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RE: Money Management Stops



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Kevin

I'm not sure whether I agree with any of the gambling analogies when used
for comparison to trading the markets.  My primary reason for this is that
in gambling (roulette and craps are examples) your analogies are 100%
correct, IMHO.  When compared to blackjack, there are some variances based
upon the play of players before and after you that impact the deck and the
play.

When compared to trading the market, I don't think these analogies are
applicable at all.  Again, that's just my opinion.

I'll agree that it's possible to have 1,000 events go against you in a row
and then have 1,000 go for you in a row.  However, if in testing this
system, you ever decided to trade it, you would be broke in no time at all.

If on the other hand, you develop a system that is capable of 80% profitable
trades, proper testing would give you some idea as to the distribution of
these losing events.

In our case, even when we develop a new weighting schema, we back test the
system for 6 months, 5 years and 18 years.  While we're primarily interested
in the last 3 years, we also need to see how the system would have done in
the real world over a longer period of time.  Rather than manufacturer a
random list of numbers going back many years, we just use the actual
market's performance over that longer period.  In our case, again, large
losses are exceedingly rare, thank goodness.  Repetitive losses are also
very rare.  On average, for the past 15 years, we average no more than 6 or
7 losses a year while still maintaining our minimum profitability ratio of
over 70%.

If in back testing, we ever encounter repetitive losses of the type you
describe, even while still maintaining good profitability, we would never,
ever trade it.  In all of our back testing, we take repetitive losses into
consideration as well as the system's profitability.  A system that wipes
you out without giving you the opportunity to make a "come back" is hardly a
system.

Regards,

Guy
Fax (630) 604-1589

-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of Kevin243@xxxxxxx
Sent: Monday, April 17, 2000 4:53 PM
To: metastock@xxxxxxxxxxxxx
Subject: Re: Money Management Stops

The answer is no.

It is completely possible to have a 1000 events go against you in a row and
then have another 1000 go for you in a row.

The point is that you could be wiped out before the reversion back to the
mean.

What you are describing is like doubling your bet each time you lose
figuring
eventually, you will win.  Not true.  You will eventually find a streak that
breaks your bank first.  Play long enough, and you will eventually lose
everything.  The house is counting out that.  The house has a positive
expectancy, you the gambler does not.

Kevin Campbell

In a message dated 4/17/00 7:43:39 AM Central Daylight Time,
Michel.Amelinckx@xxxxxxxxxx writes:

> Thanks for helping me out here.  I guess my explanation was not very
>  understandable. And the example of the roulette table was even worse
>  actually it was WRONG because of course you still have the 0, so this was
>  WRONG.
>  What I just tried to say, like described here below is if you have a
system
>  with 70% prob. (of course these statistics are as good as you test them)
and
>  your system shows 4 or more LOSES IN A ROW. And because of this it is
>  deviating from your mean and thus the prob. of the next trade being
correct
>  is higher. (There is of course a change that your system stops working at
>  that point)
>  Is this incorrect ?
>
>  Greetings
>
>  Mickey
>  B
>