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What fraction of the account to trade?

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  • What fraction of the account to trade?

    What fraction of the account to trade?
    When you start trading, you must make two decisions: what position
    open, long or short, and how much to trade. Decision on co-
    The name always depends on the balance in your account. With an account of $ 10,000
    acquiring 100 gold contracts would be too risky. If on
    your account 10 million dollars, isn't it obvious that the acquisition of one
    the gold contract will have almost no effect on the account? Whether we admit it or not
    the decision as to how many contracts in a certain
    the moment of time to trade depends on the level of the account balance. If we will
    use a certain percentage of the account in each trade (in other words, when
    we will trade in an amount correlated with the size of our account), then
    we will achieve faster capital growth. The quantity depends not only on
    balance in our account, and is also a function of some other
    variables: our estimated worst-case loss in the next
    transaction; the rate at which we want our account to grow; dependence on
    past transactions. The fraction of the account to be used for trading will be
    depend on many variables, and we will try to collect all these variables,
    including the level of the account balance, in order to eventually accept a rather subjective
    deciding how many contracts or stocks to trade. From
    in this chapter, you will learn how to make mathematically correct decisions in
    relation to quantity and not to base their actions on subjective and,
    possible, erroneous judgment. You will see that if you use the wrong
    quantity, you will have to pay an excessive price, and this price will increase as
    time. Most traders do not pay enough attention to the problem
    choice of quantity. They believe that this choice is largely random, and
    it doesn't matter how much to use, only how much
    they are right about the direction of the trade. Moreover, an erroneous
    the impression that there is a direct relationship between how many contracts
    discover, and how much you can win or lose over time. it
    wrong. As we will see, the relationship between potential gain and
    quantity is not expressed in a straight line. It's a curve. This curve has a peak, and
    it is at this peak that we will reach the maximum potential gain. From
    in this book, you will learn that the decision on the quantity used in a certain
    the trade is just as important as the decision to go long or short. We
    refute the false opinion of most traders and show that the account level
    depends on the correct choice of the number of contracts no less than
    from the correct direction of trade. You do not control prices, and it does not depend on you whether the next trade will be profitable or unprofitable. However, the number
    the contracts you open is entirely up to you. Therefore your
    resources will be used more efficiently by focusing on
    the correct amount. With any transaction, you at least approximately assume
    what the worst case loss could be. You may not even be aware of it
    but when you start trading you have a feeling, even if
    subconscious, what can happen in the worst case. Perception of the worst
    case together with the level of balance on your account forms a decision on whether
    how many contracts to trade.

    Thus, we can say that there is a certain divisor (a number between 0
    and 1) the largest estimated loss to quantify
    contracts. For example, if with a $ 50,000 bill, you expect at worst
    case, a loss of $ 5,000 per contract, and 5 contracts are open, then the divisor
    will be 0.5, since:

    50,000 / (5000 / 0.5) = 5
    In other words, you have 5 contracts for a $ 50,000 account, i.e. 1 con-
    path for every $ 10,000 of the balance. Would you expect the worst to lose
    $ 5,000 per contract, so your divisor is 0.5. If u
    you had one contract, then the divisor in this case would be the number 0.1, since:

    50,000 / (5000 / 0.1) = 1
    We will call this divisor variable f. Thus, consciously or subconsciously
    in any case, you choose the f value when you decide how much
    tracts or shares to acquire.

  • #2
    Now look at Figure 1-1. It presents a game where you have 50%
    chance of winning $ 2 versus 50% chance of losing $ 1 in each game.
    Note that here the optimal f is 0.25 when the TWR is 10.55
    after 40 bets (20 sequences +2, -1). TWR is “relative
    terminal capital "(Terminal Wealth Relative), it represents the income for your
    rates as a multiplier. TWR = 10.55 means you would increase 10.55 times
    your initial account, or would have made a 955% return. Now look,
    what happens if you deviate only 0.15 from the optimal f = 0.25.
    When f is 0.1 or 0.4, your TWR = 4.66. It doesn't even make up half of it
    what will happen at 0.25, and you have moved only 0.15 from the optimal value and
    made only 40 bets!

    What dollar amount are we talking about? With f = 0.1, you bet $ 1 for each
    dye 10 dollars on the account. With f = 0.4, you bet $ 1 for every $ 2.50
    On account. In both cases, we get TWR = 4.66. With f = 0.25, you put $ 1
    lar for every $ 4 on the account. Note that if you bet $ 1 each
    even 4 dollars on the account, then you win twice as much after 40 bets than in
    if you bet one dollar for every $ 2.50 in your account! Obviously,
    that you should not unnecessarily increase the rate. With a bet of $ 1 for every 2.50
    dollar you will get the same result as if you bet a quarter of this amount,
    that is, $ 1 for every $ 10 in your account! Note that in the game
    50/50, where you win twice as much as you lose, with f = 0.5 you only
    "Stay with your friends"! If f is greater than 0.5, you lose this game, and now
    the ultimate ruin is just a matter of time! In other words, if f
    (in a game 50/50, 2: 1) deviates by 0.25 from the optimal, you will be bankrupt with
    probability that approaches certainty if you continue to play
    long enough. Thus, our goal will be an objective search for the peak
    curve f for a given trading system.

    Figure 1-1 20 sequences +2, -1

    certain concepts are covered from a gambling perspective.
    The main difference between gambling and speculation is that gambling
    the game creates risk (and hence many are opposed to it), while
    speculation is the transfer of an already existing risk (assumed)
    from one side to the other. Illustrations of gambling are used for
    a good example of the concepts presented. Money management mathematics and
    the principles used in trading and gambling are quite similar.
    The main difference is that in the mathematics of gambling, we usually have
    dealing with Bernoulli outcomes (only two possible outcomes), while
    how in trading we are faced with the whole distribution of results that
    only can be in the real deal.