Money Management

The per trade risk depends on the number of opened positions you have, and it's calculated from your position's cost and its stop-loss. The total open risk can be optimized for your trading starting from Kelly's formula, or you canuse the rule of thumb of 5-6%.

But we all know that we're also taking a gap risk, and this has to be quantified and observed in our position sizing too. The way I estimate it is by calculating the impact on my account if a 3-sigma and 5-sigma adverse price movement occurs on all my positions at the same time. I use the 1 year worst case historical volatility for this.
Quote from monee:
I agree even if a small risk is taken per trade risk is meaningless without limiting the # of trades.
http://www.elitetrader.com/vb/showthread.php?s=&postid=902372#post902372
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I can’t remember the last time I was here, but I saw the hits on my web site. Thanks Oddtrader for acknowledging the source of the Trade Size article.

cnms2 is right in that there are some asymmetric issues associated with VFP, but there are with all POW (progress-on-win) money management strategies.

What VFP does is reward very good systems (or sequences) and protects your account when the wheels drop off! FFP (or even flat trade size) is probably better if you expect so-so results - but who wants to trade a system like that?

VFP is also my way to systemize the management of greed and fear; to which I’m still not immune! This is particularly important as I'm a 100% automated trader, yet have to live with my results.

Hope there is other stuff on the site that is of interest.

~chaffcombe

http://users.bigpond.com/morleym/index.htm
 
chaffcombe, Great results! Congrats!
Quote from chaffcombe:

I can’t remember the last time I was here, but I saw the hits on my web site. Thanks Oddtrader for acknowledging the source of the Trade Size article.

cnms2 is right in that there are some asymmetric issues associated with VFP, but there are with all POW (progress-on-win) money management strategies.

What VFP does is reward very good systems (or sequences) and protects your account when the wheels drop off! FFP (or even flat trade size) is probably better if you expect so-so results - but who wants to trade a system like that?

VFP is also my way to systemize the management of greed and fear; to which I’m still not immune! This is particularly important as I'm a 100% automated trader, yet have to live with my results.

Hope there is other stuff on the site that is of interest.

~chaffcombe

http://users.bigpond.com/morleym/index.htm
More...
 
Hi All,

The twin darlings of the 95% crowd:
TREND FINDING and MONEY MANAGEMENT
(Good ole Victor comes popping up as well.)

Making money in markets cannot be done with a bunch of 'little recipe' tools that you have to grab whenever the need arises. Be especially suspicious for anything passed off smelling like math (I don't mean to say that mathematics could not be useful to make money, but it has to be used with virtuosity - most academics and so-called quants don't).

Nevertheless, if you go for little rules, try these for a start (freely after wb):
(1) Never lose money;
(2) Never forget rule (1).

These are much better than any other cheap money management gimmick - could perhaps have saved Victor as well.
disclaimer: no guarantee they will work for YOU.

nononsense
:cool:
 
Calculate the probability f of never seeing an a% drawdown for a given x=1/Kelly:

f=1-a^(2*x-1); i.e. a=0.7, x=5, f=0.9596

Calculate x=1/Kelly to have a probability f of never seeing an a% drawdown:

x=1/2*(1+ln(1-f)/ln(a)); i.e. a=0.7, f=.96, x=5.012
Quote from cnms2:

Here there is a probability analysis that justifies using 1/4 to 1/6 Kelly for sizing your positions (risk). The table shows the probability of "never being unhappy" as the author names it, for different combinations of maximum drawdown (a) and Kelly fractional (x=1/k of Kelly):

  • "We look more closely at some special cases of the formula to see how Kelly fractions affect risk. In the sequel, we introduce the variable x=1/k, the inverse of the Kelly fraction. Thus x=1 and x=2 correspond to full Kelly and half-Kelly, respectively.

    In the table below we tabulate the function f(x)=1-a**(2x-1), which is the risk that you never reach the value a, as a varies from .5 to .8. For a=.5 it appears that this risk of being halved gets very small and doesn’t change much as x increases above 4. This indicates (quite subjectively of course) that there is little reason for blackjack players to be more conservative than quarter-Kelly. Some futures traders suggest k=1/6, a conservative fraction perhaps due to the fact that traders are not usually sure of their edge (among other infelicities).

    The risk of never being unhappy
    (the probability of never reaching a=.5 to .8 for x=1/k=1 to 6):
    Code: 
          x:    1       2       3       4       5       6

a

0.5     0.500   0.875   0.969   0.992   0.998   1.000

0.6     0.400   0.784   0.922   0.972   0.990   0.996

0.7     0.300   0.657   0.832   0.918   0.960   0.980

0.8     0.200   0.488   0.672   0.790   0.866   0.914
    "
You may find the whole document here.
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Quote from cnms2:

You may find the whole document here.
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If you think that you need that document, it means that your method is NOT GOOD ENOUGH.
It only tells you that you either: (1) will stay poor, or: (2) that you'll end up in the poorhouse.
So, you'll have to find something better.

(The rest is market kiddie-tales about brownian motion and diffusion equations. There are truly competent books on that)

nononsense
:D
 
Quote from nononsense:

If you think that you need that document, it means that your method is NOT GOOD ENOUGH.
It only tells you that you either: (1) will stay poor, or: (2) that you'll end up in the poorhouse.
So, you'll have to find something better.

(The rest is market kiddie-tales about brownian motion and diffusion equations. There are truly competent books on that)

nononsense
:D
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I find your reasoning to be quite nonsensical, nononsense. He is not selling you a method, he is sharing a mathematical approach to risk. He doesn't seem to be claiming it is the be all and end all to money management, so lay off a bit will you? There is enough absolutely useless banter on this site, no need to add to it.

Cnms has been kind enough to share that paper, which I'm sure many find useful. Just look at the number of views this thread has gotten, adjust for the number of pages, and it will show you that there a lot of pairs of eyes poring over these posts...

Now if you have something else to share other than "trade small" which one might add to be the ton of platitudes devoid of practicality, please contribute, if not, please take a hike.

ES335
 
Quote from ES335:

I find your reasoning to be quite nonsensical, nononsense. He is not selling you a method, he is sharing a mathematical approach to risk. He doesn't seem to be claiming it is the be all and end all to money management, so lay off a bit will you? There is enough absolutely useless banter on this site, no need to add to it.

Cnms has been kind enough to share that paper, which I'm sure many find useful. Just look at the number of views this thread has gotten, adjust for the number of pages, and it will show you that there a lot of pairs of eyes poring over these posts...

Now if you have something else to share other than "trade small" which one might add to be the ton of platitudes devoid of practicality, please contribute, if not, please take a hike.

ES335
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Only trying to help. Seems you need lots of it.

nononsense
PS: where the heck did I ever recommend "to trade small"? You're dreaming - bad for trading. Better hike off to the psycho thread.
 
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