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Money Management
- Thread starter cnms2
- Start date
This is the simplest Money Management tip for beginners:
I want to get my mathematical skills running again. In F = ((1+1)*(1/2)-1)/1 = 0 is the * a multiplication sign?Quote from cnms2:
Correct, RunTrade!
I was leading toward using Money Management to calculate the optimum size of the bet. Using Kelly's formula:where: F is your optimum bet as % of your money, P is the probability of winning, R is the ratio (winning amount / bet)
- F = ((R + 1)*P - 1)/ R
Plugging in the data results in F = 0 for both games:Now I'm hoping for opinions on the optimum risk assumed by a trader.
- coin flip: F = ((1+1)*(1/2)-1)/1 = 0
- dice: F = ((5+1)*(1/6)-1)/5 = 0
There's a good article Ed Seykota - Risk Management that touches on some of the things you mentioned. He writes about risk, pyramiding, martingale, Kelly formula, diversification, uncle point, measuring portfolio volatility, Sharpe, VaR, Lake Ratio, stress testing, position sizing, ...
Quote from OddTrader:
Perhaps one of the key elements in deciding optimal bet size, imo, would be the (dynamic?) correlations among the assets (providing keeping/ trading the same assets with same weighting all the times).
I guess the correlations based on historical data might be sometimes not good enough to measure/ define/ predict the "you know your maximum risk" in the future trading environment, using whatever available tools/ calculations such as Kelly, Terminal Wealth Relative, VaR, double summation, etc.
Using "Average" for problems such as MaxDD/ MaxConsecutiveLoss/ etc. and how to define them could be another interesting issue for me to learn. Just my 2 cents.
Q
Variable Fractional Percent (VFP)
http://users.bigpond.com/morleym/Thoughts.htm#Trade Size
Trade Size
This comment only scratches the surfaces of what is one of the most important topics of all, but it does establish the basic criteria in the right sequence.
.......................................................................
I don't think you can set trade size and then decide on your s/l. It should be the other way around.
First you decide the maximum % of your account you are prepared to lose if the trade fails in a worst case scenario.
Then you decide how wide your stop needs to be to accommodate things like normal market movements and the nature of your strategy, etc.
Finally with these two bits of information you can work out your trade size by simple maths.
Full discussion: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=15;t=001398;p=1#000004
Now if you want to know how I set my trade size... this is a description of the method I use, which I normally refer to as Variable Fractional Percent (VFP)
If you want another money management idea that is very responsive to performance, yet doesn't make you make too hard decisions up front try this:
Firstly you need to know your daily Net Asset Value (NAV) gain or loss in percent.
Start trading at a conservative 5% FFP (or whatever suits you). But instead of using a Fixed Fractional percent, you use a range say 2%-25%. Move up and down the scale by adding or subtracting half of your last daily NAV percentage.
For example start at 5% FFP
Next day profit on trades = 1.5%
Therefore your next FFP = 5 + (1.5 * 0.5 ) = 5.75%
Say you then lose 3%
Next FFP = 5.75 + (-3 * 0.5) = 4.25%
Obviously use ranges and a daily factor (here 50%) that suits you, but you'll find this method really rewards good methods, and lightens up very quickly on bad.
I use it myself, and find it very sound.
~chaffcombe
Full discussion: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=002042;p=3
There was also a very good discussion on trade sizing methods (FFP, VFP and Fixed Ratio) here:
http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=004708;p=1
UQ
Variable Fractional Percent (VFP)
http://users.bigpond.com/morleym/Thoughts.htm#Trade Size
Trade Size
This comment only scratches the surfaces of what is one of the most important topics of all, but it does establish the basic criteria in the right sequence.
.......................................................................
I don't think you can set trade size and then decide on your s/l. It should be the other way around.
First you decide the maximum % of your account you are prepared to lose if the trade fails in a worst case scenario.
Then you decide how wide your stop needs to be to accommodate things like normal market movements and the nature of your strategy, etc.
Finally with these two bits of information you can work out your trade size by simple maths.
Full discussion: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=15;t=001398;p=1#000004
Now if you want to know how I set my trade size... this is a description of the method I use, which I normally refer to as Variable Fractional Percent (VFP)
If you want another money management idea that is very responsive to performance, yet doesn't make you make too hard decisions up front try this:
Firstly you need to know your daily Net Asset Value (NAV) gain or loss in percent.
Start trading at a conservative 5% FFP (or whatever suits you). But instead of using a Fixed Fractional percent, you use a range say 2%-25%. Move up and down the scale by adding or subtracting half of your last daily NAV percentage.
For example start at 5% FFP
Next day profit on trades = 1.5%
Therefore your next FFP = 5 + (1.5 * 0.5 ) = 5.75%
Say you then lose 3%
Next FFP = 5.75 + (-3 * 0.5) = 4.25%
Obviously use ranges and a daily factor (here 50%) that suits you, but you'll find this method really rewards good methods, and lightens up very quickly on bad.
I use it myself, and find it very sound.
~chaffcombe
Full discussion: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=002042;p=3
There was also a very good discussion on trade sizing methods (FFP, VFP and Fixed Ratio) here:
http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=004708;p=1
UQ
Thanks OddTrader. It seems interesting, I'll check it out.
Quote from OddTrader:
Q
Variable Fractional Percent (VFP)
http://users.bigpond.com/morleym/Thoughts.htm#Trade Size
Trade Size
This comment only scratches the surfaces of what is one of the most important topics of all, but it does establish the basic criteria in the right sequence.
.......................................................................
I don't think you can set trade size and then decide on your s/l. It should be the other way around.
First you decide the maximum % of your account you are prepared to lose if the trade fails in a worst case scenario.
Then you decide how wide your stop needs to be to accommodate things like normal market movements and the nature of your strategy, etc.
Finally with these two bits of information you can work out your trade size by simple maths.
Full discussion: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=15;t=001398;p=1#000004
Now if you want to know how I set my trade size... this is a description of the method I use, which I normally refer to as Variable Fractional Percent (VFP)
If you want another money management idea that is very responsive to performance, yet doesn't make you make too hard decisions up front try this:
Firstly you need to know your daily Net Asset Value (NAV) gain or loss in percent.
Start trading at a conservative 5% FFP (or whatever suits you). But instead of using a Fixed Fractional percent, you use a range say 2%-25%. Move up and down the scale by adding or subtracting half of your last daily NAV percentage.
For example start at 5% FFP
Next day profit on trades = 1.5%
Therefore your next FFP = 5 + (1.5 * 0.5 ) = 5.75%
Say you then lose 3%
Next FFP = 5.75 + (-3 * 0.5) = 4.25%
Obviously use ranges and a daily factor (here 50%) that suits you, but you'll find this method really rewards good methods, and lightens up very quickly on bad.
I use it myself, and find it very sound.
~chaffcombe
Full discussion: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=002042;p=3
There was also a very good discussion on trade sizing methods (FFP, VFP and Fixed Ratio) here:
http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=004708;p=1
UQ
I think that chaffcombe's Variable Fractional Percent (VFP) introduces an additional risk factor, or at least a blurring factor. He also writes in one of his posts that he's so content with it that he's using now 100% of his gain/loss to adjust his risk percentage.
Why do I think so: when you make 5% then lose 5% you end up with less than the starting amount, because 5% of $100 is +$5 (gain), then 5% of $105 is -$5.25 (loss); result = $99.75.
Also, it affects the trader / trading system expectancy, as well as his (average win / average loss) ratio. It blurs trader's results, making it more difficult to know how well he performs, and when his results degrade and an adjustment is needed.
OddTrader what's your opinion?
Why do I think so: when you make 5% then lose 5% you end up with less than the starting amount, because 5% of $100 is +$5 (gain), then 5% of $105 is -$5.25 (loss); result = $99.75.
Also, it affects the trader / trading system expectancy, as well as his (average win / average loss) ratio. It blurs trader's results, making it more difficult to know how well he performs, and when his results degrade and an adjustment is needed.
OddTrader what's your opinion?
Quote from OddTrader:
Variable Fractional Percent (VFP)
http://users.bigpond.com/morleym/Thoughts.htm#Trade Size
...
Start trading at a conservative 5% FFP (or whatever suits you). But instead of using a Fixed Fractional percent, you use a range say 2%-25%. Move up and down the scale by adding or subtracting half of your last daily NAV percentage.
For example start at 5% FFP
Next day profit on trades = 1.5%
Therefore your next FFP = 5 + (1.5 * 0.5 ) = 5.75%
Say you then lose 3%
Next FFP = 5.75 + (-3 * 0.5) = 4.25%
Quote from cnms2:
Also, it affects the trader / trading system expectancy, as well as his (average win / average loss) ratio. It blurs trader's results, making it more difficult to know how well he performs, and when his results degrade and an adjustment is needed.
Investment Performance Attribution (Hardcover)
by David Spaulding
http://www.amazon.com/gp/product/0071408851/102-1237962-6951363?v=glance&n=283155&s=books&v=glance
Practical Portfolio Performance Measurement and Attribution (The Wiley Finance Series) (Hardcover)
by Carl Bacon
http://www.amazon.com/gp/product/0470856793/102-1237962-6951363?v=glance&n=283155&s=books&v=glance
Fixed Income Attribution (The Wiley Finance Series) (Hardcover)
by Andrew Colin
http://www.amazon.com/gp/product/0470011750/102-1237962-6951363?v=glance&n=283155&s=books&v=glance
How To Set Portfolio Risk % -- The Easy Method
Using the drawdown results provided in Table 5, there is a simple way to estimate how much portfolio risk you should take. You stated that you would like to experience no worse than 30% drawdowns on average in your account. From simulation of your system, we know that we also have a 10% chance of getting a 10.3R drawdown over a 2-year period. Our risk percent can then be calculated as:
This is an excerpt from the "Comprehensive Trading & Risk Analysis Report" prepared by IITM for a trader. It provides a comprehensive analysis of this trader's results, and provides a suggestions for improving his performance.
Using the drawdown results provided in Table 5, there is a simple way to estimate how much portfolio risk you should take. You stated that you would like to experience no worse than 30% drawdowns on average in your account. From simulation of your system, we know that we also have a 10% chance of getting a 10.3R drawdown over a 2-year period. Our risk percent can then be calculated as:
- RISK = 30%/10.3 = 2.91%
This is an excerpt from the "Comprehensive Trading & Risk Analysis Report" prepared by IITM for a trader. It provides a comprehensive analysis of this trader's results, and provides a suggestions for improving his performance.