Quote from nonprophet:[..]can you recommend any reading materials about serious money management? [...]
âeven if you were successful 90% of the time (a highly dubious claim - which would put you at about 10 standard deviations above the average success rate of traders)â
that particular quote was half hyperbole, half supposition based on experience. i don't have any hard data but years of personal experience and talking with a lot of traders and brokers pretty much confirms that most options traders - whether winners or losers - are generally right about 50% of the time with most folks falling between 55% and 45% win rates.
you can kind of see some confirmation of this if you look at options volume and know something about options pricing.
about 50% to 60% of all trading on options takes place around at the money strikes. you probably know that the ATM strike is about a 50 delta option with a corresponding 50% probability of expiring in the money. because options are fairly priced at the midpoint between bid and ask, in theory and usually in practice, whether you buy or sell the ATM option, you are likely to win about half the time. if you can buy at the midpoint you will have a net zero change in your capital after a large number of these trades.
win rate is obviously only part of the picture when it comes to trading profitably. the important equation is expectancy which is simply your win rate times your average $ won per trade minus your loss rate times your average $ loss per trade. so if you win 50% of the time and average $1.20 per win vs $1.00 loss, your expectancy is .5*1.2-.5*1 = .1 or a 10% positive expectancy.
even with positive expectancy you are not guaranteed to be on the path to financial independence. you need to look at something like the velocity or frequency of trades to judge whether you can quit your day job to trade full time. with that above example you can indeed expect to make 10% of your money per trade but for this to be significant (i.e. worth your effort) you have to 1) have enough trading opportunities and 2) avoid risk of ruin.
with the example above, if you bet your whole bankroll on a single trade, you will most likely either gain 20% or lose it all. not the best recipe for long term success. but if you limit your trades to a very small percentage of your capital, say 1% or 2% wagered on each trade, you can expect to survive long enough for your system/skills to reach that 10%+expectancy.
if you are only betting 1% on each trade (and thus, based on the example, only winning on average 0.1% of your bankroll per trade) you can then see why velocity of trading becomes important: you need a lot of trading opportunities to make your bankroll grow to the point where you can beat even the risk free rate. again based on the hypothetical example, you'd need at least 40 trades per year just to meet t-bill returns of 4% with a winning system that most traders would envy!
all this brings me to why i find the claim of 90% win rate and the boast that someone could turn $10,000 into $100,000 in three months absurd. you'd have to grow that $10K around a COMPOUNDED 21.2% return per week for twelve weeks to make that boast come true. if you risk "only" 20% of your capital on one trade per week, you'd have to have each trade more than double (grow 106%) to meet that target. the purported "method" used is to buy ITM options which look to be 70 to 80 delta strikes. to me that means every one of those picks needs to have the underlying move somewhere between 8% and 12% in the desired direction in one week's time. i'm not sure there are such optionable occurrences every week that fulfill this requirement let alone the possibility of accurately finding and predicting the events with "90% success."
so sorry for the digression but to answer your question directly, i really don't know specific books. most of what i do is basic college intro level stats & probability. any good text book, or better a local community college course on probability, should give you the fundamentals.
i believe some of this type of reasoning is discussed in books by nicolaus taleb and van tharp as well. you could also gain some good tips reading some quantitatively geared gambling books like sklansky on poker and peter griffin or stanford wong on blackjack. you should also google "kelly fraction" or "kelly betting fraction" to find some papers on optimizing betting or position size based on expectancy.
hope this helps. i know that i spent a lot of wasted years studying ultimately worthless trading books (especially useless is anything related to technical analysis). for better or worse, i got my real education in the line of fire through actual trading. that's why i really emphasize that new traders need to be focused on fixed risk strategies and miniscule position size. if you can't win with one-lot trades, there's no reason to believe you'll turn things around by increasing your size. do enough one-lots and you'll learn enough to move up to the next level.
