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Re: Optimal f code for Tradestation



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At 8:43 AM -0400 6/8/00, Bob Fulks wrote:

>>He defines "Optimal_f" as a fraction of the biggest losing trade of the
>>historical series of trades.

At 7:27 AM -0700 6/8/00, Dennis Holverstott wrote:

>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.

But that is the way the math works out. The optimal_f point is a
function of the biggest losing trade. And with a really good trading
system with a high Sharpe Ratio, the optimal_f point is very close to
the point where you are guaranteed to go broke - sort of like trying
to walk about a foot from the edge of the Grand Canyon in a wind
storm...

Ralph Vince, in Chapter 5 of his latest book, "The New Money
Management", offer some ideas on trading less aggressively than
optimal_f but he still seems to be hung-up on trading at least a
fraction of your account at optimal_f. He says in Chapter 5 (page
165):

     > "Ideally, you would sit through the drawdown which took your
        account down to $50,000 from the $10 million mark before it
        shot up to $20 million" -

and (page 166) that

     >  "...you should expect to see 100% of the active equity portion
         wiped out at any one time."

Can you possibly imagine any rational human being sitting there
watching his $10 million drop to $50,000 and believe that it would
stop there and that all he has to do is keep at it and soon it will
shoot up to $20 million.

I sure wouldn't want him managing my money...

Bob Fulks