Can money management alone create any edge?

Discussion in 'Risk Management' started by Ricter, Mar 8, 2005.

  1. Ricter

    Ricter

    I'm puzzling over the difference between win-rate and expectancy...
     
    #21     Mar 8, 2005
  2. Without an edge, the market can't be a source of appreciation.
     
    #22     Mar 8, 2005
  3. Anseld

    Anseld

    if you had a system that had 90% winners, then 90% is the win rate.

    expectancy is the expected value from each trade.

    so if each winner gave you a buck, and each loser took two away from you, your expected value is:

    ( (90 * 1) + (10 * - 2) )/100= 70cents
     
    #23     Mar 8, 2005
  4. fan27

    fan27

    The way I look at it, Money Management is used to Maximize an edge and make sure you don't blow up, however it is not an edge by itself.

    fan27
     
    #24     Mar 8, 2005
  5. I you have a positive expectancy over the course of all trades it matters not whether 70%/winners 30%/losers or vice versa with 30%/winners 70%/losers. or any other combination.

    If the end result is a positive expectancy then money management(AKA position sizing) can help the account grow astronomically.

    If the end result is not a positive expectancy then money management/position sizing will not save it.

    So step one is make sure your trading has a positive outcome overall through the life of your trading activity. whether you trade a system or discretionary.

    Only then can you move to step two, which is to size your positions based on the value of your account using some method that you are comfortable with, suchs as fixed fraction, fixed ratio or rules that you come up with. should be anit-martingale.
     
    #25     Mar 8, 2005
  6. Anseld

    Anseld

    i think it matters psychologically.

    probably depends on your character and your level of forbearance.

    if you had a string of losers and you're waiting for that "home-run" to overcompensate, you might not sleep as well, right?

    i don't know. i don't touch anything that's below 75%.
     
    #26     Mar 8, 2005
  7. The thing is a trading system will always die one day, and it's easier to see it doesn't work anymore with a 65% winning rate than it is with a 25%. With such a low winning rate, it can take time before you can say that your system isn't reliable anymore. Ans as you say it, it's a psychological factor.
     
    #27     Mar 8, 2005
  8. Yes, in reality mentally it would be too hard to trade with only 30% winners but technically you can still get positive results regarldess of win rate. The point seems to be that there are a quite a few ways to skin a cat.
     
    #28     Mar 8, 2005
  9. Actually it could, but this is very theoretical. This is called Parondo's paradox, where a mix of losing strategies brings a positive return. But as I said it, it's only a theory in game theory ;-)
     
    #29     Mar 8, 2005
  10. sonnet

    sonnet

    Jesus some of you are quite retarded about this. No money management can't make an edge. Sad how brokerages lie and spread these myths for sheep to follow.
     
    #30     Mar 8, 2005