit dates.