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Bill:
>This thinking is absolutely incorrect. A negative expectancy game is just
>that; over time the returns are negative. No position sizing routine, no
>betting algorithm, no stop-loss strategy can change this. You will lose
>playing a negative expectancy game.
>You can change the rate of loss, but the final outcome is completely
>determined.
Sorry, but I still don't see it. Let's do a thought experiment. We look
at a hypothetical system that's had 100 trades historically. 50 of them
returned 5%, 50 of them returned -10%. Obviously, a negative expectancy
based on V. Tharp's definition (we've backed out and normalized the
position sizing, by examining only the return). But what if you had had an
algorithm that somehow "knew" to leverage your winning bets by 4/1. Now we
have a very profitable game, but Tharp's "expectancy" is still negative.
The "knowing" which bets to leverage is not absurd. There are many folks
who load up on what they consider to be higher probability bets.
After reading many thoughtful replies to my letter, I still believe I'm
correct, though I was missing a critical point. Phil Lane helped clarify
the situation for me, when he replied:
>If you know which trades to load up on, then you should reprogram the system
>to take those trades and skip the rest. And then you should be able to
>demonstrate a "positive" expectation w/o regard to size..
This helped me realize that, while it is theoretically possible to have a
very profitable negative expectancy game over long periods of time, it
could only occur by loading up on high prob trades. And if you were clever
enough to do so consistently, then you'd be frivolously hurting your equity
curve by continuing to make the smaller trades.
I conclude that V. Tharp's expectancy is indeed critical to track, because
a negative expectancy game is highly likely to be a loser over time, AND
because if a game has a negative expectancy and yet is profitable over
time, it can be immediately improved by simply cutting out the smaller
trades. If this thinking is fuzzy, please say why but please do respond to
the thought experiment, also.
>For a better explanation than I can give, follow this link to the online
book,
>"The Mathematics of Gambling" by Edward Tharp. One of the later chapters in
>the book discusses this very topic.
>
>http://www.bjmath.com/bjmath/thorp/tog.htm
Thank you very much, I'll d/l it tomorrow and read it thoroughly.
Thanks to all of you for taking the time to respond. I would welcome any
add'l criticism, as I would like to get my thinking about this very clear.
BTW, I have learned a lot from Van Tharp's book, and recommend it highly.
Paul
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