Good time of day, the citizens of the speculators! Spring comes to our land, it makes me very happy, although urban areas flooding could have been avoided. Spring mood is very helpful to make the material for the blog, here and now will try to write more useful. I decided not to torment regular readers and publish articles about the continued risks. Let me remind you that the risk management, money management - a sore spot for every novice trader. You are able to understand and grasp the written - stop losing or increase your profits! Go!
Note that this series - translation of an article by Ed Seykota, phenomenal trader with great experience. He explains in detail the complicated things in simple language, it must be said, pretty well! To read from the middle, look at the first part.
Transfer.
Pyramiding and Martingale
In our case, the process of deposition heads or tails is completely random, so the coin will not be able to fall on the priority by different parties, there are lots of loss of one and the same side, despite an equal probability of 50%. We did not use this phenomenon. In other areas, such as in trading stocks, you can use pyramiding and improve at the expense of the results.
Pyramiding - is to increase the volume of the position when it becomes profitable. This technique can be useful to the trader who knows, but the larger the pyramid, the more cautious you need to act as worthless in an instant to lose all the profits. Globally, these losses are not particularly important if you have followed your system, including the risk management system. With the accumulation of experience in the trade, each trader may slightly depart from the system and to trust your inner voice, maybe it would be more effective in some situations.
Martingale Method - a system of rate increase after a losing trade. In the case of another defeat, we still raise the volume and so on. This approach allows you to earn a penny, with enormous risks. It is meaningless, since one only deal sooner or later will destroy your account. (Totally agree with Ed, it is unprofitable way of money management)
Optimization using testing
Let's look at the risk management system, for example, it will be a system of fixed interest, we will be able to test it and to choose the best options. When checking, we can change only one parameter - a fixed percentage of that risk in the transaction.
Note: this example with a coin is intended to demonstrate some elements of risk, and their relationship. Test parameters: the ratio of risk to profit of 2: 1, the probability of an eagle is the probability of tails, and is 50%. In our example, the idealized results, the coin falls one by one the different parties. It is not necessary to consider the results as risk parameters for trading.
Transfer.
Pyramiding and Martingale
In our case, the process of deposition heads or tails is completely random, so the coin will not be able to fall on the priority by different parties, there are lots of loss of one and the same side, despite an equal probability of 50%. We did not use this phenomenon. In other areas, such as in trading stocks, you can use pyramiding and improve at the expense of the results.
Pyramiding - is to increase the volume of the position when it becomes profitable. This technique can be useful to the trader who knows, but the larger the pyramid, the more cautious you need to act as worthless in an instant to lose all the profits. Globally, these losses are not particularly important if you have followed your system, including the risk management system. With the accumulation of experience in the trade, each trader may slightly depart from the system and to trust your inner voice, maybe it would be more effective in some situations.
Martingale Method - a system of rate increase after a losing trade. In the case of another defeat, we still raise the volume and so on. This approach allows you to earn a penny, with enormous risks. It is meaningless, since one only deal sooner or later will destroy your account. (Totally agree with Ed, it is unprofitable way of money management)
Optimization using testing
Let's look at the risk management system, for example, it will be a system of fixed interest, we will be able to test it and to choose the best options. When checking, we can change only one parameter - a fixed percentage of that risk in the transaction.
Note: this example with a coin is intended to demonstrate some elements of risk, and their relationship. Test parameters: the ratio of risk to profit of 2: 1, the probability of an eagle is the probability of tails, and is 50%. In our example, the idealized results, the coin falls one by one the different parties. It is not necessary to consider the results as risk parameters for trading.
Modelling of the risk management system with a fixed percentage of the capital.
If we take 0%, then the capital will remain unchanged. Consider the rate of 5% of the capital, 5% of $ 1,000 is $ 50 on the first toss eagle falls, and we win, earning twice as much set, so the capital is increased by $ 100 and is equal to $ 1100. The next toss we put 5% of the already $ 1100, it is $ 55, lose and lose them, so the result remains $ 1045. Note that the best results are achieved with a 25% risk. Look, the choice of bet size becomes apparent after one cycle of "win-lose", it simplifies the task of finding the optimal parameters.
If we take 0%, then the capital will remain unchanged. Consider the rate of 5% of the capital, 5% of $ 1,000 is $ 50 on the first toss eagle falls, and we win, earning twice as much set, so the capital is increased by $ 100 and is equal to $ 1100. The next toss we put 5% of the already $ 1100, it is $ 55, lose and lose them, so the result remains $ 1045. Note that the best results are achieved with a 25% risk. Look, the choice of bet size becomes apparent after one cycle of "win-lose", it simplifies the task of finding the optimal parameters.
The figure shows the final results of the level of risk in each transaction.
The best capital growth is obtained at a fixed percentage of risk of 25%, reaching $ 1,800. After that, despite the increased rate of fall. This chart reflects two important risk management principles: (1) if you bet too little, you will not be able to earn good money, (2) if you bet too much, you can lose everything. In a system that requires opening multiple transactions should be considered a general risk for all positions, it will be closer to reality.
Optimization - the use of computing
Since our experience is quite simple, you find the best options you can use calculations. We noted above that the optimal parameters become visible after one repetition win-lose, it will simplify our task.
The amount of capital after going 2 flip - winning and losing:
S = (1 + B * P) * (1 - B) * S 0
Where S - the final amount of capital after 2 tosses;
At - risk as a percentage of capital;
P - gain after a victory - 2: 1;
S 0 - initial capital;
(1 + B * P) - capital gains after a successful transaction;
(1 - B) - capital reduction after a losing trade;
Thus, capital gains after two flips can be calculated by the formula:
R = S / S 0
R = (1 + B * P) * (1 - B)
R = 1 - B + B * P - V 2 P (B2 - In this second degree)
R = 1 + B (P-1) - a 2 P
We can draw the dependence of R on B, such as the chart above, and select the most visually. Let's find this point by the following formula:
dR / db = (P-1) - 2bP = 0
b = (P-1) / 2P, and P = 2 for 1
b = (2 - 1) / (2 * 2) = 0.25 (25%)
Consequently, the optimal risk as 25% of the capital.
Optimization with Kelly formula
In the J. Kelly «A New Interpretation of Information Rate», 1956 considered transmission technology over telephone lines. One of the formulas of this work is applicable to trade in order to optimize risk management.
Kelly's formula:
K = W- (1-W) / R
K - the required percentage of capital, the optimal risk in the transaction,
W - the ratio of profitable trades to all,
R - gain (ratio of potential profit to potential loss).
Let us remember our experience with a coin, win / risk of 2: 1, the probability of an eagle 50% (0.5), then
K = 0,5- (1-0,5) / 2 = 0.5-0.25 = 0.25.
According to this formula, the optimal exposure is 25%, as in the previous calculations. Here's a money management.
Note that W and R are the mean values, they may change with time.
The best capital growth is obtained at a fixed percentage of risk of 25%, reaching $ 1,800. After that, despite the increased rate of fall. This chart reflects two important risk management principles: (1) if you bet too little, you will not be able to earn good money, (2) if you bet too much, you can lose everything. In a system that requires opening multiple transactions should be considered a general risk for all positions, it will be closer to reality.
Optimization - the use of computing
Since our experience is quite simple, you find the best options you can use calculations. We noted above that the optimal parameters become visible after one repetition win-lose, it will simplify our task.
The amount of capital after going 2 flip - winning and losing:
S = (1 + B * P) * (1 - B) * S 0
Where S - the final amount of capital after 2 tosses;
At - risk as a percentage of capital;
P - gain after a victory - 2: 1;
S 0 - initial capital;
(1 + B * P) - capital gains after a successful transaction;
(1 - B) - capital reduction after a losing trade;
Thus, capital gains after two flips can be calculated by the formula:
R = S / S 0
R = (1 + B * P) * (1 - B)
R = 1 - B + B * P - V 2 P (B2 - In this second degree)
R = 1 + B (P-1) - a 2 P
We can draw the dependence of R on B, such as the chart above, and select the most visually. Let's find this point by the following formula:
dR / db = (P-1) - 2bP = 0
b = (P-1) / 2P, and P = 2 for 1
b = (2 - 1) / (2 * 2) = 0.25 (25%)
Consequently, the optimal risk as 25% of the capital.
Optimization with Kelly formula
In the J. Kelly «A New Interpretation of Information Rate», 1956 considered transmission technology over telephone lines. One of the formulas of this work is applicable to trade in order to optimize risk management.
Kelly's formula:
K = W- (1-W) / R
K - the required percentage of capital, the optimal risk in the transaction,
W - the ratio of profitable trades to all,
R - gain (ratio of potential profit to potential loss).
Let us remember our experience with a coin, win / risk of 2: 1, the probability of an eagle 50% (0.5), then
K = 0,5- (1-0,5) / 2 = 0.5-0.25 = 0.25.
According to this formula, the optimal exposure is 25%, as in the previous calculations. Here's a money management.
Note that W and R are the mean values, they may change with time.
