Traders' Roundtable

In both examples the first statement is correct but the second is wrong.

The number of trades needed for this to occur can’t be calculated like that. I will give you an example with 2 losses in a row from a fair coin flip.

The sequence may look like this

Loss-loss we will need two coin ...

Without reinventing the wheel I will post the solution illustrated in Ed Thorps paper that can be found everywhere on the web.

Only one system available

We take a simple system: p (probability of winning) 60% , q (probability of losing) 40%

R-multiple probability
-1 40%
1 60%

f (Kelly) = [(-1 ...

Example for two systems:

System_1 : f = 0.18
System_2 : f = 0.2

1 st case: The two systems are independent

When system_1 gives a signal allocate 0.16 of your capital to it
When system_2 gives a signal allocate 0.18 of your capital to it


Gbos, thanks for your reply. Lets stick with this ...

I am afraid that the answer to that is very complicated. Also it is one of the most misunderstood concepts of money management. The solution of simply dividing your capital in proportions and trading each system independently is highly sub-optimal. For a ‘correct’ treatment, you have to know the ...

Hi vegasoul

This is not difficult. An easy way that you can simulate this kind of relationship between trades is with the aid of Markov chains. See any introductory text on probability for reference. As for a<0.5 I can’t understand the question. If you are referring to the add-in 'a' coefficient ...

Kiwi very nice program. Here is my own home made add-in (MonteCarlo.xla) (money management orientated) with instructions (Read_Me.pdf). Works fine on my Excel 2002 (English Version) but I haven’t tested in other excel versions so if it doesn’t work please don’t throw me rocks.

Hi Hiramhon

That’s true but the calculation of expectation and variance remains straightforward.

Expectation = p1 * w1 + p2*w2 + p3*w3 + …..
Variance = p1*w1^2 + p2*w2^2 + p3*w3^2 + ….. – Expectation^2

The approximation f = mean/variance remains valid for small f not matter how many ...

An excellent paper about betting size and “optimal fâ€

A few explanations about the spreadsheet:

Yes, the payoffs that we know (by statistics) our system generates are entered in column C.
When we click on Monte Carlo button, vba code does the following:
It creates a trial of say 30 consecutive trades. Each trade of these is pooled randomly from the ...

8) If one knows the characteristics (profit/loss frequency and magnitude) of the trades generated from his system, then an easy way to examine the alternative paths that chance alone could realize is Monte Carlo simulation. Suppose that you know your system generates equal probable (this assumption ...