Risk (pain) vs Reward (gain)

[rvince99]

Correct. The Kelly properties (such as 10% chance of 90% drawdown, for example) are derived from the infinite horizon.



rvince99, are you Ralph Vince? Thanks for the reference, I'll take a look.

Nonlinear, the other paper along these lines (and shows as well as the calculation for the manifold of inflection points) also shows the caclulation for the manifold of zeta-points (all in the hyaline manifold of what I refer to as "Leverage Space" for lack of a more creative term) but this paper is a little tougher pull thaan the one I mentioned above:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2364092

The book is a more digestible trailhead to these ideas, the papers, a complete exposition of the calculations behind them. (Yes, I'm Ralph Vince, at least I was when I went to sleep last night, I come onto Elite Trader every few weeks or so and try to catch up with things, but I'm not always able to do it lately. Besides, I signed an agreement 5 or so years ago with a large index provider to refrain from any social media participation, and I don't want to test that).

 

[nonlinear5]

a point called the "zeta point" might be of interest to some on this thread too, (since one of the themes of this thread is optimal quantities where the criterion is not necessarily expected-growth optimality) it's the point where the ratio of reward-to-risk is maximized, and resides between the inflection point and the expected growth-optimal peak.

Yes, that's essentially what I am looking for: not the maximum growth rate, but the growth rate which yields maximum utility with respect to some sensible utility function.

 

[stepan7]

There is always a tipping point - his max return red dot in this case.

Think of it this way; say you have an edge at roulette somehow. You bet 5% per spin and win some and lose some but, over time, you are making money. Then, you decide you want to make 20x your return so you bet 100% per spin.

Sooner or later you have a loss and are left with 0, which puts you out of the game. 100% is far to the right of optimal leverage for your system. The question then becomes, what % of your account gives the best return. If you go above that level of risk, the long-term returns are actually worse or can even turn a winning system into a losing one.

I'm not sure nonlinear's curve looks totally accurate, but I am sure he's right about there being a "Kelly" style max profit peak.

Sorry but it's only true if someone use gamblers approach for the trading.

 

[oly]

...
If you're interested in some of the academic papers belying these ideas, those can be downloaded at my website www.ralphvince.com. I'm not trying to hustle you guys on anything here but some of these ideas.

Thanks Ralph, your books are great, easily in the 1% most useful of what's out there.

 

[Xela]

I signed an agreement 5 or so years ago with a large index provider to refrain from any social media participation

An unexpected pleasure to find you posting here.

I wouldn't worry too much: given the tone of many of the contributions here, it would be a considerable stretch to interpret ET as any kind of "social" media?

 

[oly]

Sorry but it's only true if someone use gamblers approach for the trading.

Either I misunderstood you are you are just being argumentative. Replace "roulette" with "swing trading with a positive expectancy" if you like. Or don't, I don't care.

 

[stepan7]

Either I misunderstood you are you are just being argumentative. Replace "roulette" with "swing trading with a positive expectancy" if you like. Or don't, I don't care.

I don't care as well.
Only one thing is for sure, if statistic or/and pure science approach for trading could work then statisticians or/and scientists would be richest people in the world.

 

[nonlinear5]

True only on the first trade. After some t trades, that point beings to migrate "rightwards, and has, as its asymptote (as t->infinity) the expected growth optimal peak.

It looks like the convergence is very fast. After some 20 periods, it would be almost indistinguishable from the infinite horizon, correct?

I am including the figure from one of your papers below (hope you don't mind). In my case, the number of periods is around 300.

 

[Xela]

Only one thing is for sure, if statistic or/and pure science approach for trading could work then statisticians or/and scientists would be richest people in the world.

Its a slightly simplistic argment, I think, Stepan? There are certainly both scientists and statisticians (e.g. market/financial analysts at Goldman Sachs and elsewhere) among the world's richest, anyway.

 

[stepan7]

Its a slightly simplistic argment, I think, Stepan? There are certainly both scientists and statisticians (e.g. market/financial analysts at Goldman Sachs and elsewhere) among the world's richest, anyway.

How many folks from GS, MS, JPM, C etc. (except their CEOs, or former employees that moved to HF) in top the world's richest?