Greetings, friends! We continue our journey through the country's money management. Let me remind you that this is the translation of the article 3 of the risks Ed Seykota, a professional trader.
Here are links to Part 1 and Part 2, if you have not read the previous ones, then I advise them to start with, because the material is read from the middle is not clear. Its time to begin!
Transfer.
Graph of dependence between the percentage of winning bets, risk / profit and optimal risk percentage.
The optimum percentage of the risk increases with the ratio of profit / risk ratio and the percentage of winning trades.
Transfer.
Graph of dependence between the percentage of winning bets, risk / profit and optimal risk percentage.
The optimum percentage of the risk increases with the ratio of profit / risk ratio and the percentage of winning trades.
This graph shows the percentage of the best indicators of risk for different parameter risk / reward (X) and the percentage of successful transactions (Y). At high settings, the optimal percentage of risk close to the percentage of winning trades. For example, when a ratio of gain / risk 1.5 and 50% of successful transactions optimal risk percentage is approximately 50%. (For those who have not read the previous posts I will explain that these calculations are correct for an ideal process, and is not suitable for real trading. Why? Read the first part.)
The potential profit for optimal percent of risk
.
The potential profit for optimal percent of risk
.
This graph shows the greatest potential gains for different values, with optimal amount of risk. The more parameter profit / risk (X: 1/1 to 5/1) and the higher the probability of a successful transaction (the Y: 0.2 to 0.7), the higher the potential earnings. For example, the highest income at 70% of profitable trades and the ratio of profit / risk ratio 5/1.
The most effective risk under different parameters profit / risk and probability of successful transaction.
The most effective risk
The most effective risk under different parameters profit / risk and probability of successful transaction.
The most effective risk
The graph shows the potential profit to various experimental parameters with a coin (read in the previous section). Schedule is built with a probability of 50% successful rate. The highest profit potential indicates the most effective at a certain percentage of the risk ratio profit / risk. For example, setting the profit / risk ratio = 1.5 / 1, most income will at risk of 15%. A for 1.2 - 25%. 5/1 For optimum risk of 45%. Note: in the second part, we examined in detail in the schedule section for the ratio profit / risk ratio 2/1.
The actual allocation of risk and the value of
All this time, we looked at risk management, suggesting that the coin will fall one by one, and one the other side, that is, profitable trade will be replaced by a loss. In fact, in our experience and inevitable series of unprofitable trades. What happens if a sequence of only profitable trades? Then, at a ratio of profit / risk of more than 2/1, the initial capital is growing rapidly gorgeous!
For example, profit / risk ratio = 3/1. At the optimum risk of about 35%, each tossing increase the initial capital by 1.5 times. Thus, through 10 transactions of $ 1000 to become a $ 1000 * (1.5) 10 (note 1.5 to 10 degrees !!!), that will be about $ 57665.
All these money management strategies are unprofitable for real trading
Considered risk management techniques are not suitable for real trading. For example, the probability of winning trades 50%, the ability to catch series of 10 successful trades in a row is equal to (0.5) at 10 degrees, which is about one chance in a thousand. Nevertheless, the potential profitability of such risk management systems are very attractive, so if a trader is not responsible for the discharge of accounts, they can apply.
Either the trader can split their funds on individual accounts, and use riskier methods of money management. Most deposits will live a long time, but some, at the expense of big profits, and offset losses.
diversification
Diversification is a strategy for distributing funds to various tools to help protect yourself in case of loss of one of them. Diversification helps to feel confident, for example, if you lose in one action, you can make money at the expense of others, it smooths the overall portfolio volatility.
loss point (not sure it translates UNCLE POINT, can anyone knows how?)
If you have a diversified portfolio, some tools will still pull down and reduce the yield. In this case, the results of trade attracted the attention of the manager and the investors. Trading hedge fund (managing trader) is the same emotions as a personal trading.
In particular, the special relationship is the value of the drawdown, it can undermine investor confidence or control. If a major investor would leave hedge fund, this may lead to complete elimination. I believe that when emotions drawdown and its consequences receive little coverage on the Internet.
When starting a new fund, the value of the estimated drawdown remains in the shadows and not advertised. This is unfortunate, since a lack of understanding in this matter could lead to big trouble, unnecessary emotions and withdraw funds when you need them. This is particularly important for the fund to greater volatility, where there are rare drawdown.
Managers are trying to reduce the amount of subsidence, seeking to reduce trade volatility. But trade with low volatility does not often give a good return. However, large drawdowns scare investors and traders, so that the latter prefer the small profits and small drawdowns.
The actual allocation of risk and the value of
All this time, we looked at risk management, suggesting that the coin will fall one by one, and one the other side, that is, profitable trade will be replaced by a loss. In fact, in our experience and inevitable series of unprofitable trades. What happens if a sequence of only profitable trades? Then, at a ratio of profit / risk of more than 2/1, the initial capital is growing rapidly gorgeous!
For example, profit / risk ratio = 3/1. At the optimum risk of about 35%, each tossing increase the initial capital by 1.5 times. Thus, through 10 transactions of $ 1000 to become a $ 1000 * (1.5) 10 (note 1.5 to 10 degrees !!!), that will be about $ 57665.
All these money management strategies are unprofitable for real trading
Considered risk management techniques are not suitable for real trading. For example, the probability of winning trades 50%, the ability to catch series of 10 successful trades in a row is equal to (0.5) at 10 degrees, which is about one chance in a thousand. Nevertheless, the potential profitability of such risk management systems are very attractive, so if a trader is not responsible for the discharge of accounts, they can apply.
Either the trader can split their funds on individual accounts, and use riskier methods of money management. Most deposits will live a long time, but some, at the expense of big profits, and offset losses.
diversification
Diversification is a strategy for distributing funds to various tools to help protect yourself in case of loss of one of them. Diversification helps to feel confident, for example, if you lose in one action, you can make money at the expense of others, it smooths the overall portfolio volatility.
loss point (not sure it translates UNCLE POINT, can anyone knows how?)
If you have a diversified portfolio, some tools will still pull down and reduce the yield. In this case, the results of trade attracted the attention of the manager and the investors. Trading hedge fund (managing trader) is the same emotions as a personal trading.
In particular, the special relationship is the value of the drawdown, it can undermine investor confidence or control. If a major investor would leave hedge fund, this may lead to complete elimination. I believe that when emotions drawdown and its consequences receive little coverage on the Internet.
When starting a new fund, the value of the estimated drawdown remains in the shadows and not advertised. This is unfortunate, since a lack of understanding in this matter could lead to big trouble, unnecessary emotions and withdraw funds when you need them. This is particularly important for the fund to greater volatility, where there are rare drawdown.
Managers are trying to reduce the amount of subsidence, seeking to reduce trade volatility. But trade with low volatility does not often give a good return. However, large drawdowns scare investors and traders, so that the latter prefer the small profits and small drawdowns.
