January 20, 2011
Since in the beginning, you start by buying less than the Buy & Hold; you suffer less in drawdowns at the portfolio level. You could even forego your initial positions and see a lot less drawdown. Any price decline is the same for all. What matters is the relative quantity on hand at the time of comparison. As the trading strategy evolves, your inventory in rising stocks will increase to the point of exceeding the Buy & Hold strategy, and sometimes, many times over.
But this happens only in the case where you already show big paper profits. Your trailing stop should help you keep most of those. The price will be the same in both scenarios, percentage-wise, but the dollar amount might be much higher on the rising stocks using the Alpha Power strategy.
As for the downers, they are gradually eliminated and have less and less impact on drawdowns again at the portfolio level since they started with a low quantity which was further reduced over time.
The methodology is very chicken (risk-adverse). It follows its predetermined equations, knows its capital requirements, and knows beforehand the value that any price change will have on the payoff matrix. It’s like instead of trying to predict stock prices for the next twenty years you predict your behavior to price changes whatever they may be.
Created on ... January 20, 2011, © Guy R. Fleury. All rights reserved.