my journal 3

This is a discussion on my journal 3 within the Trading Journals forums, part of the Reception category; I am going to start reading The Mathematics of Money Management by Ralph Vince , because I happen to have ...

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Old Feb 19, 2012, 1:15pm   #271
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starting to read "The Mathematics of Money Management by Ralph Vince"

Yamato started this thread I am going to start reading The Mathematics of Money Management by Ralph Vince, because I happen to have the inspiration. At the same time I will keep doing the review exercises at Khan's and the practice exam at Stat Trek's, where I already got 7 problems correct:
Advanced Placement (AP) Statistics Practice Exam

I will start Vince right here, with just one sentence at a time, because it's hard. I know it's hard. So let's get started.

Initially I was going to read Markowitz, but since Vince himself has several pages on Markowitz, I opted for Vince instead.

Preface and Dedication

The favorable reception of Portfolio Management Formulas exceeded even the greatest expectation I ever had for the book. I had written it to promote the concept of optimal f and begin to immerse readers in portfolio theory and its missing relationship with optimal f.

Besides finding friends out there, Portfolio Management Formulas was surprisingly met by quite an appetite for the math concerning money management. Hence this book. I am indebted to Karl Weber, Wendy Grau, and others at John Wiley & Sons who allowed me the necessary latitude this book required.

There are many others with whom I have corresponded in one sort or another, or who in one way or another have contributed to, helped me with, or influenced the material in this book. Among them are Florence Bobeck, Hugo Rourdssa, Joe Bristor, Simon Davis, Richard Firestone, Fred Gehm (whom I had the good fortune of working with for awhile), Monique Mason, Gordon Nichols, and Mike Pascaul. I also wish to thank Fran Bartlett of G & H Soho, whose masterful work has once again transformed my little mountain of chaos, my little truckload of kindling, into the finished product that you now hold in your hands.

This list is nowhere near complete as there are many others who, to varying degrees, influenced this book in one form or another. This book has left me utterly drained, and I intend it to be my last.

Considering this, I'd like to dedicate it to the three people who have influenced me the most. To Rejeanne, my mother, for teaching me to appreciate a vivid imagination; to Larry, my father, for showing me at an early age how to squeeze numbers to make them jump; to Arlene, my wife, partner, and best friend. This book is for all three of you. Your influences resonate throughout it.
Ok, this was easy!

But I am wondering: shouldn't I start from his previous book, which seems to be shorter? It's called "Portfolio Management Formulas" and I've already got it.

Let me think...

Year of writing? Topics covered?

"March 1992" for the preface of "mathematics" and... no, wait: I don't have his other book.

Ok then let's forget the other book and keep reading this one, on to the Introduction:


I wrote in the first sentence of the Preface of Portfolio Management
Formulas, the forerunner to this book, that it was a book about
mathematical tools.

This is a book about machines.

Here, we will take tools and build bigger, more elaborate, more
powerful tools-machines, where the whole is greater than the sum of the
parts. We will try to dissect machines that would otherwise be black
boxes in such a way that we can understand them completely without
having to cover all of the related subjects (which would have made this
book impossible). For instance, a discourse on how to build a jet engine
can be very detailed without having to teach you chemistry so that you
know how jet fuel works. Likewise with this book, which relies quite
heavily on many areas, particularly statistics, and touches on calculus. I
am not trying to teach mathematics here, aside from that necessary to
understand the text. However, I have tried to write this book so that if
you understand calculus (or statistics) it will make sense and if you do
not there will be little, if any, loss of continuity, and you will still be
able to utilize and understand (for the most part) the material covered
without feeling lost.
Ok, so far so good. I will take a break for a while now. Let's be satisfied and happy that I finally got started on what was the final of objective (risk and money management) of four months of math and almost ten thousand problems solved at Khan's and at other websites.

Obviously I am not going to need sine and cosine to understand this book (nor most of the material I covered), but I made myself do it, because it was not practical to skip sections at khan academy, and it was part of the high school curriculum. I went from being a student who stopped studying math in junior high school to a student who has a thorough knowledge of high school math, and who's confident and not afraid of formulas.

Congratulations to myself. Thanks. You're welcome, you deserve it. Let me shake your hand.


This math journey began on October 3rd, 2011:
Ok, that's it. I suck. I need to gather my remaining forces and embark on a mission to understand formulas.

This whole paper is full of formulas. They're probably relatively simple, but it's like a new language for me.

So I will look for a "formulas for dummies" dictionary or glossary or similar. I am totally lost in this language, and there is no way I can finish this thing if I don't first learn the language he's speaking.

The concepts he's using are not new at all. The problem is I get lost in his formulas.

If I can get past this ignorance/phobia of mine, I will solve all my other formulas problems. And I will be able to accomplish this task, and follow through in my nobel prize route rather than taking another less preferred and less trusted route (trading vendor route). I know the nobel prizes are not out to screw me or scam me for sure. I cannot say the same about the vendors.

Let's start the journey, and let's go back to highschool, and to what they never taught me there. Let's study my enemy:
Formula - Wikipedia, the free encyclopedia

That's the day I decided to "go back to high school". Four and half months ago. And now I feel finally ready to face these money management books, which means I am ready, because if you feel ready, if you have that confidence, half the job is done. You'll keep reading and trying until you figure it out. If you feel it's hard, then it will be too hard. Half of the job was restoring my confidence, which was gone in the first year of high school (I was skipping classes, not doing homework, they were going too fast, my father was busting my balls with extra homework - I basically quit studying when I was 14... I mentioned this before).

October 3rd came one week after I ended the trading with the investors, because we had exceeded the expected drawdown of 40k (we had lost all profits made, which amounted to 37k, plus another 11k).

I had spent the whole month of September wondering what was wrong and what should be done, had investigated markowitz and other portfolio theory authors, and eventually had come up to the conclusion that I was not capable of reading those books. Maybe I am just as capable now as I was then (four months ago), but now I am confident about math and formulas, so this makes a huge difference. The extra knowledge I have may not even be much. I do have a lot of extra knowledge relative to four months ago but most of it is not related to those formulas. But the confidence gained by having solved 10 thousand problems - that's what will make the difference. This, among the other things I accomplished in the last four months, is what will make the difference:

Click the image to open in full size.
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

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Old Feb 19, 2012, 5:23pm   #272
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Re: my journal 3

Yamato started this thread Free funny pictures, photo pranks & jokes, fun comic albums, humor ? See Now ?

Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.
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Old Feb 19, 2012, 5:52pm   #273
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difference between being stupid and intelligent

Yamato started this thread Still reading the first few lines of Vince's Introduction and I have already made my first encounter with complicated math:
Certain mathematical functions are called upon from time to time in
statistics. These functions-which include the gamma and incomplete
gamma functions...
But this time I am not scared, unlike four months ago. This time I just look it up:
Gamma function - Wikipedia, the free encyclopedia
In mathematics, the gamma function (represented by the capital Greek letter Γ) is an extension of the factorial function, with its argument shifted down by 1, to real and complex numbers...
I still don't understand it, which means I still do not know enough to understand it. But this time I don't get scared by the fact that, even after looking it up, I don't understand it, because I know the problem is from ignorance and not from stupidity, and the mere fact of knowing and thinking this, makes me immune from the risk of stupidity itself, which is the attitude of thinking "I am too stupid to understand it". Thinking you can't understand something is the premise for stupidity. Thinking you don't know enough to understand something is the premise for knowledge and understanding. Big differences here.

Two different people both don't understand something and for the same reason (ignorance), but the one who thinks he's too stupid to understand it will never understand it. The one who thinks he's too ignorant to understand it still will preserve the pride, confidence, and chance to understand it in the future (when he'll have gathered the necessary knowledge). So basically the difference between being stupid and intelligent lies in this: realizing that you don't understand something because of ignorance rather than stupidity. In other words, also, what makes you stupid is underestimating your intelligence, and what makes you intelligent is having confidence in your intelligence. Attributing your lack of understanding to the wrong cause blocks any further understanding and learning (because you don't even realize that ignorance is what keeps you from understanding something).

So now we might even debate on whether people are confident because they're intelligent, or rather, as I think, people are intelligent because they're confident.

Furthermore, since knowledge brings understanding, people understand things because they have knowledge to begin with, and then they gain confidence, and then when they gain confidence they have the right attitude of never thinking they're too stupid to understand something, but always "too ignorant to understand something", and this is the key for your learning and understanding to go hand in hand, and to continue and never stop.

What sometimes happens in school is that your confidence is destroyed, and they get you to think you're stupid rather than just ignorant, just because there's other more knowledgeable classmates who get to the answer faster than you, and either they or the teachers make you think that rather than practice or knowledge the cause of this is that you're stupid. That's why school is so bad: because these unfair comparisons lead children to think they're stupid and destroy their confidence - there will always be someone faster than you at every subject, and he will always destroy your confidence. Distance learning, like Khan and the internet, allow you to build up knowledge and confidence without outside interference and discouragement.

That's one of the reasons I started a new journal with the "only posts from contracts" options. I was getting a lot of feedback from these evil mother ****ers telling me I was doing basic math and that it wasn't going to get me anywhere, reproducing the same exact problem that goes on in the classroom.

Another good point and the summary of this is that I was "stupid" as far as mathematics, until recently, because school had me feel that way, whereas now if I don't understand something I just feel ignorant, and therefore I am all of a sudden "intelligent", because even if I don't understand something I still have the tools - learning - that will make future understanding possible.


Ok, let's keep reading:
...These functions-which include the gamma and incomplete
gamma functions, as well as the beta and incomplete beta functions-are
often called functions of mathematical physics and reside just beyond
the perimeter of the material in this text. To cover them in the depth necessary
to do the reader justice is beyond the scope, and away from the
direction of, this book. This is a book about account management for
traders, not mathematical physics, remember? For those truly interested
in knowing the "chemistry of the jet fuel" I suggest Numerical Recipes,
which is referred to in the Bibliography.
Mmh, he says "mathematical physics"... is he a physicist?

Who is Ralph Vince?

I could not find a biography, except this one but it's not him:
Ralph Vince - Wikipedia, the free encyclopedia

This guy is actually Italian, the football player.

The trading author, I found his website:
Ralph Vince : Home Page

But once again there's no biography.

He's got a... google group, where he answers everyone's questions:
Leverage Space Trading | Google Groups

He even wrote on
Forums - View Profile

All right, the former neighbour is coming for dinner, so I have to resume tomorrow. It'd be interesting to read what he wrote on elitetrader.

I am starting to like this guy. The way I like Khan and others who are good at teaching me things.

Here's a good thread on where I learned that Ralph Vince was a member:
Forums - Notable ET Celebs

I feel like a new person - someone who is reading a book titled "The mathematics of money management". I feel good about myself. Yes, I go to work with stupid people, but I am doing something special, I am getting somewhere. I am not like the rest of them.

I am not just a bank employee, and I am not just a trader - I am becoming a fund manager. I am like a company. I have a company in my own brain, in my own little excel workbook. It's all very compact, but it's all there, miniaturized, including my capital. So, don't stop me now, because I am having a good time.


Let's read some more:
I have tried to cover my material as deeply as possible considering
that you do not have to know calculus or functions of mathematical
physics to be a good trader or money manager. It is my opinion that
there isn't much correlation between intelligence and making money in
the markets.
That's interesting because after all my talk about what intelligence is the author equates intelligence with knowledge of math. Even before my reasoning on this post, I had never thought intelligence meant a knowledge of math. Nor did I think that intelligence was merely an attitude. Let me think... I had always thought that intelligence was the ability to understand things given a certain amount of knowledge. So we can't assume that someone who knows calculus, even a professor of calculus is more intelligent than a taxi driver who doesn't know any. We have to measure two people with the same amount of knowledge and see how well they employ it and then we find out who's more intelligent. Intelligence is therefore... the ability to use one's knowledge to solve problems. Instead, knowing calculus could never be defined as intelligence, as he does. But let's keep reading because overall I like what he says, and I like his tone.

Reading further down...

Still reading the Introduction. This part is quite good:
Since the publication of Portfolio Management Formulas I have
been asked by some people why I chose to write a book in the first
place. The argument usually has something to do with the marketplace
being a competitive arena, and writing a book, in their view, is analogous
to educating your adversaries.
This is the question I asked and that I read others ask, endlessly. Why teaching people how to trade or portfolio theory? What does he answer?
The markets are vast. Very few people seem to realize how huge today's
markets are. True, the markets are a zero sum game (at best), but
as a result of their enormity you, the reader, are not my adversary.
The markets are so big that it doesn't make a difference. Well, dude, portfolio theory in itself is not enough, so I buy this explanation. But if I let out a secret about a trading system, it might stop working soon. Let alone if you are a famous author. But maybe portfolio theory ain't a big deal. I mean, it's of vital importance, but its secrets are not as vital as a profitable trading system.


Ok, I understood everything he says and got to this section (excluded): "SOME PREVALENT MISCONCEPTIONS", on page 6.
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

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Old Feb 20, 2012, 10:22am   #274
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Re: my journal 3

Yamato started this thread The umpteenth asshole yesterday rated my journal one star. What am I going to do? Let's hope for some profit to compensate this frustration of mine. If I get rich enough, I'll pay people to rate me 5 stars. If I get richer, I'll pay a hit man to track down the assholes who rate me one star.


NG is falling but not enough to buy another QG contract (this time expiring in April). I'll wait until it'll reach 2.5 (if ever).
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

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Old Feb 20, 2012, 2:06pm   #275
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Re: my journal 3

Yamato started this thread I've done khan. I've done one question from here, the evil "AP Stats" glossary-tutorial, with a really bad teaching methodology (but comprehensive statistics material):
Advanced Placement (AP) Statistics Practice Exam

Now I am going to print a few pages from the Ralph Vince book, and then I'll read them. I've had a lot of work today, so I am tired. Still one and a half hour to go.

Yesterday I got quite drunk with that guest I had. I just used my restaurant vouchers so it was like a free dinner. It's too complex to get a refund for those vouchers.

The one-star rating is still burning.

But I know I am beautiful, no matter what they say:

Click the image to open in full size.
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

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Old Feb 20, 2012, 3:09pm   #276
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Re: my journal 3

Yamato started this thread On page six of the Introduction he says:
Preparing for the worst is quite difficult and something most traders never do. Preparing for the worst, whether in trading or anything else, is something most of us put off indefinitely. This is particularly easy to do when we consider that worst-case scenarios usually have rather remote probabilities of occurrence. Yet preparing for the worst-case scenario is something we must do now. If we are to be prepared for the worst, we must do it as the starting point in our money management strategy.
This is quite disturbing to me, because the worst is blowing out and there's nothing that you can do to prevent the worst from happening. After studying some probability, I have realized that you can never be sure that you will not blow out your account, no matter what you do, no matter how good your systems are, because you can just keep on getting unlucky, trade after trade.

So I suppose you cannot prepare for the worst, or the worst is this: what do you do if you keep getting unlucky? Well, my answer, right now, is that I do not have an uncle point and that I will simply blow out my account, going from 9k to 2k, after which I can't trade any longer. So yes, I am prepared for the worst: i am prepared to blow out my account.

But what he might be getting at is to be prepared in a different way, a way to not get hurt. So if that's what he means, then he either means "what's your uncle point?" or he doesn't have his probability theory right, because the worst means you just keep on losing trade after trade for the rest of your life, and there's no way to avoid that, it's just chance - it's unlikely, but it could happen. You could be the best trader in the world and lose on every single trade for the rest of your life. The only way to be prepared for this "worst" (which is the only real "worst" by any dictionary and logic) is just to know how much you're willing to lose before you stop trading.

Oops, wrong, and I am glad. Here's what he says next:
Finally, you must consider this next axiom. If you play a game with unlimited liability, you will go broke with a probability that approaches certainty as the length of the game approaches infinity. Not a very pleasant prospect. The situation can be better understood by saying that if you can only die by being struck by lightning, eventually you will die by being struck by lightning. Simple. If you trade a vehicle with unlimited liability (such as futures), you will eventually experience a loss of such magnitude as to lose everything you have.

Granted, the probabilities of being struck by lightning are extremely small for you today and extremely small for you for the next fifty years. However, the probability exists, and if you were to live long enough, eventually this microscopic probability would see realization. Likewise, the probability of experiencing a cataclysmic loss on a position today may be extremely small (but far greater than being struck by lightning today). Yet if you trade long enough, eventually this probability, too, would be realized.
So he agrees with me that the worst-case scenario is that you just keep losing and losing, but that it probably will not happen during our lifetime - if we do things right.

Yeah, we're on the same wavelength, and he understands about this issue even more than I do, so i am in good hands:
There are three possible courses of action you can take. One is to trade only vehicles where the liability is limited (such as long options). The second is not to trade for an infinitely long period of time. Most traders will die before they see the cataclysmic loss manifest itself (or before they get hit by lightning). The probability of an enormous winning trade exists, too, and one of the nice things about winning in trading is that you don't have to have the gigantic winning trade. Many smaller wins will suffice. Therefore, if you aren't going to trade in limited liability vehicles and you aren't going to die, make up your mind that you are going to quit trading unlimited liability vehicles altogether if and when your account equity reaches some prespecified goal. If and when you achieve that goal, get out and don't ever come back.
There's a lot to read about this book here:

I'll read these reviews on the Vince's book when i get home.
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

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Old Feb 20, 2012, 4:01pm   #277
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Customer Reviews on Amazon

Yamato started this thread Customer Reviews: The Mathematics of Money Management: Risk Analysis Techniques for Traders

Only 11 reviews to read. But I must first stress out that Larry Williams and John Bollinger recommend to read his books, so he's clearly not an idiot:
"If Ralph Vince writes it, I read it...every word, every thought this guy has produced has led me to additional market profits. Money management is clearly the way to the kingdom of wealth in the investment world and Ralph gives you the keys in this book."
--Larry Williams, trader, fund manager, and author of Trade Stocks & Commodities with the Insiders: Secrets of the COT Report and Long-Term Secrets to Short-Term Trading

"I have known Mr. Vince for many years and he is quite simply one of the brightest minds in the industry. Do not miss this opportunity to share his insights into the investment process".
--John Bollinger, CFA, CMT, author of Bollinger on Bollinger Bands.
Ok, now on to the reviews instead.

They are all very interesting and that's why I always read reviews before reading a book. But I cannot quote all 11 reviews, because i already provided the link and so it would not make sense.

So I'll quote the ones that strike me the most.

I just came up with an awesome recipe I created, with these ingredients:
Smoked salmon - Wikipedia, the free encyclopedia
Salted butter
This bread, on both sides

It tastes great. It's my copyright or whatever. You can't eat it without paying me a few dollars. Then I drank some of the wine left from yesterday so I am tipsy... on to the reviews.

This is definately not a book that can be read in a few days, unlike the majority of books I've encountered on trading.
...some ideas are very challenging to formulate into a statistical package...
...I am quite confident in the fact that Vince makes a mistake with one of his partial derivatives in the introductory chapter on E-V Theory (when employing the Lagrange method)...
Gee, not my piece of cake for sure, but until things will be comprehensible I'll keep reading Vince's book.

The book is well written, reflecting level of education. The author is no dummy.

However, the community is better served to realize that there is a divide between Modern Portfolio Theory, followers of quantitative methods ad infitum, and those followers of Practical Portfolio Theory, who are more or less followers of the Edwards & Maggee/Wyckoff schools of trading thought.

My recommendation is to identify to which school of thought you belong and simply lay to rest the other quack books that come along.
Very important points: what school of thought do I belong to? "Practical Portfolio Theory" is appealing to me, because it sounds practical.

I must have close to a 100 trading books and this one is a gem. As Elder points out in one of his books there are three legs that support successful trading: Trading Strategy, Psychology and Money Management. Optimal F which is well explained in this book is the best measure of your Risk/Reward. Knowing the optimal f of a trade allows you to compare apples and oranges. I can tell if trading a stock option with a potential return of 1000% is better than trading a stock with a potential return of 20%.
I have an extensive math background, but I cannot get convincing quantitative results in Excel using his presentation, even after re-deriving for myself all the equations he deigns to show us. Perhaps if I had a futures trading background I would find his prose easier to follow, but I would have been much better off with the equations, in an appendix at least.
The guy with an "extensive math background" (what I dream of) doesn't find the book satisfactory. And he's not the first one. Interesting.

Overall (I read all reviews) what strikes me is that the book is very famous but there aren't that many reviews and practically none of the readers is fully satisfied.

So I'll read it with a grain of salt, and i'll read it because this is the best that I could find so far. At the moment, I don't think it's perfect.

Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

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Old Feb 20, 2012, 11:03pm   #278
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Yamato started this thread While this Big Brother bitch host is hosting the Italian Big Brother evening, and yelling in the background, and sounds like a dog barking, I've been reading the last few paragraphs of Vince's introduction.

And I've got bad news. The whole problem Vince has opened m eyes about is the concept of "unlimited liability":
We've been discussing worst-case scenarios and how to avoid, or at
least reduce the probabilities of, their occurrence. However, this has not
truly prepared us for their occurrence, and we must prepare for the
worst. For now, consider that today you had that cataclysmic loss. Your
account has been tapped out. The brokerage firm wants to know what
you're going to do about that big fat debit in your account. You weren't
expecting this to happen today. No one who ever experiences this ever
does expect it.
Indeed, I've been talking about losing endlessly and finding a timing to stop trading, if you're the unluckiest person in the world, but that was nothing compared to an even worse case scenario: you lose more than you have.

I had forgotten and never fully realized that despite the margin call procedure (with its immediate automatic liquidation), you could still lose more than you have on your account.

This is very very unlikely, but as he says here, the only way to avoid that problem is to either "quit trading unlimited liability vehicles"...
Now, take that sheet of paper with your contingency plans (and with the amount at which point you will quit trading unlimited liability vehicles altogether written on it) and put it in the top drawer of your desk.
...or to have a huge account, which I do not have.

Indeed, what I stand to lose, with the real worst-case scenario, by trading one NG contract (as I've been doing for years) is not just my small account, but 24k. And when I trade the YM, I stand to lose... 5 dollars for every point from 13,000 to zero. Which is... 65,000 dollars. Yes, that much, each time I trade a YM contract.

So in fact it is not really an unlimited liability because the end of your liability is zero. If instead you are short on anything, then it is indeed "unlimited".

I guess I'll never play things this safe - I will never wait to have 130k before trading one YM contract. If I want to make things happen within my lifetime, I also have to risk that hypothetical debt with IB.

But Vince now made me realize that my mother is not far from wisdom when she says that I can't quit my job even if I have 100k, even if I have made 500k, because any money I am trading with cannot be considered money I made. She, and other relatives, said that the money is safe only once you are not investing it, and once it is not even in the bank, and you've bought apartments with it and you're getting paid rent... and basically I should have picked my parents better, richer ones, because this is not going to happen, unless I behave recklessly both according to my mom and to Ralph Vince:
Hope for the best but prepare for the worst. If you haven't done these exercises, then close this book now and keep it closed. Nothing can help you if you do not have this foundation to build upon.
I can't prepare for the worst. It's more likely that I'll die before the worst happens. The worst is death, so I am going ahead with my reckless plan of trading without having the capital to back up losses that could happen if a future I am trading goes to zero. Goddamnit.

Nonetheless, I will still read the rest of his book. I will read his book and build upon the foundation that the worst risk is death. My money management, as I was reminded throughout this introduction, is based on the awareness of my own death. I am aware. Je suis aware.

Everyone made fun of this philosophical talk, but he was really talking about risk and reward. Being aware of risk and reward, and making the best of what you got.


There: I've started the systems for tomorrow. Let's hope the god of randomness is on my side.
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

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Old Feb 21, 2012, 2:53am   #279
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Re: my journal 3

Yamato started this thread I finished the Intro, but I'll have to go back to one of those reviews by a reader, because it intrigued me.

Here's what I found interesting at the end of the Intro, but also connected to what the reader said:
Modern portfolio theory, perhaps the pinnacle of money management
concepts from the stock trading arena, has not been embraced by
the rest of the trading world. Futures traders, whose technical trading
ideas are usually adopted by their stock trading cousins, have been reluctant
to accept ideas from the stock trading world. As a consequence,
modern portfolio theory has never really been embraced by futures
He concludes the sentence with: "...never really embraced by futures traders". This is a good time to try and see where Vince and his theories fit, even though the drawer seems the right drawer.

But I do want to know what I am about to get into, and the right time to find out is before I get into this huge thing. I don't have any time to waste. If I can find a better use of my time, i'll drop this book and get another one.

The reader I was mentioning is B. Brooker "bbrooker81": Customer Reviews: The Mathematics of Money Management: Risk Analysis Techniques for Traders

He says:
The book is well written, reflecting level of education. The author is no dummy.

However, the community is better served to realize that there is a divide between Modern Portfolio Theory, followers of quantitative methods ad infitum, and those followers of Practical Portfolio Theory, who are more or less followers of the Edwards & Maggee/Wyckoff schools of trading thought.

My recommendation is to identify to which school of thought you belong and simply lay to rest the other quack books that come along.
I am going to try to find out, as he says, what these schools of thought are and which one I like better, and proceed in that direction.

As I was looking to find out who B. Brooker (the writer of the review) is, I came across another trader and author, with a similar name, but without the "r": Rob Booker. He seems just as smart:

He made a lot of good videos on automated trading systems. Here's another one:

How do I know they're good? I noticed they have as few as 100 views. That means that he didn't even promote them. So he's not out to sell anything, despite the quality of his material.

Anyway, let's keep moving.


I have been browsing for a bit, googling. The problem of portfolio theory is that when you want formulas, and not rule-of-thumb you're asking for academics, but academics also bring in a lot of bull****, maybe too much bull**** for me to handle.

But I might be able to find someone who's practical, not an academic, or at least not writing for academics, and he has read and sifted through all this bull**** - I can't read a paper that spends 10 footnotes per page referencing other academics' work.

E.P.Chan might have been the perfect fit (just the right amount of science), but somehow I did not find what I was looking for in his book on automated trading.

I think I need someone who trades, and I get a feeling that all these guys writing books do not trade.

So I am here scratching my head quite a bit.

These guys might be on to something:

Then we got the maslowian portfolio theory:

Then we got the "Practical Applications of Post Modern Portfolio Theory":

Then the "Black–Litterman model":

Essays, papers, theses... scholars, academics... a sea of bull**** I am drowning in.


What I will not do is keep on browsing and getting discouraged and give up.

I cannot learn much more by just browsing and browsing and going through dozens of papers by these guys. I cannot follow these students/academics (Vince is not one), who write their papers to impress the other faculty/academics. I need a book aimed at traders, whether it's by an academic or not.

I need to gain a better understanding of the subject. The best would have been to read someone who had read them all, and summarized them. This is not going to happen unless... unless I go to forums, specifically elite trader.

Let's do it.

I knew it was the right place - here it is:
Forums - Construct a good portfolio?

Black diamond is a ****ing genius:
This approach is correct in theory but the big problem is that you don't have the true mean, vol, and correlations, you only have estimates from your sample. Then when you optimize, you end up optimizing on the errors more than the true properties.

There are strategies used by quant funds to correct for this, google bayesian shrinkage or the Black-Litterman model. I discussed this in another thread, maybe with more details, but the bottom line is I don't think it is worth the effort to follow these methods precisely. The basic idea is you use the information from your optimization but consider it suspect and end up with something between the optimized weights and neutral weights.

The other big issue - you have to decide if you assume the inidividual strategies are stationary or if you think you can time them. The basic approach you mentioned assumes they are slowly time varying, so you are timing them in the sense that you assume recent history is your best estimate of the next-period characteristics. The other approaches that come to mind: (1) you assume they are really stationary and use all the data you can (an expanding estimation window instead of the rolling window) or (2) try to time them by building a model that generates predicted means,vols, and correlations based on some variables that capture the market state or strategy specific stuff.

I think unless you strategies are easy to time, you are probably best off equal weighting and spending your time on something else.
He sums it all up in a few lines - all the problems involved with creating a portfolio of systems. You'd be building something very precise on quicksand. What's the point of the precision of a portfolio according to the existing formulas if you only have an estimate of future performance? On the other hand, this is a cheap excuse for not doing all this work, and that's why I may be thinking this way. Or should I do as he says, allocate equal amounts of money to each system and then spend my time on something else?

Whatever the answer is, right now the best thing is do my searches on elitetrader for threads with "portfolio" in the title. So I'll do more of this.

More on that thread, always by the same black diamond:
...with all the uncertainty around your inputs you can do a lot of work for little or no gain.
He's saying once again: what's the point of fine-tuning your portfolio when there's so much uncertainty regarding its ingredients?


That thread didn't say much more. I'll need to read a little more of the book by Vince, because my question of five months ago (long debate with bbmac) remains unanswered: how do I find a univocal way of allocating systems/contracts?

The big problem now is that I'm in the middle of the night, and I might not... i will not get enough sleep to be able to go to work tomorrow, and yet everyone is counting on me, because the boss is not there. What the **** do i do? I wish I could just do my work from home now and go back to sleep.

Here's another good thread, dead on target: Multi-system portfolio.

Not much here either.

Overall, I will keep reading Vince. And now I'll try to sleep.
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

Last edited by Yamato; Feb 21, 2012 at 11:30am.
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Old Feb 21, 2012, 4:00pm   #280
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The History Of The Modern Portfolio

Yamato started this thread I am getting there, at my own slow pace. I just found this excellent article on investopedia:
The History Of The Modern Portfolio

What I have come to realize yesterday and today is that there are several schools of thought and before getting into any one of them, I should get the big picture.

I will quote the article above as i read it, and as i go along i will also list the good links I find on the subject. These are the links so far (I'll come back later to add more, for the next 24 hours, as long as the post allows).

The History Of The Modern Portfolio
CFA Level 1 - Portfolio Management (boring but can be used as a good simplified glossary)

Modern Portfolio Theory (MPT) Definition | Investopedia
Black-Litterman Model Definition | Investopedia
Money Management Using the Kelly Criterion

...In this article, we will explore the evolution of the modern portfolio from its humble beginnings in an unremarkable, and largely ignored, doctoral thesis, all the way to its current dominance, where it seems nearly everyone knows what you mean when you say, "you better diversify your portfolio."

The Wastelands
In the 1930s, before the advent of portfolio theory, people still had "portfolios." However, their perception of the portfolio was very different, as was the primary method of building one. In 1938, John Burr Williams wrote a book called "The Theory of Investment Value" that captured the thinking of the time: the dividend discount model. The goal of most investors was to find a good stock and buy it at the best price.
This article is so good that I'd feel like quoting everything, but it wouldn't make sense, because i provided the link. I'll just try to quote the best parts (even though it all seems good).

During this period, information was still slow in coming and the prices on the ticker tape didn't tell the entire story. The loose ways of the market, although tightened via accounting regulations after The Great Depression, increased the perception of investing as a form of gambling for people too wealthy or haughty to show their faces at the track.
It's true. I am not like that, but in some periods of my career i was like these guys, too haughty to show my face at the track.

**** it. I am just quoting pretty much everything:
In this wilderness, professional managers like Benjamin Graham made huge progress by first getting accurate information and then by analyzing it correctly to make investment decisions. Successful money managers were the first to look at a company's fundamentals when making decisions, but their motivation was from the basic drive to find good companies on the cheap. No one focused on risk until a little-known, 25-year-old grad student changed the financial world.
Lucky him!
When Markowitz read John Burr Williams' book, he was struck by the fact that no consideration was given to the risk of a particular investment.
One of the reasons that "Portfolio Selection" didn't cause an immediate reaction is that only four of the 14 pages contained any text or discussion. The rest were dominated by graphs and numerical doodles. The article mathematically proved two old axioms: "nothing ventured, nothing gained" and "don't put all your eggs in one basket."
Yeah, that's why I didn't understand jack **** of it, and it got me started on my mathematical quest. And I still am not good enough to understand its formulas, also because the mother ****er doesn't make any efforts to be understood by me, because it's a book for other academics, actually meant to impress other academics.

Ok, I am done with the article. It was short, well written, but not what I expected. Maybe the author does not trade. It was appealing in its language, but... the flow of information stopped pretty quickly.

Ok, let's look for something else.

I was looking for the black-litterman model, and i came across Fischer Black, but then he had a link, on wikipedia, to the International Association of Financial Engineers. So I looked that up on youtube and found this interesting thing:

Academia meets trading. He is a professor. Let's see what he teaches:
Francois-Serge Lhabitant
LHABITANT François-Serge, PhD - Recherche EDHEC & Corps Professoral

Nothing here. Let's look at the other places he's teaching or has taught.

No luck.

Let's get back to reading Vince.


You know, i keep reading up on portfolio theory for futures, googling it, searching it on forums, and I just came up with yet another long paper on it:

But the problem is... I am too advanced to just apply rule-of-thumb portfolio methods, and yet I am too behind and ignorant to read any one of these papers (markowitz, and even vince)... this is just too much work. Maybe I'll be able to read vince, but I won't go any further, and instead I'd like to be able to compare authors.

These portfolio theory authors, beginning with markowitz, are not user-friendly, reader-friendly... they don't care about the retail traders. They're writing for mathematicians, physicists, academics... not for me.

This search is driving me crazy, because these assholes are anything but clear and simple. They purposely make it more complex than it needs to be.


One exception is Chan. He's not a vendor, nor an academic. A good mix of the two. Indeed, the ideal thing would have been E.P.Chan's chapter on this, chapter 6 of his Quantitative Trading book. His book is precisely the right level of conciseness I need. But I don't understand it either.

Let's go over it once again: Quantitative Trading: How to Build Your Own Algorithmic Trading Business (Wiley Trading) (9780470284889): Ernie Chan: Books

Ok. He mentions two authors: Edward Thorp and Kelly. The same Kelly mentioned by Vince. So I guess we're on the same wavelength.

His bibliography also suggests these readings:
Cover, Thomas. 1991. “Universal Portfolios.” Mathematical Finance 1(1):1–29.
Grinold, Richard, and Ronald Kahn. 1999. Active Portfolio Management. New York: McGraw-Hill.
I need to find them, because I trust E.P.Chan.

This is what I'll do. I'll need to read Vince and Chan again, of course, but also Kelly, Thorp, and these last two books he mentions. So as of now I have 5 books/chapters to read. These are presumably user-friendly, not like the other mother ****ers.

Nonetheless, this is going to take a ****load of time. In the meanwhile, I'll underbet.


Ok, I've gathered the e-books in folders named after the authors. They were all available on the web:

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Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

Last edited by Yamato; Feb 21, 2012 at 6:48pm.
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Old Feb 21, 2012, 9:02pm   #281
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Re: my journal 3

Yamato started this thread I've printed the pdf of the first chapter of vince. It is too dense. Right now I can't handle it.

Now I have a choice of what to do with my time, among these different choices:

1) 5 portfolio theorists (which I'll analyze here below)
2) khan review (always will do them)
3) AP Stats at Stat Trek (will do slowly, and looking things up as in a glossary - but no commitment)
4) Statistics and Probability Quizzes and Trivia -- Fun Trivia (from time to time - but no commitment)

In the meanwhile the account should keep increasing, after a whole three straight negative weeks.

5 portfolio theories:

1) The Mathematics of Money Management by Ralph Vince. The book I am reading right now, and it's "only" 200 pages long.

2) Active Portfolio Management by Richard C. Grinold and Ronald N. Kahn
I might work on khan (math) and kahn (portfolio theory) simulteaneously, and the book sounds very wise right from the start, but, dude, 621 pages!

3) THE KELLY CRITERION IN BLACKJACK SPORTS BETTING, AND THE STOCK MARKET by EDWARD O. THORP. Only 45 pages and it is the basis for what Chan wrote in his chapter 6 of Quantitative Trading. I might end up reading this one.

4) Universal Portfolios By Thomas Cover. This book, like all the previous ones (with the exception of the next one, by Chan), is full of formulas as complex as the ones used by Markowitz in his 15 pages 1952 graduate work. It's not going to be easy. It's going to be fun, provided my eyes allow me. I might have to finally get some glasses to embark on this endeavour.

5) Quantitative Trading by ERNEST P. CHAN. He's the one who told me to get all the books above except Vince. So I'm definitely going to have to read his chapter 6.

Pretty funny how I'll be studying Chan, Khan and Kahn, all at once.

I'm gonna stick these five books in my signature so I can remember to do them. It is time to replace the math links with what was my original objective: reading the portfolio theory books.

In these almost five months, and almost 10 thousand problems solved, I did not remove most of my math ignorance, but I did successfully fill most of my highschool gaps, and I definitely removed most of my fear/phobia for math and formulas. I still ignore a lot of what I need to know, but, after solving all these problems and learning all these things, I have the confidence needed to learn more. And the confidence is that I know I am capable of learning math, whereas, five months ago, with my phobia for math, I'd look at a complex formula and panic. This disables your learning skills.

For once I have something I know won't desert me.

Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

Last edited by Yamato; Feb 21, 2012 at 10:51pm.
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Old Feb 21, 2012, 11:08pm   #282
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time to go to sleep

Yamato started this thread And now would be the time to go to sleep, but as usual I can't make myself go to sleep, I can't turn off my mind, because I don't know if I'll get restarted again, tomorrow. That's why it always bothers me to go to sleep. In Italy we say that sleep is a bit like death.

Only if you're not aware of this, you're going to go to sleep as if it were the easiest thing. But I am aware. Je suis aware.

If ****ing sucks. David Letterman is on, and I can't watch - it's not funny enough.

And I am frustrated once again. And I feel like eating.

I have to devise a way to quit my job at the bank. I am going to let my capital reach 20k, which is the safe neighbourhood, where i can start spending something, and then I will really work on something to get me out of there.

That's another thing that is keeping me from falling asleep. Because what awaits me is another day just like today, so I feel that if I go to sleep, and turn myself off for 8 hours, the moment I will go to work is only one minute away. It suddenly becomes immediate. If instead I stay up, that moment is 8 hours away.

Irrational or rational? I can't really figure it out.

This makes a lot of sense to me. I don't want to turn myself off, despite being tired.
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.
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Old Feb 22, 2012, 12:56am   #283
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Re: my journal 3

Yamato started this thread Still awake and frustrated.

What I need to think about is something that will ennoble me. They say here in Italy that "work ennobles man". Well, instead I need to decrease my hours of work to ennoble myself, because I am working with idiots, and so to the contrary work does not ennoble me, and I feel demeaned by it.

I've been reasoning on this.

First of all, with my probable future profits, of a few thousands per month, I will add to the present capital, and I will spend a small part of them, not to treat people to lunch, unlike in the past, but to do the following:

1. take trips on weekends
2. take taxis to the swimming pool
3. finance ideas for websites, so I could become a small web entrepreneur (I'll start useful websites - i used to be a web designer).
4. drugs
5. beer

These things, along with making more money from trading than from the banking salary, will ennoble me and reassure me. I will not feel as stupid as I feel now, for working side to side with these idiot colleagues of mine (who in turn might think I am the idiot), hearing them talk about soccer, laugh about nonsense... I deserve much better than this, for having broken my back for all these years, for being more intelligent and for a lot more (being more honest, hard working, etc.).

I am better than them, I deserve better, and yet at the moment I am getting worse. Worse ranking even, and worse salary - because I do not kiss up like they do. Because I do not socialize and go on coffee breaks with the boss.

So basically i need a few months of profit to make this happen and make myself feel better about who I am and where I stand on the monkey scale.

Otherwise i'll keep being frustrated, and staying awake because of it.

For a while longer, a lot longer, I still will not be able to quit my job, but taking all these measures might enable me to feel better despite the fact that I'll continue to work.

So, now it all depends on the profit coming in.

For the first month it has happened: I made over 100%.

If I'll keep making a few thousands per month, I'll be able to make this (smaller) dream come true. Now I have two more weeks before the second month expires, after which I'll know if I had a second consecutive profitable month. I am well aware that i could still blow out the account, and that probability according to my estimates is right now at about 10%.

Regarding quitting my job altogether, my parents do not give me their blessing unless I have made 1 million dollars, so that seems to be quite far away on the horizon, or even on the other side of the earth, so it's not in sight.

Until that happens, or at least until the small-scale dream happens and i start using the profit to feel better about myself, I'll keep coming here and complain as i will right now about this long list of things:

1. neighbour bitch slamming her door
2. neighbour child screaming
3. roommate talking to me and boring me
4. stupid people asking me "how are you?" when i cross them in the hallway
5. insomnia due to frustration of going to work with such people
6. insomnia from not living at the house by the beach
7. insomnia from having to get up and shaving every day at the same time
8. other complaints I still haven't come up with

I could start feeling "safe" (never really safe with trading) once I reach 20k of capital. So, considering an optimistic, 3k per month, I will get there in... 4 months. Damn, that is a long time. Until then, I can't spend anything except taxis and I can't even rush things or I'll blow out the account.

4 more months of math and portfolio theory:
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

Last edited by Yamato; Feb 22, 2012 at 1:39am.
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Old Feb 22, 2012, 10:13am   #284
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having terrible problems with IB

Yamato started this thread As if all the math I've been doing weren't enough, and the portfolio theory struggle, and the standing against probability, and against my job and family (there are just so many obstacles to overcome in order to become a profitable automated trader...), here's the latest problem in my way:
Forums - IB TWS security token asked after disconnection

In some cases (rarely but it is definitely a problem) I start my automated trading and, a few hours later, within the same session (within those 24 hours that do not have the forced disconnection), presumably after a disconnection, I get asked again for the login code from the IB security code card authentication.

What happens is I connect to my server, and see the popup window asking for the security codes, and since my trading is automated, this also means that the DDE data feed to excel has stopped (sometimes for hours) and my daily automated trading session has been compromised.

This has been happening for the past two months, at the frequency of once every two weeks, so it has happened already four times. Does anyone (from IB or forum users) know what I could do to fix this problem, which is not just my problem presumably? This is a very recent problem and before this, disconnections did not cause it, and IB TWS could get reconnected without the need for me to fill in the security codes again.
But luckily someone has already helped me on EliteTrader, which is another awesome forum, together with this one, but it's better for this type of question, due to the fact that the automated trading community here just cannot meet, due to it being dispersed and spread across the 100 forum sub-sections (mostly dead, precisely because of being too many).


People are replying to the thread I started, which is just great. I am not the only one with this problem, and hopefully, with all these unhappy customers, they'll solve it, sooner or later.
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.

Last edited by Yamato; Feb 22, 2012 at 3:20pm.
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Old Feb 22, 2012, 10:20am   #285
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QG and NG March contracts being surpassed by April ones

Yamato started this thread Today it's February 22nd, and, after many days of being alert, the day has come when the March contracts have nearly the same or less volume than the April ones, especially on QG:
E-mini Natural Gas


I was going to go long on QG, but I'll wait to see if it falls another 100 ticks. Too bad if I miss a good opportunity.
Read: E.P. Chan, Cogneau - Hubner, Sewell, Tverberg. Search: expected shortfall, Monte Carlo VaR, extreme value theory. Trade.
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