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To apply the Optimal f and find the optimal value to risk for an
account, follow the steps below:
• Establish the account size. This is the starting account size and
should be obvious to traders.
• Establish the size of the single largest losing trade. Traders will
need to look at the trades to figure this out.
• Use the included software to calculate the Optimal f
• Divide the largest loss by the Optimal f. • Divide the account value
by the results of step 4.
• Repeat after each trade.
The results from step 5 will tell traders how many units/contracts to
take on each trading signal for maximum growth to their accounts. Here's
a real example:
• The account size is $25,000.
• The largest losing trade is $2,050.
• The Optimal f is 27%. • $7,592 = ( $2,050 / 0.27 ).
• 3.29 units = $25,000 / $7,592.
When comparing the Optimal f value of two systems, all other things
being equal, it is wise to pick the account with the larger value. The
system with the largest Optimal f value will have the potential to grow
the quickest, if the proper Optimal f Position Sizing technique/approach
is used.
The Optimal f graph is usually displayed as an arch. The optimal value
is the peak of the curve. This peak is usually called the Optimal f. In
this optimal value lies the tools for growing an account the fastest.
But it is necessary to go through the steps above before the data is
truly useful to traders.
I hope this is helpful
Ray
> Message: 4
> Date: Tue, 10 Aug 2004 09:15:26 -0000
> From: chichungchoi
> Subject: Money Management for Ralph Vince's "Portfolio Management
> Formulas"
>
> According to Optimal f. Read Ralph Vince's "Portfolio Management
> Formulas", Now, I know this formula, but one thing I don't
> understand is to find any $2 profit with $1 risk opportunity.
> Profit and risk depend on support and resistance levels, but those
> levels have no clear solid definition on where it is. How do I know
> which conditon will fit for the opportunity of $2 profit with $1
> risk? If I think current condition is $2 profit with $1 risk, but
> other people will see it $1 profit with $1 risk. It is very
> depended on the levels of support and resistance. Does anyone have
> any idea?
> Thank you
> Eric
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