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Has anyone considered dynamically adjusting %f based on the slope of the
equity curve and also setting the stoploss signal based on same ?
> -----Original Message-----
> From: Gary Fritz [mailto:fritz@xxxxxxxx]
> Sent: Thursday, June 08, 2000 2:24 PM
> To: Dennis Holverstott
> Cc: omega-list@xxxxxxxxxx
> Subject: Re: Optimal f code for Tradestation
>
>
> > That seems like the fallacy of optimal f to me. It gives entirely
> > too much weight to a single losing trade ...
>
> Agreed...
>
> > and doesn't account for the possibility of stringing several losers
> > together in the future.
>
> Not really true. If you string losers together, you'll continue to
> scale down your size as your account dwindles. Of course, if you get
> *enough* losers in a row you'll go bust, but that's true for ANY
> position sizing algorithm.
>
> The real danger is if you ever hit a loss significantly bigger than
> the biggest loss (MaxLoss) in your historical test period. A loss
> larger than MaxLoss / f will bankrupt you.
>
> Why? Using opt f, you calculate your bet size as
> PositionSize = AccountSize / (MaxLoss / f)
>
> So any loss you take costs you
> LossAmount = NewLoss * AccountSize / (MaxLoss / f), or
> LossAmount = AccountSize * (NewLoss / MaxLoss) * f
>
> If you hit a loss as big as your MaxLoss, then your account will be
> reduced by a factor of f. If you have $100k, trade at an f value of
> .60, and take a MaxLoss loss, you'll knock your account down to $40k.
>
> If you take a loss (a SINGLE loss, not a series of losses) that is
> MaxLoss / f or greater, then (NewLoss/MaxLoss)*f is > 1, and your
> account is history.
>
> The "optimal" value of f is chosen as the one with the largest
> return, which means it's the one with the most aggressive leverage
> that *didn't quite* go bust. Any higher value of leverage caused the
> account to go bust, or at least took it down so low that it couldn't
> recover as well as the optimal value. So bottom line, the optimal f
> is the level where the largest historical loss "almost but not quite"
> killed the account.
>
> So if you trade at optf, a loss more than 1/optf larger than your
> MaxLoss kills you. You can give yourself more breathing room by
> trading at a lower value of f; for example, trading at 1/2 optf means
> you can take a loss up to 2/optf. But if you take a sufficiently
> large loss -- where "sufficiently large" is MaxLoss / f, whatever f
> you trade at -- you are toast.
>
> > 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.
>
> Yes and no. If you're confident you'll ""never"" see a loss more
> than 2/f bigger than the biggest loss in your historic test period,
> then trading at 1/2 opt f should be safe. (But see Michael S's
> comment about 12-sigma moves!!!)
>
> Gary
>
>
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