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John Sweeney S&C wrote:
>
> Extending our comments on the fraction of trading capital to be used
> in any given trade (See previous notes from Bob Pisani and Louis Kates
> [snipped below]), can we all agree that it's unlikely that, on any
> given trade, we face the same probability distribution we faced on any
> other trade?
Of course it is unlikely, but then what are you left with?? Again, you
have given no views on what you think is better. Are you advocating
that Money management shouldn't be used since it can't be calculated
perfectly?
SInce the potential gain or loss in trading is unknown (even with
stops), unlike in gambling it is impossible to be perfect in the
calculation. But again, what good does that observation do us? You
have simply told us what won't work.
Again, as I mentioned earlier, this is why it is applicable to break a
system's past performance down into average potential gains and losses.
Then apply money management with those figures. It won't be perfect
when looked at trade by trade, but to the extent that your system
performs to expectations over time, fixed fraction will be effective
over time despite its flaws.
How does anyone else here decide what quantity to trade???
Subjectively?? I am in the camp that believes that consistency and
guidelines are important aspects of money management.
Eric
>
> John
>
> Bob Pisani:
> >It comes out of a very simple model in gambling theory, whose
> simplicity
> >makes it only remotely applicable to real life investing and trading.
> As
> >you may know, the result goes back to a paper by Kelly on information
> theory
> >and to a couple of theorems by Breiman showing that the strategy is
> >"asymptotically optimal". The Kelly criterion was publicized in the
> early
> >70's by Ed Thorp and evidently some people just took the idea and ran
> with
> >it. But it is in fact optimal only in a very special situation,
> namely when
> >the distribution of your profit is the same on every bet -- ie when
> you are
> >making precisely the same bet over and over, and only that bet. In
> the real
> >world, you will have different situations with different possible
> outcomes
> >and differing probabilities associated with those outcomes. If the
> >distribution changes from bet to bet, the assumptions behind these
> results
> >will not pertain, and the fraction of your capital you should bet in
> order
> >to achieve maximal capital growth will depend upon the particular
> >distribution of profits that characterizes your current bet, and this
>
> >optimal fraction will typically not be fixed at all but will vary
> from bet
> >to bet.
>
> Louis Kates:
> Just to add specificity, fixed ratio money management in the case of
> independent bets in which you double your bet with probability p
> or lose it with probability q=1-p is a system where you bet a fraction
> f=p-q
> on each bet. Of course, if p differs from one bet to another then
> the corresponding f clearly differs as well. There is no implication
> that there is one f that works for all p.
>
> John Sweeney, Tech. Editor Technical Analysis of Stocks & Commodities
> Technical Analysis, Inc. The Traders' Magazine
> 4757 California Ave. S.W. Phone: 206 938-0570 Fax: 206 938-1307
> Seattle, WA 98116-4499 USA Web: http://www.traders.com/
> ____________________________________________________________________
> Contents may not reflect official opinion of Technical Analysis, Inc.
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