Proportional betting and diversification

Discussion in 'Trading' started by tom_p, Jul 15, 2001.

  1. tom_p

    tom_p

    2 quotes from another thread (You won't get rich daytrading...my story) :
    Wet :
    "Third, I never put all of my capital in one stock. At the most, sometimes I'll have 1/3 of my capital in one stock. But I'm never comfortable with doing that, and so I don't usually do it (I'm comfortable with 1/6, or 1/5).
    So if you don't use margin, keep a sound position sizing percentage (0.50% say), and spread around your capital, you are utilizing sound money management."

    Sniper_Trader1 :
    "So, the true risk in a trade is not 1/2%, it is always the amount of money you have on the line. When the EMLX hoax took place, stops that were placed at 99+ were executed at 45-50.
    It isn't until you get caught in one of these disasters that you understand the true risk."

    Wong in his 1981 paper "What Proportional Betting Does to Your Win Rate" says :

    "Suppose: 1) you have an advantage in a sequence of games, 2) you bet an optimal proportion of your bankroll on each individual game, and 3) you win approximately the expected proportion of the games. When you compare your net win to your total action (total bets) you will discover that you have won at about half the expected arithmetic rate"

    Wong is not dismissing proportional betting, but rather says "You can think of this as being the premium you have to pay for the insurance against going broke that you get with proportional betting."

    On a similar theme, let's assume I wish to "bet" (daytrade, ...) $20,000. The added expectation of diversifying in n stocks would in *my* case be more than offset by the degradation of simultaneously monitoring more than one position.