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----- Original Message -----
From: Bob Fulks <bfulks@xxxxxxxxxxxx>
To: John Manasco <john@xxxxxxxxxxx>
Sent: Monday, July 10, 2000 9:23 AM
Subject: Optimal f
> At 8:43 AM -0400 6/8/00, Bob Fulks wrote:
>
> >>He defines "Optimal_f" as a fraction of the biggest losing trade of the
> >>historical series of trades.
>
> At 7:27 AM -0700 6/8/00, Dennis Holverstott wrote:
>
> >That seems like the fallacy of optimal f to me. It gives entirely too
> >much weight to a single losing trade and doesn't account for the
> >possibility of stringing several losers together in the future. So,
> >everybody ends up trading at some smaller f to be safe but the method
> >doesn't give any guidance about how much smaller the f should be and you
> >are back to guessing.
>
> But that is the way the math works out. The optimal_f point is a
> function of the biggest losing trade. And with a really good trading
> system with a high Sharpe Ratio, the optimal_f point is very close to
> the point where you are guaranteed to go broke - sort of like trying
> to walk about a foot from the edge of the Grand Canyon in a wind
> storm...
>
> Ralph Vince, in Chapter 5 of his latest book, "The New Money
> Management", offer some ideas on trading less aggressively than
> optimal_f but he still seems to be hung-up on trading at least a
> fraction of your account at optimal_f. He says in Chapter 5 (page
> 165):
>
> > "Ideally, you would sit through the drawdown which took your
> account down to $50,000 from the $10 million mark before it
> shot up to $20 million" -
>
> and (page 166) that
>
> > "...you should expect to see 100% of the active equity portion
> wiped out at any one time."
>
> Can you possibly imagine any rational human being sitting there
> watching his $10 million drop to $50,000 and believe that it would
> stop there and that all he has to do is keep at it and soon it will
> shoot up to $20 million.
>
> I sure wouldn't want him managing my money...
>
> Bob Fulks
>
>
>
>
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