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In a message dated 12/24/2001 4:29:35 PM Central Standard Time,
janitor@xxxxxxxxxxxx writes:
> Congratulations to Ken Lindauer for applying
> the Quadratic Formula to get the closed form
> expression for #contracts = f(equity). Also
> congratulations for making the more subtle observation
> that Jones's formula depends, in fact, upon
> NetProfits *only*, and not [for example] on
> the amount of starting equity in the account.
> Thus we have the paradoxical result that if
> two traders, Alice and Bob, start trading
> some system like Oddball at the same time,
> but Alice starts with $300,000 and Bob starts
> with $30,000, the given formula will have them
> trade the exact same number of contracts,
> on the first trade (when Alice has 10X more
> money than Bob) and on all subsequent trades.
While what you say is correct, I don't think it is quite as brain dead as
this example might imply. Obviously you need to have a large enough account
to trade the system, or phrased the other way (assuming you are trading more
than one market and/or system) you must initially choose a portfolio with
total risk appropriate for your account size. Indeed Fixed Ratio does not
provide any criteria for this, but then again risk tolerance is subjective in
fixed fractional also. In fixed fractional, what is your risk tolerance? 2%,
4%, 5%? It is subjective. With either fixed fractional and Fixed Ratio you
initially choose a risk tolerance, and then the purpose of the money
management strategy is to make position sizing decisions within the
constraints of your risk tolerance.
> However, please remember that this is only the
> easy part. This is the part that Jones calls
> "Rate of Increase" or ROI. The *hard* part is the
> part that Jones calls "Rate of Decrease" or ROD.
>
> The reason why ROD is difficult is that you need
> access to the entire portfolio-level equity history
> stretching back to the first day of trading.
> Unlike ROI, ROD is "path dependent" -- what you
> do today is a function of today's equity AND of
> the historical events that got you to this equity.
>
> Behold! doesn't provide this. Trading Recipes doesn't
> provide this. Athena doesn't provide this.
PowerST does provide this, and on a portfolio basis. PowerST provides sample
code for both fixed fractional and Fixed Ratio, plus a programming
environment for testing user defined portfolio money management strategies.
Bob Bolotin
President, RDB Computing, Inc.
Developer of "PowerST: The Power System Tester"
http://www.powertesting.com
bob@xxxxxxxxxxxxxxxx
847-982-1910
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