Beating the Market with Money managment

Discussion in 'Strategy Development' started by 220volt, Nov 30, 2006.

  1. 220volt

    220volt

    Beating the market with Money management techniques.
    I don't think enough emphasis is dedicated to Money Management techniques and it is easily overlooked what you can do with it to enhance your returns and minimize your risk.

    I wanted to see what some of the expert think about different trading strategies and money management technique.
    Here is mine (I don’t trade like this but I might in the future)
    Let’s say I have $10,000 (for easy math) to invest and my brokerage fees are $5 per trade (tradeking)
    I would trade only two securities at the time. $5000 each.
    My goal is to make at least 3% on each trade in a less then a month.
    I figure that I can make 3% on each trade within a month or less with no huge risk providing that I find stocks only that are likely to produce 3% move within month and use technical indicators along with fundamentals to time the entry.
    As soon as made 3% I would sell.
    Commission fees would be $10 for each trade which equals to 0.2% on a $5000 trade.
    I would still have 2.8% profit a month or 33.6% a year per security.
    End of the year comes along and I have to pay 25% capital gain tax (holding security less then a year) and I would pay it and still have 29.4% net profit a year.

    Profit per security:
    Initial balance: $5,000
    Capital Gain: $1,964 (33.6%)
    Total taxes paid on capital gain: $491 (25%)
    Total: $6,473
    Profit: $1,473 (29.4%)

    29.4% return. Or $95,223 within 10 year time. Not bad for one time investment.
    Wouldn’t that beat market in pretty much any given time with not lot of risk?
    If you keep adding lets say $1000 a month you would end up with $451,309 over 10 year period after taxes and brokerage fees.

    Note: You can set your goal to 4% or 5% a month but higher percentage, higher the risk.
    We could also trade with only one security to lower commission cost but there will be more risk using only one security and commission fees are not bad anyway.
    My example was just one time $10,000 investment.

    I would love to hear some other money management or trading strategies ideas.

    Thanks in advance
     
  2. kut2k2

    kut2k2

    If you're risking half your trading account on each trade, that's not money management, that's gambling. Even blackjack cardcounting experts wouldn't take that kind of risk (ignoring the additional risk of casino survellance).

    As a simple example, suppose you had a situation where you flip a fair coin and if you get heads, you win double your bet and if you get tails, you lose your bet. Clearly you have an edge: a positive expectation. Does this mean that you should bet the farm? NO!! Just because you have an advantage, that doesn't mean that you risk everything (unless you have the ever-elusive "sure thing"). The proper bet size for the above example is 25% of your betting account.

    ref: Kelly betting; optimal geometric growth betting.

    http://www.seykota.com/tribe/risk/index.htm
     
  3. Another fool and his money will soon be parting ways.
     
  4. uglyboy

    uglyboy

    As a simple example, suppose you had a situation where you flip a fair coin and if you get heads, you win double your bet and if you get tails, you lose your bet. Clearly you have an edge: a positive expectation. [/B][/QUOTE]

    How does this give you positive expectancy? Neutral perhaps?
     
  5. How does this give you positive expectancy? Neutral perhaps? [/B][/QUOTE]


    Please re-read the above to understand what he meant.

    Also, the OP never said he was risking half the account on each trade. Not at all.
     
  6. gbos

    gbos

    To apply proper money management, as a first step you need an estimation of your trading probabilities. Without it no one can say if what you are doing makes sense or not.

    Your game plan is ‘Sell when the stock rise 3%, with a monthly time frame’. How often this will happen within a month? What is the losing scenario and how often will it happen? You need estimations about these first.
     
  7. The crux of applying MM to trading is, like gbos already mentioned, the estimation of your probabilities and the distribution of your returns. As these trading-probabilities are never static/constant it is in my opinion very dangerous to apply and rely on techniques like kelly, optimal-f...
     
  8. This does not correlate to flipping a coin. The risk is the amount of the stop on the $ put forward. If you buy one stock X number of shares) for the whole 10k with a stop at 1%, you are risking $100, not the 10k. Depending on the stock/overnight hold/bad news etc...if the stop is in place and their is little likliehood of a gap past it, the risk is managed. Can't do that with a coin toss. Successive losses with that kind of management is drawdown.
     
  9. Another "genius" who knows just enough high school math...
    To blow his brains out... and waste everyone's time.

    No "money management" technique can "make money"...
    Rather it can ONLY optimize an underlyng profitable strategy.
     
  10. ?
     
    #10     Dec 2, 2006