Question? Ralph Vince & How much to put on a trade?
Question? Ralph Vince & How much to put on a trade?
I've been searching for an answer in the field of "What is the perfect amount to risk per trade  with all factors being accounted for"
I recently read Ralph Vince "The new money managementâ€
I recently read Ralph Vince "The new money managementâ€

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Your Advice
Thanks for your advice I will look harder, It's kind of funny you recommended Google. I found this forum while I was searching for the answer to the question I just posted.
When I found the forum I did search it for every combination of my question I could think of, and found things that were unrelated.
I think my question is pretty direct, I have been doing a lot of research on the subject, I felt it seemed this forum was a group of professional traders so I thought I may seek their opinion on the subject.
I've been to many seminars as well which gave out decent formulas on the subject but I was looking for something more.
I am currently using {Account balance x Risk Percentage}/largest Loss= contracts or shares to trade this is ok it's the one Larry Williams recommends but hopefully you guys have found something better.
When I found the forum I did search it for every combination of my question I could think of, and found things that were unrelated.
I think my question is pretty direct, I have been doing a lot of research on the subject, I felt it seemed this forum was a group of professional traders so I thought I may seek their opinion on the subject.
I've been to many seminars as well which gave out decent formulas on the subject but I was looking for something more.
I am currently using {Account balance x Risk Percentage}/largest Loss= contracts or shares to trade this is ok it's the one Larry Williams recommends but hopefully you guys have found something better.

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joeb4now
You will find the greatest help for answering this question by studying utility theory. (also very easily referenced by Google)
Utility theory explains why I will trade up to 5% of my equity on my trades, others 8%, and still others here grudgingly will trade .5% on the very same trades. And none of us are necessarily "wrong".
Best wishes.
Leonardo
I think what you are searching for is what everyone would like have too. The problem with the solution is the "all factors being accounted for" tag.I've been searching for an answer in the field of "What is the perfect amount to risk per trade  with all factors being accounted for"
You will find the greatest help for answering this question by studying utility theory. (also very easily referenced by Google)
Utility theory explains why I will trade up to 5% of my equity on my trades, others 8%, and still others here grudgingly will trade .5% on the very same trades. And none of us are necessarily "wrong".
Best wishes.
Leonardo

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JoeB, it is always proper and often insightful to ask "What do YOUR test results show?" (abbreviated WDYTRS). Please tell us, when you try three or four or five different methods of choosing your betsize, what do your test results say? Is one "better" (i.e. you like it more) than all the others? Do they all produce similar outcomes? Or are they different, and you can't decide which you like the most?
How can we help you interpret your own results (abbreviated HCWHYIYOR) ?
If you have no test results, you are only going to get the standard boilerplate reply, Do Some Work On Your Own And Think About Your Test Results (abbreviated DSWOYOATAYTR).
May God Bless You.
How can we help you interpret your own results (abbreviated HCWHYIYOR) ?
If you have no test results, you are only going to get the standard boilerplate reply, Do Some Work On Your Own And Think About Your Test Results (abbreviated DSWOYOATAYTR).
May God Bless You.
From a book reveiew:
Be careful out there (esp if u get close to optimal or believe ryan).
John
And here is a formula B(n) = (1+f)^W*(1f)^L*B(0) which comes from a much more detailed discussion at http://www.bjmath.com/bjmath/Betsize/mlmax1.htmtrade (not drawdown) experienced in backtesting. If you use optimal f and the largest loss in actual trading is greater than the loss experienced in backtesting, you will go bankrupt. Vince deals with this problem in an offhanded manner by suggesting that the actual f you use should be "padded". OK, so in the end you don't even use the actual optimal f, you pad it. And how much do I pad it by? Vince is silent on this question. So the purpose of optimal f  to decide by formula how much capital to allocate to a trade  is totally negated by the fact that you must "pad" optimal f. And you must pad it by a qualitativly determined amount because, again, Vince gives no formula on how much to pad it by. Optimal f is totally useless for system traders or any other trader for that matter.
Be careful out there (esp if u get close to optimal or believe ryan).
John
Optimalf
Joe,
Ralph provides BASIC code for finding Optimalf in Appendix B, page 189. He describes two methods for find Optimalf starting on page 84.
Optimalf isn't succinctly described in a short formula. To quote one web source "Optimalf is found in a round about way". The optimization involves walking a curve to find a top or maximum point, just before sliding down the other side of the curve. In terms of application, optimalf is still fixed fractional bet size (BTW: If you look closely at Larry William's formula, it is also simply fixed fractional bet size).
There is a serious consideration to ask yourself: what do I mean by optimal? In Ralph's case, he spells it out clearly: he chooses optimal to mean the fixed fraction value that yeilds the highest geometric mean growth. In that regard he is 100%, spoton correct.
In my opinion, "optimal" involves other aspects, such as drawdown and stability. So I might use something like Monte Carlo analysis with a constraint question of "what value of f would result in a confidence level where the probability of reaching a 50% draw down is less than X%". Selecting, say 95% confidence, I could derive the value of f and start testing with it over multiple timeframes, markets, etc. So, even MC analysis only provides a starting point. In the end, I've got to feel comfortable with the allocation risk.
Stan asks some good questions. It come down to doing your own homework. In my experience, there isn't a blanket answer for all sizing situations. The answer varies by system, techniques within the system, and certainly by the person. Cool thing about being human, I guess.
Kiwi, I don't know where you got the quote, but I'd offer that Optimalf actually does have value to the trader. For one, no trader should ever be above the optimalf line ... many times the Kelly formula will be (hint: maybe you don't want to use Kelly). Secondly, Optimalf provides great insight into system performance potential and can even be used as a ranking metric between systems (along with MAR et al).
Cheers,
Kevin
Ralph provides BASIC code for finding Optimalf in Appendix B, page 189. He describes two methods for find Optimalf starting on page 84.
Optimalf isn't succinctly described in a short formula. To quote one web source "Optimalf is found in a round about way". The optimization involves walking a curve to find a top or maximum point, just before sliding down the other side of the curve. In terms of application, optimalf is still fixed fractional bet size (BTW: If you look closely at Larry William's formula, it is also simply fixed fractional bet size).
There is a serious consideration to ask yourself: what do I mean by optimal? In Ralph's case, he spells it out clearly: he chooses optimal to mean the fixed fraction value that yeilds the highest geometric mean growth. In that regard he is 100%, spoton correct.
In my opinion, "optimal" involves other aspects, such as drawdown and stability. So I might use something like Monte Carlo analysis with a constraint question of "what value of f would result in a confidence level where the probability of reaching a 50% draw down is less than X%". Selecting, say 95% confidence, I could derive the value of f and start testing with it over multiple timeframes, markets, etc. So, even MC analysis only provides a starting point. In the end, I've got to feel comfortable with the allocation risk.
Stan asks some good questions. It come down to doing your own homework. In my experience, there isn't a blanket answer for all sizing situations. The answer varies by system, techniques within the system, and certainly by the person. Cool thing about being human, I guess.
Kiwi, I don't know where you got the quote, but I'd offer that Optimalf actually does have value to the trader. For one, no trader should ever be above the optimalf line ... many times the Kelly formula will be (hint: maybe you don't want to use Kelly). Secondly, Optimalf provides great insight into system performance potential and can even be used as a ranking metric between systems (along with MAR et al).
Cheers,
Kevin
I liked the quote Kevin especially the logic that leads one to conclude that if u have to pad it then it is totally useless. My first hit searching on Google .
I felt it was rather nicely balanced by finally providing a formula for the long and patiently waiting joeb4now and, rather more useful, a link to a page that discusses the application of the formula (first hit with slightly differnet phrasing).
All proves Eck's point really.
I also like Leonardo's post and your points about taming optimality with montecarlo. My own additional warning would go along the lines of "the past is an imperfect predictor of the future."
John
I felt it was rather nicely balanced by finally providing a formula for the long and patiently waiting joeb4now and, rather more useful, a link to a page that discusses the application of the formula (first hit with slightly differnet phrasing).
All proves Eck's point really.
I also like Leonardo's post and your points about taming optimality with montecarlo. My own additional warning would go along the lines of "the past is an imperfect predictor of the future."
John

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leonardo wrote: joeb4now
I think what you are searching for is what everyone would like have too. The problem with the solution is the "all factors being accounted for" tag.I've been searching for an answer in the field of "What is the perfect amount to risk per trade  with all factors being accounted for"
You will find the greatest help for answering this question by studying utility theory. (also very easily referenced by Google)
Utility theory explains why I will trade up to 5% of my equity on my trades, others 8%, and still others here grudgingly will trade .5% on the very same trades. And none of us are necessarily "wrong".
Best wishes.
Leonardo
For me Thorp explains optimal f the best in his paper, "Portfolio Choice and the Kelly Criterion."
The main problem is with three types of stats, descriptive, predictive and prescriptive.
Descriptive: Data on an observed behavior is fitted mathematically. Many different utility functions might be needed, corresponding to widely varying circumstances, cultures or behavior types.
Predictive: "Explains" observed data: fits for observed data are deduced from hypotheses, with the hope of future data will also be found to fit. Many different utility functions are needed, corresponding to the many different sets of hypotheses that may be put forward.
Prescriptive: A "guide" to behavior  a recipe for optimally achieving a stated goal. Most traders use optimal f as a prescriptive stat  a prescription for allocating resources so as to maximize the rate of growth of assets.
So to finding optimal f may require you to become a doctor. One who writes prescriptions.
Lawrence

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There's also been much written on this same topic in:
viewtopic.php?t=177
Since that topic is specifically entitled "Optimal f" let's continue discussions of Optimal f there.
 Forum Mgmnt
P.S. I'm really not a fan of using optimal f. I think it is useful to know there is a relationship between bet size and profits and that there is a maximum but any numbers coming out of the formula are decidedly useless. See the above topic for my primary reason.
viewtopic.php?t=177
Since that topic is specifically entitled "Optimal f" let's continue discussions of Optimal f there.
 Forum Mgmnt
P.S. I'm really not a fan of using optimal f. I think it is useful to know there is a relationship between bet size and profits and that there is a maximum but any numbers coming out of the formula are decidedly useless. See the above topic for my primary reason.