Newbie expectancy question

Discussion in 'Risk Management' started by nravo, Dec 15, 2007.

  1. nravo

    nravo

    Been reading Thorp, Turtles, et-cetera, and I have a question about positioning-sizing formulas and the use of expectancy. How do you determine the win-loss percentage of your system or a particular trade? Back-testing? Guessing? If back-testing, how far back? Best software to backtest, say stocks hitting 20-day highs and lows?
     
  2. Many systems have a win/loss percentage of less than 50% but are profitable due to letting the profits run and cutting the losers, which I am sure you have already heard. I recently had a similiar question and was directed to:

    http://www.adaptrade.com/product.htm

    they have a 30 day trial and it is an excellent site.
    If you plan on developing a trend trading system you will most likely get signals in whipsaws and have significant drawdown. I have heard these systems have not done as well lately (I can't tell you for sure, I am not a trend follower)
    for more info on position sizing look into this site as well:

    http://www.surinotes.com/index.cfm?CSEL=2200

    I do not know what you trade so I cannot be of more help.
     
  3. ronblack

    ronblack

    Read the article "Relation of Expected Gain to Kelly Formula" by Michael Harris:

    http://www.tradingpatterns.com/About_Us/articles/articles.html

    I recommend a fixed risk percent method. Expectancy is very hard to determine accurately. I use a fixed 2% risk per trade to determine position size and it does the job.

    Ron
     
  4. nravo

    nravo

    Thanks. Interesting. And here is my really really naive questions (apologies): Backtesting is a requirement for determining the % of winning trades to losing, et-cetera, right? So, for discretionary trading developing expectancy isn't really possible is it?
     
  5. ronblack

    ronblack

    Not right. What is more important is the calculation of the actual values after you employ your method in actual trading, whether it is mechanical or discretionary.

    Ron
     
  6. Leth

    Leth

  7. nravo

    nravo

    Couldn't get that link to work.
     
  8. Leth

    Leth

    works now..
     
  9. nravo

    nravo

    Got it; thanks. I've seem the formula elsewhere, and without the digressions. I am wondering now about back-testing for non-pattern strategies. For instance, how could one back test every stock split on NYSE, day of announcement and average gain until ex-date and EOD on ex-date. Any cheap software do that? Wealth Lab? Or is most retail back testing software made only for technical analysis and doesn't do other types of strategies?
     
  10. dozu888

    dozu888

    thorp = garbage
    turtles = almost garbage.

    find something else to read
     
    #10     Dec 23, 2007