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How advanced mathematics and gaming theory can help you as a trader
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How advanced mathematics and gaming theory can help you as a trader

  #101 (permalink)
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Geomean View Post
I spent weeks studying Vince 8 years ago and setting up excell files of a 35+ year trading history to calculate optimum f on my personal trading history.

Well worth the effort, and it uncovered that my bet sizes were often way too big. It also reduced my overall market exposure, and confirmed a kind of anti-Martingale approach of the type Vince discusses in his "Leveraged Trading Space"

But even @ optimum f, I still didn't like the drawdowns, and the potential drawdowns, especially when trading in highly correlated assets in leveraged positions, although the run ups were exciting.

Then I found that adjusting optimum f for the biggest drawdown /size of loss I'm willing to suffer helped both my trading and my disposition.

Thus, I now use Optimum f % x total equity bet size/largest loss % =bet size/1% of equity. Such sizing also permitted more reliance on trading signals for exits rather than stops.

Then I increased the number of systems I traded and expanded the asset classes involved in an effort to reduce the overall correlation of the different bets in the portfolio.

Seems to work OK and add consistency, but there is more effort to time and monitor many more asset classes/positions, plus be worried about how everything seems to be correlated these days. A lot of work for a lone trader.

Indeed, a resource on correlation coefficients would be most helpful.

Geo

Thanks for this post!

Could you post one example which explains, how you have adapted Optimal F to comply with larger drawdowns?

For me the position sizing that results from Optimal F is still too aggressive, so if you discovered with Optimal F that your position sizing was too large, what leverage did you use before?

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  #102 (permalink)
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i have a roulette system that works if you have enough money and go to a table with no limits,its a red/black system,first you wait until 3 reds or black hit in a row,then you bet on the oppisite,if you win you take your money and wait for 3 of the same colors again and bet on the oppisite,if you lose you triple your money,so say you bet 20 bucks and lose then you bet 60 bucks,if you lose you bet 180 if you lose bet 540,on and on you get the pic,but you better have some cash and make sure your on a no limit table...sharky

KILLING THE MARKETS DAILY
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  #103 (permalink)
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was just thinking and no i havent tried but i wonder if that would work on trading if you have a loseing trade triple your money an the next entry?...sharky

KILLING THE MARKETS DAILY
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  #104 (permalink)
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sharky View Post
was just thinking and no i havent tried but i wonder if that would work on trading if you have a loseing trade triple your money an the next entry?...sharky

It works until it doesn't, and then your account is blown.

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  #105 (permalink)
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sharky View Post
i have a roulette system that works if you have enough money and go to a table with no limits,its a red/black system,first you wait until 3 reds or black hit in a row,then you bet on the oppisite,if you win you take your money and wait for 3 of the same colors again and bet on the oppisite,if you lose you triple your money,so say you bet 20 bucks and lose then you bet 60 bucks,if you lose you bet 180 if you lose bet 540,on and on you get the pic,but you better have some cash and make sure your on a no limit table...sharky

Sharky,

this does not work. You are a victim of the Gambler's Fallacy. There is no system in the world that will work with an even Roulette wheel. Only if you spot an uneven wheel, you may have an edge.

Tripling your money is a Martingaleapproach. This approach will typically get you many small wins and in the end a final large loss, which will exceed the aggregate wins.

You can look it up under

-> Gambler's Fallacy
-> Martingale

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  #106 (permalink)
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sharky View Post
was just thinking and no i havent tried but i wonder if that would work on trading if you have a loseing trade triple your money an the next entry?...sharky

This would be progressive betting. If you increase your bet size after a losing trade, this is known as a Martingale strategy. It is one of the commonest mistakes of traders and known as averaging down.

Martingale approaches can work, if you have a trading approach, where the outcome of two consecutive trades are negatively correlated. However, it is not easy to show that this is the case.

When averaging down, you have a highly positive correlation of the trades. This can be understood, if you redefine the trades. This is what you would do

-> enter a position with contract size n
-> one the first position has lost a certain amount you add n contracts to your position

Now this is the same, as if

-> you had exited the first trade taking a loss
-> entering a new trade with contract size 2*n

If the old and the new trade are positively correlated, this is not a good decision. If there is a negative correlation, this strategy may give you an edge. However, this behavior is typically driven by loss aversion and not by correlation analysis and is known as one of the fastest roads to disaster.

Never average down any of your losses. Be a man and take the first loss.

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  #107 (permalink)
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sharky View Post
i have a roulette system that works if you have enough money and go to a table with no limits,its a red/black system,first you wait until 3 reds or black hit in a row,then you bet on the oppisite,if you win you take your money and wait for 3 of the same colors again and bet on the oppisite,if you lose you triple your money,so say you bet 20 bucks and lose then you bet 60 bucks,if you lose you bet 180 if you lose bet 540,on and on you get the pic,but you better have some cash and make sure your on a no limit table...sharky

I used to do something similar, the odds of getting 4 red or black in a row are lower than a straight 3. I used to eyeball several tables at once waiting for them to come up.


Also, I found a site where you can calculate binomial probability distribution, as well as other types of cumulative probabilities - Statrek.com


Quoting 
What is a binomial distribution? A binomial distribution is a probability distribution. It refers to the probabilities associated with the number of successes in a binomial experiment.
For example, suppose we toss a coin three times and suppose we define Heads as a success. This binomial experiment has four possible outcomes: 0 Heads, 1 Head, 2 Heads, or 3 Heads. The probabilities associated with each possible outcome are an example of a binomial distribution.


"The primary thing required to obtain what you want from life, is simply the will to pursue it, and the faith to believe it is possible." - Author Unknown

"The ability to maintain discipline and stick to the rules is the hallmark of the experienced successful trader" - Curtis Faith

Last edited by PositiveDeviant; April 19th, 2011 at 01:47 AM.
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  #108 (permalink)
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Here is the problem with the roulette strategy. Even if there were such a thing as a casino that didn't limit bets you are effectively playing a game with a 47% chance of winning. That means you have a realistic probablilty of, at some stage, getting 16 losers in a row. See below for how much your last bet would be if you started with $20. Even if you could fund that bet your money would be better spent owning a casino rather than playing in one.

Your best bet is to never go to a casino. You would be better off buyng the occasional deep out of the money option like Nasim Taleb

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  #109 (permalink)
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When you go to a casino you have to go with a budget and you can't go over the budget. Its a weekend in Vegas kind of scenario. You go with $5k or $10k or whatever amount you're comfortable with that you can spend. If you can lose it without worrying too much you're fine. Just play and at the end of the weekend you either win or lose. If you do this many times over your lifetime, you're going to be in the negative.

The Law Of Large Numbers at work people.

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  #110 (permalink)
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jlancaster View Post
When you go to a casino you have to go with a budget and you can't go over the budget. Its a weekend in Vegas kind of scenario. You go with $5k or $10k or whatever amount you're comfortable with that you can spend. If you can lose it without worrying too much you're fine. Just play and at the end of the weekend you either win or lose. If you do this many times over your lifetime, you're going to be in the negative.

The Law Of Large Numbers at work people.


Casino(1), Trading(2) or Opera(3): Entertainment will cost you some money.

Unless you are the House(1), have an edge that you exploit in a repetitive and boring manner(2), or you are one of the singers(3).


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