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I agree, when trading stocks, the "leverage"
(also called "margin") is remarkably smaller
than when trading futures. Profits and losses
should be expressed as percentages rather than
dollars, since you really are committing significant
equity when you put on a stock trade. (example:
a trade that makes a $2 profit per share in
Coca Cola is not the same as a trade that makes
a $2 profit per share in Berkshire Hathaway, since
you need to set aside $26 of your account equity
to trade 1 share of Coke, but you need to set
aside $36,000 of your account equity to trade
1 share of Berkshire Hathaway.)
I myself don't settle upon a betsize selection
algorithm unless I have at least 1500 trades**
worth of historical backtest results to guide
me. And then, unlike Ralph Vince, I make
myself TWO plots to assist decisionmaking:
(1) Final Profits vs. betsize; (2) Worst case
maximum percentage drawdown vs. betsize.
I think of these as (1) Gain; and (2) Pain.
Then I introspect. I ask myself "what size
loss would be SO PAINFUL that I wouldn't be
able to continue trading?" I look at
the Gain curve and the Pain curve and I
try to strike a balance between greed (1)
and fear (2). Then I choose a betsize
and resign myself to the fact that I'm
going to see a drawdown as big or bigger
than was encountered in the >1500 trades
of historical backtesting.
But, let me emphasize, this is just me.
I am not you. I am not Ralph Vince. I
don't know how much drawdown you can stand;
I can (just barely) stand 40%. Ralph Vince
states that if you can't stand a 95%
drawdown, you shouldn't be trading.
**note: how do I possibly get >1500 trades
in backtesting? I test the way I trade and
I trade the way I test. I trade a portfolio
of >20 tradeables simultaneously, out of a
single account. So that's the way I backtest
too. The software used to do this, particularly
with betsize selection that has
positionsize = function(equity),
is NOT mass-market, advertised in magazines,
off the shelf stuff. At least, not yet,
not that I know of.
Cab Vinton writes
>A couple things I've never quite understood about Optimal F:
>
>1./ The formula for Optimal F that I've seen is determined by the
>sequence of wins & losses expressed in points gained/ lost per trade.
>Wouldn't it make more sense for the formula to use percentage gains/
>losses instead?
>
>2./ I'm not quite sure how to apply Optimal F on the equity side.
>Assuming that your number of contracts to trade is 10 (= Equity/ f$,
>where f$ = MaxLoss/ Opt F), does this mean that you should buy 10
>shares? Or does the current price of the stock come into play somehow?
>
--
Mark Johnson Silicon Valley, California mark@xxxxxxxxxxxx
"The world will little note, nor long remember, what
we say here," --Abraham Lincoln, The Gettysburg Address
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