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Regarding the thread on fixed ratio money management, Bob Fulks comments:
To be even more specific, quoting Ralph Vince's book, "Portfolio Management
Formulas", the formula f = p-q only applies if the size of all wins and
losses are the same.
If they are different, the formula is:
f = ((B+1)*P-1)/B where
P is the probability of a win
B is the ratio of the amount won on a winning bet to the
amount lost on a losing bet
This formula is accurate only if all wins are the same size and all losses
are the same size. If they are not, the solution requires an iterative
calculation as described in his book.
I would not necessarily conclude that the probability changes with each
bet. If you are trading a mechanical system on the S&P that buys and sells
on finding a given pattern, I would think that the probability might be
constant as best you can tell at the time of the trade.
But for a momentum player jumping onto a stock moving up, I would think
that the probability and expected win size of jumping into IBM would be
much different than that of jumping into a very volatile stock that might
move 10% in a day.
In addition, as I think someone commented, trading the optimal f ratio
tends to produce higher drawdowns that most people can tolerate. Perhaps
some economist in the audience can introduce the concept of the utility
function of the trader into the discussion.
Bob Fulks
bfulks@xxxxxxxxxxx
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/
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