Adam Hardy wrote:
It seems obvious to me that the optimal f money management formula
can be improved easily by taking the 'biggest loss' to be the biggest
price gap or slippage experienced in the particular market being
traded.
Don't think that you are correct here. The biggest loss is atleast always
bigger than the biggest price gap. If you would buy on the close of
bar X and sell on the open of bar Y because at that moment your
stop loss would be hit, you would at a minimum have that gap
plus the slippage as biggest loss.
Even if you would use this calculation (without using slippage) this
would only work for systems that trade from close to open of the
next bar.
What happens if you buy on close of bar X, bar Y opens at the
closing price of bar X and then goes down to close -3% and the
next bar, Z opens another 5% lower at wich your stop loss is hit.
Your biggest loss is then much bigger than the 5% drop from close
of bar Y to open bar Z.
If anyone has read this far and is interested or knowledgeable on the
subject, what do you think?
I realy think you should work with your comfort level. We all know
that optimal F is way beyound most people's comfort level. Make
sure you know what gives you comfortable sleep at night, use this
ammount and compare that to your biggest historical loss, then
take a safety margin and use that. Why the safety margin ? Because
historical losses are just that... historical.... My experience is that
in time you will come to find a new historical biggest loss.
All that will give you a good night sleep. Never trade without it :-)
Greetings
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