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are you over leveraged?
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are you over leveraged?

  #1 (permalink)
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are you over leveraged?

http://www.youtube.com/watch?v=IyATmCJf4fc

If you lay me odds that 90% of people here are over leveraged at +200 I'll take that bet all day..
There is a HUGE hole in the retail trading literature as far as risk management.."Risk 2% per trade vs quant VAR"...so everyone just says fuck it.
I don't doubt for a second the reason you don't see outliers with retail trading , even though you so should just from sample size is because so many people are betting 2X kelly without even knowing they are..
That video should be a starting point to Ralph Vince incredible work on bet sizing and way beyond Kelly....
Amazon.com: The Handbook of Portfolio Mathematics: Formulas for Optimal Allocation & Leverage (9780471757689): Ralph Vince: Books

Forget your "profit factor", even if you are calculating such things..
The first question you should ask yourself is if you are putting on 2X Kelly or not because of the deceptive nature of min margin vs contract size on index futures. I bet you are and you don't even know it and don't even know why it matters.

There is no such thing as "under capitalized"...there is only over leveraged to a betting expectation...but its a very deceptive concept to figure out.


Last edited by Big Mike; August 12th, 2010 at 11:09 PM. Reason: moved from TH to Money Management
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  #2 (permalink)
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  #3 (permalink)
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darthtrader3.6 View Post
...but its a very deceptive concept to figure out.

Read about you quitting your job to trade your PA... go for it hombré !!

As for this twice kelly/optimal f/VaR stuff... anybody that is reasonably smart can figure out what position size they can trade given their appetite for risk/vol, it ain't rocket science.

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  #4 (permalink)
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cpi65 View Post
Read about you quitting your job to trade your PA... go for it hombré !!

As for this twice kelly/optimal f/VaR stuff... anybody that is reasonably smart can figure out what position size they can trade given their appetite for risk/vol, it ain't rocket science.


But once you are profitable and can trade size, portfolio mathematics may help you to increase your account tenfold, instead of twofold.


Last edited by Fat Tails; August 13th, 2010 at 12:47 PM.
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  #5 (permalink)
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portfolio management / money management is nothing more than a tool - if you are a mechanic trying to build a wooden cabinet, get a carpenter.
As a trader you need to understand leverage v exposure v expectations...... if you dont then keep betting, maybe you will get lucky enough to last enough time to then realise what you dont know.
Its usually then you look back and think, damm i was lucky.

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  #6 (permalink)
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For beginners like myself, I think we should just trade 1 lot until we are profitable regardless of account size. I did work out some math and I will follow it until I go live (again) shortly.

I will start with 1 contract and risk only 2 points ($100 + $4 comm). When my accumulate profit is 20x my risk or $2000, I increase my size to 2 contracts and repeat. So when my accumulate profit is 6k (2k for 1 contract + 4k for 2 contracts), I will move to 3 contracts, etc. However, if I I loss 2k after I move to 3 contracts, then I will go back trading 2 contracts and accumulate another 4k profit before I move to 3 contracts (total of 8k profit) again. I hope this make sense.

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cw30000 View Post
For beginners like myself, I think we should just trade 1 lot until we are profitable regardless of account size. I did work out some math and I will follow it until I go live (again) shortly.

I will start with 1 contract and risk only 2 points ($100 + $4 comm). When my accumulate profit is 20x my risk or $2000, I increase my size to 2 contracts and repeat. So when my accumulate profit is 6k (2k for 1 contract + 4k for 2 contracts), I will move to 3 contracts, etc. However, if I I loss 2k after I move to 3 contracts, then I will go back trading 2 contracts and accumulate another 4k profit before I move to 3 contracts (total of 8k profit) again. I hope this make sense.

I am having trouble following.

What is your net account size when you are trading 2 and 3 contracts?

How much risk is each trade in terms of your net account? If your stop loss is $400, and your net account is $4,000, that is a 10% stop which is about 5-10 times higher than it should be, for instance.

Mike

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  #8 (permalink)
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Big Mike View Post
I am having trouble following.

What is your net account size when you are trading 2 and 3 contracts?

How much risk is each trade in terms of your net account? If your stop loss is $400, and your net account is $4,000, that is a 10% stop which is about 5-10 times higher than it should be, for instance.

Mike


It is not base on risk to the total account size relationship. It is base on profit. If the trader is consistent and profitable, then he/she will increase his/her her trading size.

My point is, regardless if the trader starts with a 10k or 100k account, he should trade 1 lot until he reached a certain profit before he increase is total lot or risk.

My example use $2k profit (2k to 20 times my $100 risk) for every contract.
1) profit =< 2k, trade 1 contract
2) when profit is greater 2k, trade 2 contracts
3a) since trader is trading 2 contracts, in order to move to 3 contracts, trader will need to make 4k profit (2 x 2k) for a total of 6k profit (from base acct). So when traders have 6k of total profit, he will starts to trade 3 contracts.
3b) however, instead of advancing to 6k total profit, trader actually has a string of losses, he is now back to 1k profit. when this happens, he will "downgrade" to trade 1 contract. He will only trade 2 contract when he get another 2k profit, or 3k in total profit.

If you think 2k is not an ideal number, you can plug in anther number that make sense to you.

Hope this make more sense.

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  #9 (permalink)
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Thanks. I understand what you are saying now.

You don't think the risk % per trade is important? Can you share in your scenario what the risk % per trade is?

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
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2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
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4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

If you want
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  #10 (permalink)
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google - Fixed Ratio Position Sizing

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