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Chuck,
When looking at these various approaches to "risk of ruin", I have
formulated a basic difference in approach. Most or all of these
methodologies assume a random sequence of events, like the daily stock
market closes. Based upon that, I can see how all of the approaches we
learned in school could be used to calculate this "risk of ruin" number.
However, if you add one more assumption (one that I'm comfortable with), I
think we have to do more work in establishing a magic number.
My additional assumption is:
Assume that we have developed a system that is able to consistently
(predictably) forecast the price movement between two points in time,
thereby eliminating or substantially reducing the randomness of the events
under examination as well as demonstrating loss predictability.
Now, I assume that all real traders have developed a mechanical or
systematic approach to trading and that they are able to identify and
quantify the following information about their approach.
1. The percent profitability of this system. Number of winners and number
of losers collected over a significant period of time. Let's say 100
events, for example.
2. The average profit of each winning trade.
3. The average loss for each losing trade.
4. The maximum individual loss experienced over the event horizon.
5. The maximum individual profit experienced over the event horizon.
With this additional assumption, and with the above information, I think
that we should be able to fairly accurately determine any "risk of ruin".
Again, this is why I dropped the Monte Carlo approach from consideration as
well as all gambling related systems, and have started using the Balsara
book (picked by my brother) and am wandering off into the wilderness looking
for that Holy Grail. :) I haven't looked at Optimal f or any other
mathematical approach. All I know from experience is that the approach we
used to use (investing 50% of our capital) was guaranteed a 100% "risk of
ruin" based on Balsara's book, and that we had proven this over and over
more times than I would care to admit. By applying the approach we're
using, we have successfully weathered two major losses in the last 8 months
and have recovered from both of these.
In the meantime, I haven't stopped searching for an alternative, magical
approach.
Guy
Paranoia...you only have to be right once to make it all worthwhile!
-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of CRLeBeau@xxxxxxx
Sent: Sunday, July 09, 2000 2:35 PM
To: metastock@xxxxxxxxxxxxx
Subject: Re: Risk of ruin, amount per trade formula?
In a message dated 7/7/00 8:08:49 PM Pacific Daylight Time,
gcwallace@xxxxxxxx writes:
<< To add to Guy's comments, Ralph Vince's first book, "Portfolio Management
Formulas," has a comprehensive chapter on risk of ruin. >>
Fred Gehm in his book Quantitative Trading & Money Management (a guide to
risk analysis and trading survival) has a Risk of Ruin formula on page 67.
This book is highly recommended for those who want to get serious about
money
management.
Chuck LeBeau
traderclub.com
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