Bell Curve Money Management

Quote from Aaron:

Unfortunately no. You are just looking at the endpoint of the stock price's meanderings during your set period of time. During the set period of time some of your stocks are going to wander down to your stop loss price and then come back up again. With your stop loss you will be turning many break even trades and small winners into small losers.

If the distribution of the stock price changes is gaussian (bell curve) with a mean of zero. Then your distribution of P&L's using your stop loss money management is going to be truncated on the negative side and positively skewed, but it is still going to have a mean of zero. Your average winner will be greater than your average loser, but you will have more losers than winners.
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aint that the way it always is. You figure out a way to beat the market, and somebody then goes and spolis it all by telling you nothing moves in a straight line.

It's all in the head. The way people think differently about profits and losses. Oh man, here goes, just try to think of those BIG losses that you were spared because of your tight stops as little itty bitty miniscule (even negative) profits.

For instance, if you are using 2 pt stops, you'd be better off just figuring an arbitrary amount of random trades you end at 2 pts, win or lose. Then figure how many big moves you need to breakeven. Then maybe you'd come up with a bell curve.
 
Quote from Corso482:

Alright, I'm about to spew some dilettante statistical theory. It may be completely bunk, but what the hell, that's what forums are for!

Anyway, I'm going to posit that if you take a wide random sample of stocks, hold them for a set period of time, then plot their returns, the resulting chart would look like a bell curve. Few big losers/winners, the bulk of returns would be in the middle. (I'm assuming going long/short so that bull/bear markets won't skew the sample).

So in the middle of the curve, your little winners cancel out your little losers. Then your stop loses turn your few big losers into little losers. All you are left with is your big winners that you let run i.e. your final profit.

So if the markets were random and one trades a large enough sample of stocks, can we assume that one can still make a profit using proper money management?
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Not sure you'll make money with it. But with good money management you can sure your account wont be wiped out.
 
Quote from acrary:

The distribution of returns for stocks is not representative of a bell curve. It's more like a Pareto-Levy distribution with fat tails and a smaller middle. Random studies have been done where stops were set to the lowest 20% of the returns and found to be consistently profitable using random entries.
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How would you determine the lowest 20% of random returns for a single vehicle, like es?

Would it be the same as range? Or would you have to randomly go long or short and then check the return at x number of bars?

Sounds like a very interesting rule of thumb for setting proper stops.

Thanks again for another good post. I checked out that link. The only part that wasn't over my head stated (I think) that big money moves the market in it's favor. Perhaps in a very subtle way, but over time, money produces it's own slight edge.
 
For everyone interested in this subject;

Gaming the Markets (Ron B. Sheldon) strongly deals with this subject on a game theoretic basis specifically (achieving the minimum payoff), but a well known trading-systems developer I once spoke to said it´s "not tradable"

Also, chapters 11 & 12 from "Against the gods" (Peter L. Bernstein) cover this topic; stock markets appear to form a bell curve in the short run (daily - 3 monthly basis), but not in the long run. The author also basically concludes that one shouldn´t obey it without any doubt but rather "take different perspectives".

BTW, isn´t Value@Risk based upon the bell curve?
 
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