Ultimate Algorithmic Trading System

FIGURE 9.18 Profit and drawdown are directly proportional to position size. As your position
size changes, so do your commissions and profits and losses.
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The profit is spectacular but so is the drawdown—and not in a good way. This
is how Fixed Fractional works—as the account grows so does the position size.
And we all know profit or loss and drawdown are directly proportional to position
size. Take a look at Figure 9.18 to see how the position size changes for the different
markets in the portfolio.
PORTFOLIO ANALYSIS
Portfolio Analysis
Not only does PM allow you to overlay money management, but it also allows
you to control portfolio management from a macroscopic perspective. Professional
portfolio managers often tinker with the idea of placing a global portfolio stop after
a big losing month. Let’s say the portfolio is down 4 percent by midmonth; some
managers liquidate all positions and wait until the beginning of the next month
to reestablish positions. They also tinker with the idea of liquidating positions
intramonth when the portfolio reaches a certain profit level. I have personally seen a
fund up 3 to 4 percent midmonth, but by the time the end of the month rolls around,
the fund winds up being negative. If only the fund manager had taken a profit,
then the gains would have been preserved. This type of trade stoppage sounds great
theoretically, but there are risks involved. Let’s say a fund manager stops trading
when the fund is down 4 percent, but continues to monitor the what-if trades and
finds out the fund would have recovered the 4 percent plus an additional 2 percent.
The manager realized a real 4 percent loss, but had he continued trading he would
have ended up with a 2 percent winner. This is a 6 percent equity swing and could
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