Fixed vs. percentage based stop loss

MidKnight · Jan 20, 2007

Thanks guys, I have a slightly better understanding then I had when the night started.

Best regards,
MK

ginux · May 12, 2007

Quote from acrary:

You're right. Positive expectancy was excluded. I was just trying to isolate the money management component. In a method with no postive or negative expectancy, the % of portfolio money management just adds another negative to overcome.

E = (PW *SW) - (PL*SL)
where E = expectancy
PW = probability of win
SW = size of win
PL = probabilty of loss
SL = size of loss

In the coin flipping example, where we had 5 winners and 5 losers with the same size win as a loss, the expectancy should have been:

E = (.5 * 1) - (.5 *1)
E = 0

Because we're using %'s, you get the imbalance in actual total dollars won to lost. Gains are arithmentic while losses are geometric (ex. $100 + 40 = 40% gain, while 140 - 40 = 28% loss)

The fact that it was negative with % money management, demonstrated that the method added drag. I'm sure all experienced traders are aware of the drag, but not some of the newcomers.

There's no method that can give a positive expectancy, so the best you can do with a different method is get one that doesn't contribute to your losses.
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Why did you say gains are arithmentic while losses are geometric? The egs. you show above indicates that the gains/losses are both geometric

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Fixed vs. percentage based stop loss

MidKnight

ginux