Lesson 2.
1
Market Contraction/Expansion DPS Techniques
Tomas: Module Number 2: Market Contraction and Market Expansion Dynamic Posi-
tion Sizing Techniques.
Okay, so let's move now towards the first technique I'm going to share with
you in this programme.
Again, very quickly, disclaimer.
And let's move to the introduction of the Market Contraction/Expansion DPS
technique. This is a dependent DPS technique - dependent dynamic position
sizing technique. We derive all the information we need directly from the un-
derlying data of the underlying market.
However, it is still a very, very powerful technique. Although it's dependent,
it's very, very powerful, and I think you will really like this technique.
We have developed this technique in our hedge fund. Actually, it's one of
many techniques that we have tested, and this one, particularly, showed
very, very good results.
Okay, so what is it about?
In general, markets repeatedly expand, during trends mainly, and then con-
tract, and that contraction happens during retracement and range-bound
choppiness.
Now, this expansion and contraction is repeatedly establishing new market
ranges.
So if we have strong market, which strongly goes up, then the market is es-
tablishing some new overall market range. For example, within 100 days, if
the market is strongly trending up or down, the 100-day long range will be
significantly wider than if we had 100 days of choppiness, or 100 days of mar-
kets which are retracing.
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TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
So in choppiness, we would have probably a very narrow range, and in re-
tracement, or in contraction as we call it in our hedge fund, we would have a
small range. So when market expand, they tend to make much wider range
among certain period - let's say 100 days or 100 bars - and when they started
tracing, or once they got into choppiness phase, that's the contraction phase,
the market range either stays the same or start shrinking, starts contracting.
Now these ranges can be again divided into several zones .
In our case, into three.
And we found out that if we use this concept, and just use the range and split
it into three different zones, we have very different probability of success of
our entries within each zone. And it can really vary significantly.
And it makes sense because if, let's say, we have market which has been
growing for 100 days, and now we are in a retracement phase, we will defi-
nitely have very different probabilities of success with our entries in different
zones. That means different if it's close to the market top; different if it's
close to the 50% retracement; and different if it's at the bottom of that 100-
day or 100 bars long range.
And that's basically how we are going to use this phenomena and this tech-
nique for dynamic position sizing.
So by using different position sizes within different zones, we can dramati-
cally improve, again, our Net Profit/Drawdown ratio, which is the Number 1
desired metric to improve.
Let's go directly to TradeStation, and I'll explain to you everything more in de-
tail in TradeStation.
Before that, in this module we have six different techniques.
So the Contraction/Expansion Dynamic Position Sizing comes with six differ-
ent techniques that I'm going to introduce to you directly in TradeStation.
And you also have one indicator as a part of this module, and three different
codes: The testing strategy, the optimization code, and the result code.
So I'll walk you through everything. Let's get to TradeStation now, and let's
get as much practical as possible.
Page 2 of 2
(c) 2018 [Link] / Distribution without author´s approval is not permitted.
TRADING INVOLVES A SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS,
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS