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