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At 08:42 PM 9/24/97 -0400, Ralph Vince wrote:
> *However*, as pointed out in the 1995 book, if we wager .25 of our
>INITIAL bankroll, regardless of the size of our current bankroll (a
>strategy I refer to as "consant contract," as it is akin to trading, say,
>10 bond contracts always on each and every trade, regardles of current
>equity) we find that it's gradient is steeper than trading the optimal
>fixed fraction method of .25 of our current equity on each and every play,
>for the first 24 plays of this game, on average.
Mr. Vince,
Is it fair to say that a certain number of plays should be made at a
constant dollar level to make sure your edge has been applied often
enough that you should be profitable? If you have an edge, your certainty
of being profitable increases with the number of trades taken. In effect,
one's method would prove itself at a safe level, where risk of ruin is
remote, before the ante was raised.
But would it not be best at this point to raise the ante to a higher
fixed dollar level for the next 24 trades, rather than changing to
optimal fixed fraction? If it's best to stay flat for 24 trades at
the outset, isn't it best to stay flat for 24 trades after any
subsequent change in cash at risk per trade?
A system/method may have a profit after 4 trades by luck, but after 24
trades it proves that a real edge exists. However, systems can break
down and fail. At any flat level, you may have a chance to notice the
early stages of a problem before losing much: if your total account
value hasn't grown as much as usual, or if it lost a little, you
can step back and analyise why. If your account is 99% likely to
have a profit of 10% or more after 24 trades, and it does not, you
have a big red flag that your method is breaking down.
Given a system's expected performance (% winners, $ gains/losses), we
can compute # of trades needed to verify results: enough to know that
the winnings are almost certainly not due to luck. The choice of money
management plan would then, for me, depend on both expected total
profits and risk of ruin. Does the plan offering the greatest liklihood
of maximum profit also carry the lowest risk of ruin? If not I would
choose only among those with acceptably low risk of ruin. Is this in
keeping with your thinking in terms of practical applications?
Regards,
Wayne Moody
wlm95@xxxxxxxxxx
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