|
PureBytes Links
Trading Reference Links
|
John:
When you say that optimal f would almost guarantee ruin if implemented at the
wrong time, you must be referring to either to a "biggest loss" greater than
any previously experienced in testing or actual trading, or a string of large
losses. You're right; if testing did not reveal your true biggest loss, then
your position sizing is, in fact, to the right of the optimal f peak and ruin
is indeed guaranteed. In theory, an unexpectedly long string of losses will
not cause ruin because position size is reduced after each loss. Just like a
long string of wins will cause the maximum equity increase, a long string of
losses will cause the maximum equity decrease and the trader may be
discouraged to the point of quitting -- however you cut it, ruin.
Ralph Vince does not say you must trade at optimal f, where wins and losses
will be maximized. He simply says this is the point at which equity will
increase the fastest if you have correctly anticipated your biggest loss. The
beauty of this technique is that you can make an informed decision to trade to
the left of the optimal f peak and thereby accept a lower overall return for a
known reduction in risk.
Standard rules of thumb say to risk no more than 3% of your equity on any one
trade. With optimal f and/or risk of ruin, you can quantify that risk and
determine that, yes, 3% is indeed a safe wager, or maybe that even 3% presents
too great of a risk of ruin for your system, or perhaps that your system can
actually handle 5% with almost no increase in risk of ruin but improve your
equity growth rate geometrically. Optimal f is just a method for quantifying
risk.
----- Original Message -----
From: "John Manasco" <john@xxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Saturday, July 08, 2000 4:57 AM
Subject: Re: Risk of ruin, amount per trade formula?
> I wish some of you guys would get on the Realtraders forum. They recently
> had a fairly lengthy discussion on the optimal f formula and came to the
> conclusion that it was not only worthless it would almost guarantee ruin if
> implemented at the wrong time. But the better conclusion is to join the
> Realtraders discussion forum as they have some very bright professional
> traders who like to share their knowledge.
>
> John Manasco
>
>
> ----- Original Message -----
> From: Guy Tann <grt@xxxxxxxxxxxx>
> To: <metastock@xxxxxxxxxxxxx>
> Sent: Saturday, July 08, 2000 1:38 AM
> Subject: RE: Risk of ruin, amount per trade formula?
>
> > Thanks Glen.
> >
> > While all three of us have backgrounds in math, statistics and economics,
> > we really haven't spent the time necessary to dive into Vince's books. I
> > think that's why my brother took the easy way out and went with
> > Balsara's charts. :)
> >
> > Guy
> >
> >
> > -----Original Message-----
> > From: owner-metastock@xxxxxxxxxxxxx
> [mailto:owner-metastock@xxxxxxxxxxxxx]On
> > Behalf Of Glen Wallace
> > Sent: Friday, July 07, 2000 6:49 PM
> > To: metastock@xxxxxxxxxxxxx
> > Subject: Re: Risk of ruin, amount per trade formula?
> >
> > To add to Guy's comments, Ralph Vince's first book, "Portfolio Management
> > Formulas," has a comprehensive chapter on risk of ruin. His second book,
> > "The Mathematics of Money Management," contains a condensed version
> > of his first book in the first chapter, but glosses over risk of ruin.
> > Both are excellent books and easily the most important books in my
> > bookshelf. They are not, however, for the mathematically challenged.
> >
> >
> > ----- Original Message -----
> > From: "Guy Tann" <grt@xxxxxxxxxxxx>
> > To: <metastock@xxxxxxxxxxxxx>
> > Sent: Friday, July 07, 2000 5:20 PM
> > Subject: RE: Risk of ruin, amount per trade formula?
> >
> > > Sonny and Mike,
> > >
> > > I made an error here. We bought the following books from Amazon.com:
> > >
> > > The new Money Management by Vince
> > > The Mathematics of Money Management by Vince
> > > Money Management Strategies for Future Traders by Balsara
> > >
> > > The "Risk of Ruin" chart we're using came from the Balsara book
> > > (according to my brother). I'm ordering my own copy.
> > >
> > > I'm sorry if I misled anybody.
> > >
> > > Guy
|