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Risk of Ruin
Started: by Big Mike Views / Replies:31,640 / 124
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Risk of Ruin

  #101 (permalink)
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leinster View Post
So does anyone actually use kelly ?

I'd like to also make sure you've seen the webinar:
Webinar: Ernest Chan - Capital Allocation and Risk Management

And the thread:
https://futures.io/psychology-money-management/23249-webinar-ernest-chan-capital-allocation-risk-management-kelly.html

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  #102 (permalink)
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Hi Mike,

Yes i have seen the webinar and it really peaked my interest in this whole concept.

Hence the reason i ask if anyone is using either optimal f / kelly ?

I am tempted to look at optimal f / kelly on an options spread strategy (where i can exactly limit risk).

I see the researcher in the ppt link i sent on claimed the illustrious Mr Buffett was using fully kelly and Soros .8 if thats true then it certainly is interesting!

Also this betting / money management strategy certainly explains a lot of the ways people get to 1000% in these trading competitions etc.


Last edited by leinster; January 30th, 2013 at 03:06 AM.
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  #103 (permalink)
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size risk excell



Fat Tails View Post
Now let us play a little with the Excel application and compare three different trading systems that have exactly the same expectancy per trade!

System 1:

- Average Win : 30 points
- Average Loss : 10 points
- Winning Percentage: 40%

Expectancy per contract traded is E = 0.4 * 30 points * $ 5 - 0.6 * 10 points * $ 5 = $ 30

System 2:

- Average Win: 12 points
- Average Loss = 12 points
- Winning Percentage: 75 %

Expectancy per contract traded is E = 0.75 * 12 points * $ 5 - 0.25 * 12 points * $ 5 = $ 30

System 3:

- Average Win: 20 points
- Average Loss = 20 points
- Winning Percentage: 65 %

Expectancy per contract traded is E = 0.65 * 20 points * $ 5 - 0.35 * 20 points * $ 5 = $ 30

All expectancies are before slippage and commission. Slippage and commission is identical for all three systems and would be $ 9 per roundturn based on 1 point slippage and 0.8 points commission. This leads to a net expectancy of $ 21 per trade. The important point here is that the net expectancy for all three systems is the same. System 1 is typical for a breakout system or a trend follower, system 2 is not unusual for a scalping system. System 3 could be a system that uses retracement entries.


All three systems are traded with a Kelly factor of 0.25

This fixes our risk of ruin at 078%. Note that the risk of ruin does not directly depend on the R-Multiple or the win/loss ratio, as the Kellycrieterion already adjusts for it. The three systems now

- have the same expectancy per contract traded
- have the same risk of ruin via the 0.1 Kelly approach

The best system is that one, which allows us to trade size for the same risk appetite. Now we just need to put the figures into that Excel table, and here are the results:


System 1: The optimal position size would be 3.72% of the initial balance, the system would start trading 32 contracts and the target would be reached after 104 trades.

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System 2: The optimal position size would be 10.29% of the initial balance, the system would start trading 75 contracts and the target would be reached after 45 trades.

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System 3: The optimal position size would be 5.77% of the initial balance, the system would start trading 26 contracts and the target would be reached after 128 trades.

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Conclusions

We have compared three different trading systems with the same expectancy per contract traded, that is $ 30 before commission and slippage, and $ 21 after commission and slippage.

We have then adjusted position size to our predefined risk appetite in order to maintain a level of 0.78% for the risk of ruin. The results are interesting.

System 1 allows us to trade 32 contracts, system 2 allows us to trade 75 contracts and system 3 allows us to trade 26 contracts for the same risk. Clearly system 2 is my favourite, as it allows to trade larger position size and I may reach the target account after only 45 trades.

Have written all this to show that my assumption as per last sentence of post #69 was correct, and because @Hotch has encouraged me to do so.

is this excell available?
thanks
alejo

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  #104 (permalink)
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alejo View Post
is this excell available?
thanks
alejo

Posted in the thread. Use the attachments link on top right of thread to find it if you don't want to read the posts.

Mike

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  #105 (permalink)
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Futures Edge on FIO

What value do you place on the webinars on FIO?

 

alejo View Post
is this excell available?
thanks
alejo

https://futures.io/psychology-money-management/15602-risk-ruin-7.html#post207948

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  #106 (permalink)
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question to get the rigth data to calculate risk



fat tails
i try to use your excell to calculate the max lots with risk of ruin

i have a couple of questions:

i try to compare 2 strategies:
3lots strategy
i practicing this in tradestation
entry 3 lots target 1 2lots at +1 target 21 lot +2
this is the performance report for tradestation
Tradestation considerers 1 trade per exit leg , 2 trades per 1 3lot entry trade
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then i have 4 lot strategy, (it is the same than 3lots plus 1 lot more with target +3tick)
i am practicing in S5 and i get this report


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here the excell considerers 1 trade per entry=1tradewith 4lots

then i was wondering what i need to entry in your excell to get an useful result to compare both strategy

thank you very much

alejo

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  #107 (permalink)
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alejo View Post
fat tails
i try to use your excell to calculate the max lots with risk of ruin

i have a couple of questions:

i try to compare 2 strategies:
3lots strategy
i practicing this in tradestation
entry 3 lots target 1 2lots at +1 target 21 lot +2
this is the performance report for tradestation
Tradestation considerers 1 trade per exit leg , 2 trades per 1 3lot entry trade
Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


then i have 4 lot strategy, (it is the same than 3lots plus 1 lot more with target +3tick)
i am practicing in S5 and i get this report


Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


here the excell considerers 1 trade per entry=1tradewith 4lots

then i was wondering what i need to entry in your excell to get an useful result to compare both strategy

thank you very much

alejo


The Excel table is a simple tool, which was not meant to be applied to complex trading strategies.

In your case a Monte Carlo simulation can be used for determining the risk levels.

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  #108 (permalink)
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Interesting, however if and when I'm winning not something I look at. I try to keep % of winning trades above 90-95%, and limiting risk exposure strictly upfront try to never get to a point where I'm eroding capital.

I guess my response to the thread would be to not look for a mathematical discussion with myself, but a more psychological one around my own risk aversion levels. But as we are in this thread looking to modelling it a risk aversion factor would need to be a key component. As I guess would be a level of daily VaR level - I guess reflecting the level of drawdown I'd be happy to take, and that a function of the account size.

interesting topic..

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  #109 (permalink)
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Quoting 
I try to keep % of winning trades above 90-95%

So low?
Below 99.99% I don't trade. Lol

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baruchs View Post
So low?
Below 99.99% I don't trade. Lol

Lol.. 99.999% ideally ;-) sure I get it, nothing is certain very true.

My point coming across badly perhaps.. what I'm trying to get across is that I am willing to accept slightly larger draw-downs if I'm confident in my view of the market but limit my risk exposure to a very small portion of my account. So effectively I can win a lot of my trades whilst I'm progressing my learning curve.

Most people trade more than they should risk wise in terms of proportion of their account and have way too tight stops (in my opinion). they don't give the position space to breathe. As I've seen it - how many times have we all seen a position move against us, close it, and then see it push back.

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