Can money management alone create any edge?

[The_Chartist]

Quote from The_Chartist:

I think Kenny Rogers said it best:

You got to know when to hold em'

Know when to fold em'

Know when to walk away, and

Know when to run...

Seriously though, to answer your question. "Can money management give me an edge?"

I agree with everyone that said, no.

Take the game of roulette for example. In roulette, (American) the house (casino) has a 5.26% edge. You can use all the money management schemes you want, but in the end, the house is going to win.

To have an edge, you need to find a setup (system) that makes you more money than you lose over the long run.

And, if you can find a setup that makes more than it loses trading one contract at a time. Then using money management (bet progression), can definitely improve your bottom line.

 

[mogul]

Quote from The_Chartist:

Seriously though, to answer your question. "Can money management give me an edge?"

I agree with everyone that said, no.

Take the game of roulette for example. In roulette, (American) the house (casino) has a 5.26% edge. You can use all the money management schemes you want, but in the end, the house is going to win.

To have an edge, you need to find a setup (system) that makes you more money than you lose over the long run.

And, if you can find a setup that makes more than it loses trading one contract at a time. Then using money management (bet progression), can definitely improve your bottom line.

true, but with trading it's not as black and white (or red) as with roulette since you can take action once the bet has been made and the wheel is spinning

i.e. if the trade goes your way you can act one way and if it doesn't you can act another

but that creates an edge so we are no longer talking strictly 50/50

but in terms of setups, random ENTRIES could turn profitable based on how the trade unfolds and how you manage the trade

 

[sonnet]

The notiion random entries can be profitable with Exits is a load of backtesting circle jerk bunk.

You are just playing with numbers and the past.

tharp was quite frankly a fool when he said this.

Yes if u are using a data set like net stocks in 99 almost any hairbrained idea that rides a winner seems ok. but, that is hindsight not reality of trading now and into the future.

I swear, the people who really believe simulation results, I think they contribute more htan almost anyone else!!

 

[gifropan]

Quote from Ricter:

Say you're operating in a 50/50 environment, are there money management methods that can keep you in the black?

I have thought about this problem for many years. In simple game theory the mathematical expectation of a game involving betting is defined as

W = P(W)xG – P(L)xL

Where
P(w) = the probability of winning
G = amount won
P(L) = probability of losing
L = amount of loss.

If E > 0 the game will be in the long run and if E < 0 the player will lose over a period of time. For example in the game of roulette if a player bets $10 on red, on a French wheel (with one zero) his mathematical expectation would be

E = 18/37 *10 – 19/37 *10 = -10/37
The mathematical expectation, E, is negative and therefore in the long run the player will end up losing his capital.

Getting back to the markets, if the probability of you winning a trade is 50% provided your winning trades win more than your losing trades lose theoretically you should make money over time. So if the probability of you winning a trade is 50/50 your winnings most be larger than your losing trades so that you come ahead in the long run.

Most trend following systems, in fact, rely on less the 50% winning trades, however, the idea is to have larger wins. If, for example, you have a system that has 70% losing trades but the ratio of amounts won to amounts lost is, say, 4 to 1 the the mathematical expectation for this strategy will be

E = 0.3*4 - 0.7*1 = 1.2 -0.7 = 0.5

One would expect this strategy to be in the black over the long term

 

[intradaybill]

Quote from gifropan:

I have thought about this problem for many years. In simple game theory the mathematical expectation of a game involving betting is defined as

W = P(W)xG – P(L)xL

Where
P(w) = the probability of winning
G = amount won
P(L) = probability of losing
L = amount of loss.

If E > 0 the game will be in the long run and if E < 0 the player will lose over a period of time. For example in the game of roulette if a player bets $10 on red, on a French wheel (with one zero) his mathematical expectation would be

E = 18/37 *10 – 19/37 *10 = -10/37
The mathematical expectation, E, is negative and therefore in the long run the player will end up losing his capital.

Getting back to the markets, if the probability of you winning a trade is 50% provided your winning trades win more than your losing trades lose theoretically you should make money over time. So if the probability of you winning a trade is 50/50 your winnings most be larger than your losing trades so that you come ahead in the long run.

Most trend following systems, in fact, rely on less the 50% winning trades, however, the idea is to have larger wins. If, for example, you have a system that has 70% losing trades but the ratio of amounts won to amounts lost is, say, 4 to 1 the the mathematical expectation for this strategy will be

E = 0.3*4 - 0.7*1 = 1.2 -0.7 = 0.5

One would expect this strategy to be in the black over the long term

No offense but you got no idea of what you are talking about. The win rate used in the expectation formula is the average win rate as the number of trials becomes very large. There is no such thing as stationary win rate except maybe in HFT. In the meantime, the win rate can get to as low as 0% for extended periods of time and you will get ruined before you know. So please, stop posting this crap here, for your own good and for the good of those who are not ready to understand it.

If the long-term average win rate is 30%, this means that for sufficiently long periods of time it can get to as low as 0%. Do you get that? The only thing that can save a trader is to have a high enough win rate so when it fluctuates it does not cause ruin. Do you get that?

No personal offense but what you write is less than newbie.

 

[gifropan]

Quote from intradaybill:

No offense but you got no idea of what you are talking about. The win rate used in the expectation formula is the average win rate as the number of trials becomes very large. There is no such thing as stationary win rate except maybe in HFT. In the meantime, the win rate can get to as low as 0% for extended periods of time and you will get ruined before you know. So please, stop posting this crap here, for your own good and for the good of those who are not ready to understand it.

If the long-term average win rate is 30%, this means that for sufficiently long periods of time it can get to as low as 0%. Do you get that? The only thing that can save a trader is to have a high enough win rate so when it fluctuates it does not cause ruin. Do you get that?

No personal offense but what you write is less than newbie.

Beflore your refer to this as crap, with all due respect, you need to learn some probability and game theory.

 

[intradaybill]

Quote from gifropan:

Beflore your refer to this as crap, with all due respect, you need to learn some probability and game theory.

Really? What do you think you know about probability theory? Which of the four definitions of probability you like the most and why? This is the problem with you people. You know nothing and you have an attitude instead of thanking those that try to help you.

Prove that the win rate of a system is stationary and I can accept your formula. Maybe you do not understand what stationarity means. Regardless your ignorance about this, do you know how many tosses it takes for a biased coin with prob of heads equal to 35% to converge to that number within 1%? Or are you so naive to think that the win rate will be such even in the first 10 tosses?

I mean, if you do not udnerstand what I wrote and you think I need to learn probability you are in for big surprises wtith your trading. I mean big, very big. That is if you trade...

 

[mind]

Quote from intradaybill:

This is the problem with you people. You know nothing and you have an attitude instead of thanking those that try to help you.

you have some funny way of trying to help people.

 

[Random.Capital]

Quote from gifropan:


Getting back to the markets, if the probability of you winning a trade is 50% provided your winning trades win more than your losing trades lose theoretically you should make money over time.

Not in the real world.

In the real world, if you trade a 50/50 system with any kind of size, you will blow up.

It's not a question of if, it's a question of when.

 

[RangeTrader]

Money management was originally invented by brokers and taught to amateur traders so that their traders would lose money more "slowly" and generate more commissions...

It's a load of horse sh*t.

Learn to play with high odds. Use the right leverage ratios for your account size that you can swing the entire trading range and have stops outside the trading range.

In low volatility bull markets the trading range is around 15-25 handles. In bear markets it can go upto 100. During this recent correction period from april till recently the range was around 30-50 handles.

I'm referring to the week to week ranges, not the day to day...