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Optimal f, IMHO, constitutes an absolutely misleading application of
probability theory. Just like the 1987 crash, when the market fell more than
12 standard deviations, an occurrence which statistically should take place
less than once in the entire history of our universe.
Application of Ralph's formula, termed "TWR" for "Terminal Wealth Relative"
by the author, may indeed be, well, terminal for a trader's wealth.
Michael
-----Original Message-----
From: Dennis Holverstott [mailto:dennis@xxxxxxxxxx]
Sent: Thursday, June 08, 2000 16:27
To: Bob Fulks
Cc: omega-list@xxxxxxxxxx
Subject: Re: Optimal f code for Tradestation
> He defines "Optimal_f" as a fraction of the biggest losing trade of the
> historical series of trades.
That seems like the fallacy of optimal f to me. It gives entirely too
much weight to a single losing trade and doesn't account for the
possibility of stringing several losers together in the future. So,
everybody ends up trading at some smaller f to be safe but the method
doesn't give any guidance about how much smaller the f should be and you
are back to guessing.
--
Dennis
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