Chances of Negative 100%?

Discussion in 'Risk Management' started by EliteTraderNYC, Jan 11, 2012.

  1. If you have two automated systems, both with max drawdown of 50%, and you have a perfect 0 correlation, if you double up and trade them with a 2:1 leverage what are the chances of you blowing out your account statistically?
     
  2. 25%
     
  3. what's the probability of seeing the 50% drawdown for each strategy?
     
  4. 100%.
     
  5. By gamblers ruin.
     
  6. Lets say there is a 10% chance of a 50% drawdown in each system. 50% is also the max drawdown.
     
  7. ============

    Its not the leveraged ] derivatives or stocks that are a real killer, it's much more the leverage/insane leverage]

    One of he highest probabilitys of fatal flaws in your system ;
    even if it has been a'' perfect o correlation'','' is its not likely to be perfect o correlation, in the future''Frankly you scenerio sounds too risky long term, short medium term it maybe thrilling, profitable.

    This last bit of wisdom may not mean much to you no.;
    But even if you saw someone make +/ 1 $ million , on a swing/position trade or a marker day trade, but most traders/management noted it was with insane leverage.

    I wouldnt care how often he did that............But Some may appear to to be abusing leverage, but thier total amount risked is such a small %, it works well , even over long periods.:cool:
     

  8. They can blow at once, 50% + 50% with low probability of 1% (0.1 x 0.1) or the first may blow and after a while the second will blow in which case the probability is 100% if you trade long enough.

    Let p be the probability that system A does not blow and then B does not blow, with p < 1. Then as n goes to infinity the probability that the systems do not blow p^n goes to 0 and they blow with probability 1.