## Saturday, December 13, 2014

### A review of the R curve

Below I've shown my R curve performance, which I believe is a better representation of current performance than pure equity.

As I use fixed fractional position sizing, I risk a fixed percentage of whatever my closed equity is when opening new trades.

As it is clear to see, and has been borne out on enough recent blog posts, my performance has not been great over the last few months. However, I've been trend following long enough to know that, just like price on an individual stock, equity curves do not go straight up. There are bumps along the way, regardless of who you are, from someone trading a small amount in their study to the hedge fund stars of the last 30 or 40 years.

I put up the equity curve as that is what everyone wants to look at, by in my opinion, the R curve is more relevant to your trading. Let me explain.

In theory, the way you trade should be exactly the same whether you trade a £10,000 account, a £100,000 account or a £1million account. You are risking the same percentage of your equity on each trade, but as equity increases your risk per trade, in monetary terms, increases.

As an example, if you take two traders who risk the same percentage of equity per trade, if you are trading a £100,000 account your position size (in monetary terms) is five times bigger than someone who is trading a £20,000.

If you've been fortunate to grow your account from £20,000 to £100,000, then any fluctuation up or down on a pure equity curve will be magnified by a multiple of 5. Put another way, the same drawdowns (in terms of R) placed at different stages of the equity curve will take on a different magnitude.

On an R curve, any profits or losses are expressed as a multiple of what you risk on each trade. Assuming you keep the percentage risk constant, you risk 1R on each trade, regardless of any fluctuation in the equity size.

And what does the R curve show me? Well, I can still see a clear uptrend (higher highs and higher lows) here. Not a lot wrong here. Sure, the current pullback is a bit bigger than I'd like, but its perfectly within any reasonable level of expectation. It also shows the curve trade by trade, rather than in set time units, which wouldn't reflect changes in market conditions or trading frequency.

Am I frustrated with the last few months? Absolutely, but there are far more successful trend followers than me who have suffered longer or bigger drawdowns and have bounced back. Also, having seen what other traders I regularly correspond with and mentor have been able to achieve in recent weeks, I know its a short-term blip, especially when placed in context of the next 10,000 trades.

That knowledge, combined with the changes to my own method I have discussed on previous posts, is why I am so excited going forward into 2015.