Statistics of Probable outcome of Trading systems!

[RedGreenBen]

In a theoretically ideal trading scenario, the order of wins / losses will not make any difference to the end result.

Not sure I get this, but don't have a big enough brain to claim it is wrong!

If the amount you risk is a function of your capital and R:R =/=1 then WL is always going to be different from LW. I think.

Ben

PS Thanks BSD for link, I've printed it to read later, for some reason I can't read anything vaguely complicated on a monitor.

 

[No one Knows]

Some of you might find this interesting:

Ed Seykota on Risk

He is no paper tiger either, he walked the walk and achieved real life returns of several hundreds of thousands of percent.

Hi,

Great information on this link about position sizing and money management.

thanks

regards Mark

 

[No one Knows]

The best way to convince yourself that maths is a useful but limited way to tackle risk management is to read up about 'Kelly Value', Kelly value applied to stock market speculations. Must read for any trader

It makes perfect sense until you realise that the answer is to risk 24% (in my case) of capital on each trade :-0.

I think if you look at this whole area in a quantitative way (and I have, to the point where my gf nearly left me) then all you really learn is that you have to expect big draw-downs, you have to expect a lot of variability in returns and to be able to say something statistically sound about a system/strategy you need to multiply that already large sample size by pi!*

Ben

* That's pi exclamation mark not pi factorial. I am now outed as a geek.

Hi,

Ive just calculated that using the kelly value for my system would create a 98.3% equity drawdown with 10 losing trades in a row (which is very likely). I can see what you mean about maths being usefull but limited.

Regards Mark

 

[Adamus]

Not sure I get this, but don't have a big enough brain to claim it is wrong!

If the amount you risk is a function of your capital and R:R =/=1 then WL is always going to be different from LW. I think.

OK, I'll do an example in a spreadsheet and show you. It'll have to wait until tomorrow though.

 

[Adamus]

fixed fraction - order of wins / losses not important

Here's the promised spreadsheet.

The input parameters are (1) the biggest probable loss forecast (up to your own judgement) and (2) the fixed fraction of your capital to commit to each trade.

The first column is the dollar profit or loss.

The second column is the return as a multiple of the money put down on the trade.

The third column is the running total of the returns.

Mix up the order of the results however you like and the end results remains the same.

Notice the best value for the fixed fraction to use - change it and you make less. Make it too high and you'll wipe out. This is Ralph Vince's "optimal f".