Gambler's ruin

Discussion in 'Trading' started by cheeks, Jan 14, 2003.

  1. cheeks


    Here is a fun site to play around with.

    Go to the bottom of the page and you will find a calculator that you can create all kinds of different probability/equity curve scenarios with.

    *Note: Use a very large size for the house account. The market has alot more money than any of us.

    Also, after you have entered a scenario, continually hit play for about 10 times. It is amazing how different the equity curve can look sometimes!
  2. Thanx for the link to that site. :)

    One issue is that the situation for traders is even more perilous than this simulation would lead one to believe. The simulation assumes that the trials are independent, something that no trader should ever assume. If there is positive correlation between trading outcomes, then wins tend to follow wins and losses tend to follow losses. In such cases, equity curves will be even uglier -- with a much higher chance of debilitating drawdowns (and greater chances for euphoric hot streaks). Positive correlation will occur if the trader or system goes through cycles of being in or out of sync with the market.

    IMHO, the gambling metaphor of trading is really really bad -- it is but a crude start to understanding the dynamics of the market. As bad as gambling is, the behavior of the market is far more vicious than any coin-toss or roulette wheel ever will be.

    Trade carefully,
  3. cheeks


    Oh, I agree. It is not a perfect model for a number of reasons. I posted it with the intention of helping newer traders understand the risks associated with smaller accounts and poor money management. Quite a few do not realize the drawdowns that are likely to occur when more than 1-2% of the account is risked per trade.
  4. ron2368