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On Thu, 6 Sep 2001 11:15:43 -0700, you wrote:
>I suppose you could add to your trade size as the open profit increases
>and reduce your trade size as the open profit decreases. Obviously,
>your transaction costs would be much higher with this kind of fine-tuning.
This could be a way out, but as you state, it would make things much
more complicated if it comes to low cost / contract, which is typical
for (my) short positions, when successful. So imo its not a solution
for the "investment-follows-result-dilemma" for short positions.
>Perhaps the better way to go would be to compute trade size based
>on the maximum loss you are willing to take on each trade, rather than
>based on the cost of the investment. Let's say your system testing says
>risking a maximum of $2,000 per option contract gives the optimum
>return. Let's also say that with a $100,000 account, you're prepared
>to risk 6% on each trade. Therefore, you would trade 3 contracts,
>whether they trade at 6, 60 or 600 points, and whether trading long
>or short.
>
>Here's an Optimal f example. Let's say your calculations show that
>your system has an Optimal f of 0.25 and a maximum loss of $2,000
>per option contract. This means you require ($2,000 / 0.25) $8,000
>account equity for each contract traded. With a $100,000 account,
>you would trade no more than ($100,000 / $8,000) 12 contracts
>long or short, no matter at what price they trade.
>
Again: My problem is not with the "optimal f" calculation. And if I
follow the optimal f concept consequently, there is a _given amount of
"investment"_ for every upcoming trade, and it is different for
calls& puts as it is for short&long positions (resulting from the
appropriate probability distributions of wins&losses of past trades).
(I calculate it from my personal "boundary condition", that I'm not
willing to loose more than 90% of my working capital with a
probability of more than 1%.) So, a less accurate mmgmnt procedure
(like you propose above) is not a solution to the
"investment-follows-result-dilemma" immanent to short positions. At
least not for me ...
mfg rudolf stricker
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