how much leverage- who knows confidence intervals?

Discussion in 'Risk Management' started by dumb_mother, Jan 12, 2010.

  1. i was analyzing my track record in trading and trying to figure out what amount of leverage i should be using, so i started to do some statistics on my track record, but i was never so hot with confidence intervals.

    what i'm wondering is if you could help me figure out X- what % of my account i should risk each day if i'd like a 95% chance of not losing 50% of my account over the next 2 years.

    over the past 4 years i would have a track record of an average of +1.61X / month with a sd of 2.63 over the 48 months. each of the 4 years had the following numbers individually 1(.98X/2.10) 2(1.74X/1.99) 3(2.79X/2.24) 4(-.06X/2.77).

    what is the equation for risk of ruin over N periods? all i could find were forever
  2. Then think about it the other way: what X % should you risk so the probability of losing 50% of C in the next N years is <0.05?

    The answer is known and it is 0%.
  3. what instrument? what type of trading?
  4. neither of those petrtain to my question- but i trade yield curve
  5. do you manage basis risk?
  6. i trade value at risk - risk management and if you refer to the first post you'll see the question i'm asking.
  7. Alexis



    Why don't you use your historical drawdown?
  8. well my largest historical drawdown is -7x but i'm not just using that as my bankroll, gotta be a bit safer than that
  9. Logic


    Read up on Optimal F and Secure F. That might give you some leads on how to structure your position sizing.
  10. The meaning of X is a litle bit unclear, because it seems to mean different things in the two places above.
    Does "+1.61X/month" mean +61% profit/month?
    If you can give the average annual portfolio return (ie. profit) and its standard deviation then it should be calculable...
    #10     Jan 13, 2010