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Re: [EquisMetaStock Group] Van Tharp's Money management (%VolatilityModel) : need help !!!



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Hi David,

A very instructive critic. I will take a look at the books you have mentionned.

Thanks for the input :)

Regards,

Marco



David Jennings a écrit :
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 -----
From: khamsina11
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 -----
From: khamsina11
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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