Perhaps 25% of successful trading is risk and
money management. Maybe 5% to 10% are our trading strategies, methods, tactics,
technical analysis, cycles analysis, fundamental analysis, crowd psychology,
intermarket analysis. The rest is personal psychology and self
discipline.
Strangely, we spend most of our efforts on the 5%
to 10%, rather less on money management and little on self discipline. van Tharp
leaves me with the impression that getting money management right is all I need
to do and a fortune will follow.
Recognise that no money management technique will
turn a negative expectation into a profitable trading strategy but poor money
managment will turn a positive expectation into a losing strategy. you can
probably tell me, but from memory I can't recall him discussing the optimum
amount of leverage to use - volatility and leverage are highly hazardous to
wealth. Kelly found that there was an optimal bet size as a percent of
capital in order to maximise the median ending weelth (2p-1) for games
with payouts = loss. For games without a fixed payout/loss then
optimal bet size = p- (1-p)/r. (p is probability of winning and r is the ratio
of win/loss).
Optimal leverage has a paradox for the formulae (
including optimal f) to be used then one must fully understand the return
and of volatility of your strategy.with absolute certainty so that we can
leverage our capital effectively..
My recollection is that van Tharp depicts
risk and money managment as most important and yet he completely ignores
the risk inherent in your portflio. If you have
a basket of stocks, futures, bonds, longs and shorts, at any one time then
does your next long or short reduce or compound your exposure to the
market?
Also, Tharp's definition doesn't mention anything
about win rate. In theory a low-win% system can work just as well as a
high-win% system,
but I'd want a reasonably high win %. I don't want
to trade a system that takes 20 small losses for every win. Not only is it
psychologically difficult to trade, it's too vulnerable to error. I'm sure
you would be happy to trade a system that has say 20 consecutive 200 USd losses
per week but there is a 100% chance of having a 20,000 USD trade.
However, all it takes is one error to miss that one win and ruin your
results for a very long time.
|f you want more rigorous reading,
then:
- Quantitative Trading and Money Management by Fred Gehm
-
Portfolio Management Formulas by Ralph Vince
- Mathematics of Money
Management by Ralph Vince
- New Money Management by Ralph Vince
- Profit
Strategies: Unlocking Trading Performance with Money Management by David
Stendahl
also, have a look at Market Models by Carol
Alexander and her work on co-integration.
I position size around volatility. Essentially it
means that I can take any trade that conforms to what I define as an opportunity
and know that the risk/returns are within tolerable limits. It isn't black
and white, I normalise the position size around volatility and modify my
position using Kase's Dev stop calculation to reduce the market risk
of the portfolio.
There are conflicting opinions about risk and
money management methods and details, and these topics have been a battleground
for some academics.
There are no easy, simple or single answers to
most questions about risk and money management. Beware of anyone giving
you simple or definitive answers,
especially without his/her knowing a lot
about you and your trading.
That said, the simplest and most accurate
answer to what to use for stop losses, trailing stops, position sizing, profit
targets, scaling in/out or not, is: "it depends".
It depends - upon your trading strategies, risk
tolerance, account size, personal psychology, even at times the markets and the
nature of the symbols
that you trade. There are differences between
instruments - trading shares versus trading contracts. Etc.
Like finding your own trading strategies and
methods, the same kind of effort is required for developing your own risk and
money management rules.
Hope this helps
----- Original Message -----
From:
khamsina11
Van Tharp's Money management (%Volatility Model) : need help !!!
Hi,
Thanks in advance
for your input :)
Marco
David Jennings a écrit :
'am away on business for a couple of days and
will respond on return.
-----
Original Message -----
Sent:
Tuesday, March 22, 2005 10:44 AM
Subject:
Re: [EquisMetaStock Group] Van Tharp's Money management (%Volatility
Model) : need help !!!
Hi David,
Thanks for your explanation. I
understand this model applied to stocks now :). In other words, the "point
value" for stocks is always equal to 1.
By the way, why do you say Van
Tharp's work is not worthy ? ( what are the pros and the cons
?).
Regards,
Marco
PS : I'll take a look at Kase'
books.
David Jennings a écrit :
Marco,
For what van Tharp's rubbish is worth,
assuming 50K USD and purchasing microsoft, then Microsoft is trading at
24.31 with a daily range of 0.5. Lets say that the ATR for the last 10
days is 0.5. Then the volatility is 50 USD per hundred shares.
Using his 2% of equity at risk i.e. $1000. Thus using his
logic you would buy 2000 shares - assuming your stop was placed 1 ATR
below the purchase price.
I would counsel you to have a read of
Cynthia Kase's book. The piece on Dev stops is well worth the purchase
price in its own right.
----- Original Message -----
Sent:
Monday, March 21, 2005 9:52 AM
Subject:
[EquisMetaStock Group] Van Tharp's Money management (%Volatility
Model) : need help !!!
Hi,
I am currently reading Dr Van Tharp's book
"Trade Your Way to
Financial Freedom" and I just can't understand his "Percent Volatility
Model" for stock trading (he gave examples with futures but
unfortunately not with stocks !).
Might anyone explain me with a example his "Percent
Volatility Model" applied only to stocks.
Thanks in
advance for your
help,
Regards,
Marco
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