Can money management alone create any edge?

Quote from nitro:

Mathematically at least, it has been shown that using optimal betting strategies will optimize return per defined unit of risk.

The key to the whole thing is a clear measure of risk and that is why it is such a fleeting slippery thing. Not everyone knows their risk going into a trade (although you might have a statistical approximation,) inspite of what the books tell you to do.

nitro
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the reason i put this forward is because i once asked an options floor trader how he decides how much to buy/sell.

his answer was 'all i can get'

im not saying all floor traders can trade, and know all the answers - but this guy could. if he was right, he wanted to be right in a big way (livermore said something along these lines as well). he really didnt think in terms of optimization and stuff like that.

there again - some floor traders go bust - as did livermore, and my friends business partner (another local). so maybe mny mgt aint such a bad idea!
 
Quote from nitro:

Mathematically at least, it has been shown that using optimal betting strategies will optimize return per defined unit of risk.

The key to the whole thing is a clear measure of risk and that is why it is such a fleeting slippery thing. Not everyone knows their risk going into a trade (although you might have a statistical approximation,) inspite of what the books tell you to do.

nitro
More...

nitro,

This may be true in particular cases. However, surprisingly many stochastic optimal control strategies turn out to be of the bang-bang type, i.e. as Fred's floor trader says: "All I can get" , let me add, or nothing at all.

I can't say any more. To advance a totally unspecified "edge" or "strategy" and going on to say learned things about the usefulness of "money management", equally unspecified, would not be considered by a mathematician as a "well posed problem". This is the gist of my posts on this.
 
nononsense,

I am not quit sure I understand what you are getting at, but there is nothing ill-posed about money management as I stated it above, that is, that changing the bet size per "turn" can positively affect an equity curve if you are betting on an event that has positive expectation.

Since I cannot believe you are debating this point (since it has been proven countless of times in simple situations like blackjack systems, etc) I believe you are objecting to it in relation to trading.

In that vein, I agree though that unless a system has a way to state why and when a bet should be raised/lowered, it is all meaningless mathematics in the face of trading systems.

nitro
Quote from nononsense:

nitro,

This may be true in particular cases. However, surprisingly many stochastic optimal control strategies turn out to be of the bang-bang type, i.e. as Fred's floor trader says: "All I can get" , let me add, or nothing at all.

I can't say any more. To advance a totally unspecified "edge" or "strategy" and going on to say learned things about the usefulness of "money management", equally unspecified, would not be considered by a mathematician as a "well posed problem". This is the gist of my posts on this.
More...
 
Quote from FredBloggs:

the reason i put this forward is because i once asked an options floor trader how he decides how much to buy/sell.

his answer was 'all i can get'

im not saying all floor traders can trade, and know all the answers - but this guy could. if he was right, he wanted to be right in a big way (livermore said something along these lines as well). he really didnt think in terms of optimization and stuff like that.

there again - some floor traders go bust - as did livermore, and my friends business partner (another local). so maybe mny mgt aint such a bad idea!
More...
Well, that would not disprove mny mgt - in his case he means as much as people are willing to sell him when he negotiates the price is his optimal bet size.

Market making is an unusual case in the way transactions are negotiated and should probably be seperated from typical traders. A market maker is asked to make a two sided market. He takes this risk but is compensated in some way by tipping the risk to his side on average. In other words, the way the game is structured for him, as soon as you hit his price, at that instant he can almost always do no worse than scratch a trade or take a small loss. His goal is to make a profit by doing lots of volume and tipping the odds in his favor maybe a few times a week when the getting is good. The rest of the time he is just treading water.

It also depends on what market you are making. If you are making a market in SPX options where the spreads are $1.20 wide, why wouldn't you take all that someone wants to unload on you? All you have to do is hit a hedging instrument (ES or SPY) and essentially lock in a profit. In other markets where the B/A spread is small, you need considerably greater skill to come out unscathed and then your bet size is proportionally so. In markets where there is a wide B/A spread, your best size is "as much as I can take."

nitro
 
I remember 8 years ago when i first started learning about trading. My god, the trading books are hidious and so filled with detremental information, If anyone asks me i tell them to forget learning via books exept perhaps 3 or so exeptions.

One of the myths that is so hurful to the novice is the one mentioned in this thread.

"you can win just with money management!"

OH what a laugh. THey run these cockeyed simulations pearing deep into the PAST and get results that do not factor in the slippage, commision, ect, ie the vig.

Then, there is stuff like "keep your stop at a logical point, just below resistance".

Haha. "resistance?" right. wonderful advice as it maximizes the floor trader/market makers take, keeps the brokerages safe and with much churning, and allows the retail trader to bleed his account with all of about 0 chance of closing the account with a profit.


Think of all the failed traders who then think "well if i market stuff to new traders maybe i can be made whole" and u have the "education market" for trading, or at least 95% of it.

I think more money has been lost post bubble with all the momentum traders and the flawed techniques they learned than was actually made in the bubble.
 
money management basically ensures that the novice dies a slower death than he would have otherwise.

hopefully, that slow death may just be slow enough that he learns something and manages to come back to life and trade successfully. when he has done this, mny mgt becomes less of an issue and he starts building on the size to take full advantage of his edge.

look at how its done in the good prop shops: newbie comes in and trades 1 lots. if he dont make it after x months, then hes shown the door. if he is profitable trading 1 lot for x months, hes put on 2 lots etc until hes doing x00 lots. no mention of optimized f's, fixed fractions, ratios, calculus, monte carlo simulators, sine waves, moon cycles etc.
 
You are describing money management vs a flat 1 contract trading methodology. The edge and the equity was indirectly a basis for the decision.

and sir....

Don't take away my moon trading please...



Quote from FredBloggs:

money management basically ensures that the novice dies a slower death than he would have otherwise.

hopefully, that slow death may just be slow enough that he learns something and manages to come back to life and trade successfully. when he has done this, mny mgt becomes less of an issue and he starts building on the size to take full advantage of his edge.

look at how its done in the good prop shops: newbie comes in and trades 1 lots. if he dont make it after x months, then hes shown the door. if he is profitable trading 1 lot for x months, hes put on 2 lots etc until hes doing x00 lots. no mention of optimized f's, fixed fractions, ratios, calculus, monte carlo simulators, sine waves, moon cycles etc.
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Quote from ElectricSavant:

You are describing money management vs a flat 1 contract trading methodology. The edge and the equity was indirectly a basis for the decision.

and sir....

Don't take away my moon trading please...
More...

thats my point - mmgt aint gunna help much if you cant trade. it just delays the inevitable.
 
Quote from nitro:

nononsense,

I am not quit sure I understand what you are getting at, but there is nothing ill-posed about money management as I stated it above, that is, that changing the bet size per "turn" can positively affect an equity curve if you are betting on an event that has positive expectation.

Since I cannot believe you are debating this point (since it has been proven countless of times in simple situations like blackjack systems, etc) I believe you are objecting to it in relation to trading.

In that vein, I agree though that unless a system has a way to state why and when a bet should be raised/lowered, it is all meaningless mathematics in the face of trading systems.

nitro
More...
Hi nitro,

I think you kind of summed it up. As I see it, in blackjack you should be able to figure out the probabilities and do the mathematics to place your bet sizes accordingly. You got my viewpoint correctly that with trading as discussed in this thread, we can't say anything sensible, not having a degree of understanding about the whole process, as we do with blackjack.
 
Quote from FredBloggs:

thats my point - mmgt aint gunna help much if you cant trade. it just delays the inevitable.
More...

Exactly.

If you can't trade 1 lots and make a buck then it really doesn't matter what else you do.

Mike
 
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