Re: optimal f and futures lots traded

[Lincoln Fiske <lincolnf@xxxxxxxxxxxxx>]

Scott--

What's the best way to measure "the stability of the distribution of returns from the system"? Is there a minimum threshhold of this value over which optimal f works? Can optimal f be implemented in Easy Language? I've heard so many mixed reviews of optimal f that I'd written off looking into it, but guess I should attempt to understand it.

Thanks,
Lincoln

Scott Hoffman wrote:

> The $1,000 figure is called f$. Just as f is the divisor of you biggest loss to determine f$, f$ is the divisor of your capital to determine how many contracts to trade. The only step you are missing is:
>
> Trunc ($20,000 / f$) where trunc means truncation. Truncation means drop the fraction.
>
> So # contracts = Trunc($20,000 / $1000) = 20 contracts. Notice that as soon as you experience the largest loss, $350 loss per contract, you have lost 35% of your capital. The fact that f = .35 and you loose 35% of you capital on the biggest loss is not a coincidence.
>
> A comment on optimal f:
>
> Optimal f is an awesome tool. However, it's applicability is directly proportional to the stability of the distribution of wins and losses of your system. If your win / loss patterns are stable optimal f *will* return incredible equity growth. Its just math. As I have said many times to many people, the bulk of system design effort should be spend on characterizing the stability of the distribution of returns from the system, not on maximizing the absolute value of the systems expected return (edge). Give me a stable system with a *tiny* edge (like blackjack with no bet limits) and I will make orders of magnitude more money than a guy with a *large* but unstable edge.
>
> Scott Hoffman
> Issaquah, WA
>
> -----Original Message-----
> From:   Peter Ryan [SMTP:pryan@xxxxxxxxxxxxxx]
> Sent:   Wednesday, September 09, 1998 2:11 AM
> To:     Omega-List (E-mail)
> Subject:        optimal f and futures lots traded
>
> I am not clear on how to apply optimal f to the number of lots I should trade in a futures contract.
> Could someone please help with the following:
>
> Optimal f = 0.35
> Biggest losing trade is $350.
> Therefore I should trade 1 unit for every $1,000 (350/.35) in my account.   (pg 88 r.v.'s book)
>
> Account size is $20,000.
> The futures contract tick value is $10.  (not sure if this is relevant)
>
> Based on this, how many lots should I trade ?
>
> Thanks in advance
> Peter