An average is calculated on a SAMPLE from a PROBABILITY UNIVERSE. You are not even sure that such probability Universe exists in the particular case of your trading - especially if you switch from methods to methods or have no method at all - let's suppose that it exists, the sampling must then be iid (independent and identically distributed) - if your system takes trade that depends on a previous trade sure the sampling is not iid and generally a trade that is taken relatively close to one another in time frame has some chance of violating this hypothesis - let's suppose that the sampling is iid, the average of a sampling can of course fluctuate, so yes you have to cope with standard deviation. And this standard deviation can also fluctuate itself and if it doesn't fluctuate "randomly" (barbarian term is heteroscedascicity I don't even know the exact spelling without the dictionary I'm too lazy to check ) this will be a problem also and it is necessary to take standard deviation into account in Money Management since standard deviation has the same impact as the mean in the geometric growth formula that is to optimise to find the so called optimal f-value representing the theorical optimal fraction of capital per bet.
Yes, I see.....the system must represent a consistant sample and form a sort of character as it reacts to the market....which also changes character.......but the important thing is to not change systems and use the previous systems sample. Also it is troubling to discover deviating standard deviations...how does one cope with this.....Observing why a spike in deviation takes place might be a start. Please excuse my primitive attemp to converse on this subject and thank you for your time...your comments are appreciated.. Michael B.
Huh I made only two phrases: I think I forgot to make some punctuations it is that I type them straight away without breathing
BTW I used the expression "CONSISTENT STATISTICALLY SPEAKING" but according to CFTC (see exerpt below) it is very doubtfull than any system based on TA or in fact any public information (so that even if you pretend to use your intuition and not TA per se doesn't change anything you would be even Superman in that case) can have such property (e.g. STATISTICAL CONSISTENCY) that is to say it is as if they pretend implicitely that it is equivalent to so-called HOLY GRAIL (that it is mechanical or discretionary doesn't change anything ) that's why it should be difficult to achieve such consistency in regard to efficiency theory . Now I SAY THAT THEIR DEFINITION OF EFFICIENCY IS VERY CONSTESTABLE but that's another story (see my homepage if you want although I don't want to extend deep about that as it would need one hundred pages at least ). Remember the thread : "Unbelievable but true: CFTC declares Technical Analysis as FRAUD !!! " http://www.elitetrader.com/vb/showthread.php?s=&threadid=18551&highlight=CFTC http://www.supertraderalmanac.com/censorship/technical_analysis_deemed_fraud_.htm CFTC v. R&W TECHICAL SERVICES, INC. "[R]espected scholars are virtually unified in their recognition that even the most legitimate technical systems (with their hypothetical and retroactive foundations) are incapable of providing the trader with any significant market advantage." (note 75, p 41) "The efficient market capital model emphatically contests the notion that financial markets are so inefficient that speculators can exploit these markets' inability to adjust to all types of information. Although the limits of the efficient capital market model, and its implications for regulatory policy, are a dependable source for endless debate, few dispute the model's general predictive powers. In fact many important regulatory policies are predicated on the model's accuracy. See, e.g., Basic, Inc. v. Levinson, 485 U.S. 224 (1988) ("fraud on the market" action for a violation of Securities Exchange Commission Rule 10b-5); In re LTV Securities Litigation, 88 F.R.D. 134 (N.D. Texas 1980)." (note 74, p 41) "Virtually the entire economic community is in agreement, however, that the efficiency of the market is sufficiently strong so that all publicly available information is rapidly disseminated and is then almost instantaneously reflected in the price for any widely traded investment contract. As a consequence, investor analysis of specific investment contracts will not lead to superior gains, since it will require an analyst to predict value better than the market as a whole. Thus, while some traders will profit while others will lose, the outcome of speculative investment is unlikely to significantly outperform chance. See Dennis, Materiality And The Efficient Capital Market Model: A Recipe For The Total Mix, 25 Wm. & Mary L. Rev. 373 (1984); Posner, Economic Analysis of Law, Ch. 15 (4th ed. 1992); Comment, The Efficient Capital Market Hypothesis, Economic Theory and the Regulation of the Securities Industry, 29 Stan. L. Rev. 1031 "Technical analysts . . . first make a deterministic (one might say spiritual) leap of faith that non-random price patterns exist. They then illogically posit that these patterns, once revealed to the few (or indeed -- through marketing -- to the many), may be successfully exploited in trading. To accomplish this, of course, the 'pattern' must remain undetected by others (otherwise the increased market activity defeats the 'pattern' by driving the price to a point where speculation is no longer profitable). See Marshall (1989) at 263-264. Public policy presumes that markets are not so witless. 'The presumption is [] supported by common sense and probability [as] recent empirical studies have tended to confirm Congress' premise that the market price of shares traded on well-developed markets reflects all publicly available information . . . ' Basic, 485 U.S. at 246." (note 75, page 41)" "[A]ny marketer's claim of increased profitability or reduced risk through the use of these systems is likely to be fraudulent". (note 75, page 41)
Hee hee I like when they say: "[R]espected scholars are virtually unified in their recognition that even the most legitimate technical systems (with their hypothetical and retroactive foundations) are incapable of providing the trader with any significant market advantage." (note 75, p 41) It rather means : "anybody that contest our hypothesis is not a [R]espected scholar"
Is this a singular event? or one of many consecutive trades with same 65% probability and 5:1 R/R? and how many? to properly apply position sizing, n is required, along with total max pain numbers. It's similar to a spinning wheel with 65% painted red 35% black. Red pays 5 to 1, black pays 0 to 1. On an extreme case, If you are willing to risk all your capital (both initial and accumulated if any)) and want to shoot for maximum gains: n=1 risk 100% n=2 risk 50% of capital per spin. If you win the first time, second spin risk 100% etc... This maybe of interest: Download and play levels 1-3 of Dr. Tharp's "Secrets of the Master's" trading simulation game, version 3.0 http://www.iitm.com/regform.htm Changing sizing parameters, for a fixed number of trades, % positives, R/R and risk of ruin, sure provides some interesting results. Cheers
Just entering this data into a Kelly Ratio Criterion calculator you come up with 58% bet size. Information about Kelly and the calculator is here... http://home.golden.net/~pjponzo/kelly-ratio.htm With past trade history information available I would be more comfortable using something like ProSizer http://unicorn.us.com/trading/prosizer.html that would yield much more information about potential sizing, give a positive expectancy, amount of risk taken, take volatility into account, etc.
It's something that I see come up occasionally, maybe 3 or 4 times a year, and the trades generally take 6-12 months to play out. If it came up very frequently then obviously I would be retired within a few months So far I have risked about 1-2% and have had satisfactory results, and was thinking of getting more aggressive. However, with such a long time between trades, if you bet something like 10% then 2 losers in a row (a 10-15% chance) means you have a pretty nasty drawdown which you can't quickly trade your way out of. You might have to wait 3-6 months for the next trade, and wait another 6-12 months for that to make its full return. Psychologically that could be problematic - the temptation to overtrade or take profits early when back to breakeven would be very high. I don't mind sitting on a 5-10% drawdown for half a year, but 20% would be pushing it a bit. Onewaypockets - thanks for the links.
Given everything you have said about the frequency of these trades and your comfort level, I would agree that 3%, and not much higher, is an appropriate amount to risk.