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Glen,
That was an excellent post and enjoyable read!
I did want to add this point: one thing that's implicit in all
discussions of money management is that the system has to be
profitable. The only benefit that money management will have on a
losing system will be to stretch out the pain, or at least give the
trader a chance to fix things.
When looking at a system, the standard deviation of your historical
returns can be quite important. A while back I posted about how to
export these from Metastock into Excel to do this analysis when used
in a t-test. You can use these same standard deviation results from
your trades to look at your system for money management as well.
If I have two systems, one makes great returns but has a wide
variation in the resulting trades, and the other makes small amounts
with a much narrower variation in the trade results. Which one to
trade???? --Trick question. Trade both, but treat each one
differently.
Somewhat intuitively, you know that in the first system, you can't bet
the whole wad because it's very likely to blow up. You're going to
have big drawdowns, and you'll need some trading account $$ in reserve
to trade through this. Thus, a smaller trade size, or fewer contracts
per trade.
In the second system's case, the variability of your returns is much
lower. You just know that you can trade this one bigger with a lot
less fear of blowing up. In the end, the net profits can meet or
exceed those of the first system.
Money manangement is that finishing touch that a trader can put on a
system to extract superior performance. It can also be used as a
defensive measure on a system with larger variability to ensure that
the account stays healthy long enough to enjoy those variable roaring
returns.
================
Dave Nadeau
Fort Collins, CO
> -----Original Message-----
> From: owner-metastock@xxxxxxxxxxxxx
> [mailto:owner-metastock@xxxxxxxxxxxxx]On Behalf Of Glen Wallace
> Sent: Saturday, August 11, 2001 12:05 PM
> To: MetaStock listserver
> Subject: Re: money management
>
>
> I see money management, or bet sizing, as addressing both risk
> management and position sizing. Proper money management
> inherently manages and quantifies risk. It balances the trade-off
> between risk and return.
>
> Two examples for those who have not spent time on this subject
> yet. A futures trader develops a new system and decides to
> begin trading at a rate of one contract per entry signal. After a
> time, profits accumulate and the trader decides to begin trading
> three contracts. The next trade is a big loss and the system is
> discarded as being too risky. The problem is not that the system
> is too risky, but that the trader hasn't the foggiest idea whether
> he is overtrading or undertrading his account.
>
> Now let's say, instead, the trader remains trading one contract
> and moderate, but not spectacular, profits are made. Eventually
> he discards the system as not profitable enough. But the
> problem is actually that the trader is not selecting the optimum
> position size.
>
> Your own system, Terry, of risking a small percentage of your
> account on each trade is, in fact, both risk management and
> position sizing. It is a fixed fractional (Fixed f) anti-martingale
> system, where position size increases as you profit, and it
> decreases when you take losses. It will give you geometric
> returns with arithmetic changes in risk. My question, though,
> is how do you know that the percentage you choose is correct.
>
> I'm not a great proponent of Optimal f or any other particular
> money management system. What I do advocate (and I give
> Ralph Vince full credit for my own epiphany) is quantifying risk
> and return and making an informed decision.
>
>
>
>
> ----- Original Message -----
> From: "Terry Willett" <t.willett@xxxxxxxxxxx>
> To: <metastock@xxxxxxxxxxxxx>
> Sent: Saturday, August 11, 2001 5:41 AM
> Subject: money management
>
> > Now that the subject of money management has come up, I
> have a question for
> > those that may know. I have read several authors on the
> subject, but I
> > still don't get it. I understand risk management (risking
> a small % of ones
> > trading account on each trade), which I practice. What I
> don't get is money
> > management by position sizing using optimal f or some
> other formula when
> > that would violate risk management. How are these two
> ideas coordinated, or
> > do I miss the concept altogether? Terry
>
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