I want to get my mathematical skills running again. In F = ((1+1)*(1/2)-1)/1 = 0 is the * a multiplication sign?
There's a good article Ed Seykota - Risk Management that touches on some of the things you mentioned. He writes about risk, pyramiding, martingale, Kelly formula, diversification, uncle point, measuring portfolio volatility, Sharpe, VaR, Lake Ratio, stress testing, position sizing, ...
Q Variable Fractional Percent (VFP) http://users.bigpond.com/morleym/Thoughts.htm#Trade Size Trade Size This comment only scratches the surfaces of what is one of the most important topics of all, but it does establish the basic criteria in the right sequence. ....................................................................... I don't think you can set trade size and then decide on your s/l. It should be the other way around. First you decide the maximum % of your account you are prepared to lose if the trade fails in a worst case scenario. Then you decide how wide your stop needs to be to accommodate things like normal market movements and the nature of your strategy, etc. Finally with these two bits of information you can work out your trade size by simple maths. Full discussion: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=15;t=001398;p=1#000004 Now if you want to know how I set my trade size... this is a description of the method I use, which I normally refer to as Variable Fractional Percent (VFP) If you want another money management idea that is very responsive to performance, yet doesn't make you make too hard decisions up front try this: Firstly you need to know your daily Net Asset Value (NAV) gain or loss in percent. Start trading at a conservative 5% FFP (or whatever suits you). But instead of using a Fixed Fractional percent, you use a range say 2%-25%. Move up and down the scale by adding or subtracting half of your last daily NAV percentage. For example start at 5% FFP Next day profit on trades = 1.5% Therefore your next FFP = 5 + (1.5 * 0.5 ) = 5.75% Say you then lose 3% Next FFP = 5.75 + (-3 * 0.5) = 4.25% Obviously use ranges and a daily factor (here 50%) that suits you, but you'll find this method really rewards good methods, and lightens up very quickly on bad. I use it myself, and find it very sound. ~chaffcombe Full discussion: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=002042;p=3 There was also a very good discussion on trade sizing methods (FFP, VFP and Fixed Ratio) here: http://www2.oanda.com/cgi-bin/msgboard/ultimatebb.cgi?ubb=get_topic;f=16;t=004708;p=1 UQ
I think that chaffcombe's Variable Fractional Percent (VFP) introduces an additional risk factor, or at least a blurring factor. He also writes in one of his posts that he's so content with it that he's using now 100% of his gain/loss to adjust his risk percentage. Why do I think so: when you make 5% then lose 5% you end up with less than the starting amount, because 5% of $100 is +$5 (gain), then 5% of $105 is -$5.25 (loss); result = $99.75. Also, it affects the trader / trading system expectancy, as well as his (average win / average loss) ratio. It blurs trader's results, making it more difficult to know how well he performs, and when his results degrade and an adjustment is needed. OddTrader what's your opinion?
Investment Performance Attribution (Hardcover) by David Spaulding http://www.amazon.com/gp/product/0071408851/102-1237962-6951363?v=glance&n=283155&s=books&v=glance Practical Portfolio Performance Measurement and Attribution (The Wiley Finance Series) (Hardcover) by Carl Bacon http://www.amazon.com/gp/product/0470856793/102-1237962-6951363?v=glance&n=283155&s=books&v=glance Fixed Income Attribution (The Wiley Finance Series) (Hardcover) by Andrew Colin http://www.amazon.com/gp/product/0470011750/102-1237962-6951363?v=glance&n=283155&s=books&v=glance
How To Set Portfolio Risk % -- The Easy Method Using the drawdown results provided in Table 5, there is a simple way to estimate how much portfolio risk you should take. You stated that you would like to experience no worse than 30% drawdowns on average in your account. From simulation of your system, we know that we also have a 10% chance of getting a 10.3R drawdown over a 2-year period. Our risk percent can then be calculated as: RISK = 30%/10.3 = 2.91% For your account of $150,000, this implies a risk per trade of $4,369. As Table 5 shows, the chance of getting 10.3R is 10%, which may be too high for you. If so, you can choose a lower probability number. This is an excerpt from the "Comprehensive Trading & Risk Analysis Report" prepared by IITM for a trader. It provides a comprehensive analysis of this trader's results, and provides a suggestions for improving his performance.