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Thank you b, for a very well expressed practical approach to MM. Your
approach can be understood and might even be codeable to a large degree.
Thanks you also for some of the explanations wrt futures and stocks, that
really helped me.
Thanks again,
Herman.
> -----Original Message-----
> From: b519b [mailto:b519b@x...]
> Sent: 23 October, 2002 3:48 AM
> To: amibroker@xxxxxxxxxxxxxxx
> Subject: [amibroker] Practical Money Management Rules
>
>
> --- In amibroker@xxxx, "Herman van den Bergen" <psytek@xxxx> wrote:
> > If, like it has been mentioned on this list several times, the
> > application of van Tharp's techniques are a matter of ruin or
> > no-ruin then we should have at least one single person on this
> > list of about 1000 who can to come forward with a practical
> > example that works. My appreciation of this topic swings from
> > great admiration one day to total dismay the next...
> > Herman.
>
> Herman,
>
> I do not think I can give as full an answer as you may want, but I
> will add my 2 cents worth to the discussion. My contribution will be
> much more like common sense than rocket science. Those who trade the
> futures markets may need rocket science versions of money
> management, but I think a stock trader like myself can operate well
> with a few common sense money management rules.
>
> First, I should explain why I think stock trading is different from
> futures trading with respect to money management. If a stock
> trader is a heavy user of margin or trades options, then their money
> management needs are likely to be similar to that of the futures
> trader. So I am contrasting futures with stocks and ignoring margin
> and options.
>
> 1. Future traders are -- and need to be -- much more concerned
> about "total ruin" because it is an ever present danger for them in
> a way that it is not for stock traders. The reason is the leverage
> used in futures trading. A futures trader can easily get completely
> destroyed by a 10% or 20% move in the underlying commodity or
> currency. A stock trader whose stocks drop by 50% will not be happy
> but he/she is still very much in the game -- not so the future's
> trader.
>
> 2. Another difference between futures and stocks is the minimum
> amount needed to continue trading. Those developing trading systems
> for futures need to always keep in mind the minimum contract size
> and they must ensure that their account size remains above this.
> Typically a futures contract is a lot more than the price of stock
> shares. Consider this: if a future trader begins with enough money
> to buy 2 contracts and he has a 55% drawdown, he will not be able to
> continue trading -- he does not have enough to buy 1 contract! But a
> stock trader can experience a 75% drawdown and be quite able, from a
> financial perspective, to continue trading. If the stock trader is
> using a deep discount broker the fees could easily remain below 1%
> when trading a very small account. In this respect, stock trading is
> much more "forgiving" of drawdowns than futures trading is.
>
> 3. So my assumption -- and it is just a guess since I do not trade
> futures -- is this: futures traders have to be a lot more concerned
> about drawdowns and detailed money management than stock traders.
>
> 4. Money Management for futures traders is a financial issue due to
> points 1 and 2. Money Management for stock traders is primarily an
> emotional issue -- one needs to preserve one's emotional capital (or
> that of one's spouse) to be comfortable enough to continue.
>
> Now for the Money Management principles that makes sense to me.
> Remember, I am not promising any rocket science principles:
>
> A - Do not increase my bet size in a loosing streak. It would be a
> foolish to think this way: my back testing shows that the average
> number of trades in a loosing streak is 5, and I now have had 6
> losses in a row, so the chance of another loss is very low, in fact
> my system is "over due" for a win, so I will double the size of my
> next trade -- bad idea, very bad idea! Do not increase my risks or
> bet size when in a loosing period. I also happen to think using a
> fixed percentage of a portfolio is better than using a fixed dollar
> amount, but either one is a lot better than increasing the size
> because my system is over due for a win.
>
> B - Increase my bet size if I can set a logical stop loss very close
> to the entry price (eg, if a stock has just started to bounce off a
> support line). It does make sense that a bigger bet could be placed
> in such cases, but there always is the chance that a loss could be
> greater than the distance to the stop (if a gap down hits me) so for
> me, rule B is limited by C. Due to C and the fact an equity trader
> has thousands of stocks to select from, I consider B to be a rule of
> secondary importance. But if I was trading futures, I would likely
> view B as a virtual necessity. Why? Since I am not a futures trader
> I could be misunderstanding things here, but it seems that the bulk
> of a futures trader's account is sitting in cash (to be available as
> a cushion so a dip does not result in a margin call or forced
> liquidation). Thus, rule B helps them get the maximum amount of
> money into play. They do it by looking at the distance from their
> entry to their stop loss and using that as a percentage of the
> portfolio to determine how big a bet they can make on a single
> commodity trade.
>
> C - No more than 10% of my portfolio in any single trade -- just in
> case there is a major gap down.
>
> D - Use A and C to keep me in the game financially. Use B, or more
> precisely, a variation on B to maximize the reward/risk ratio of
> methods that give price targets. Not all methods give targets so I
> do not always use B.
>
> E - Never risk more than I can afford to loose. I do not apply this
> rule to individual trades (Rule C keeps individual trades from being
> too large); rather it is a way to determine how much of my net worth
> will be put into an active trading account.
>
> Well those points are not rocket science, but they seem reasonable
> given what and how I like to trade.
>
> b
>
>
>
>
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