Uncategories Re: [amibroker] Optimal F

Re: [amibroker] Optimal F

Coolman 10.50
 

For Futures trading here are some specs that I think are worth considering  :
 
1) Utilize less than 50% of capital for margin   
2) Utilize a trading system that does long and short trades well and can be applied to the 20 top liquid futures. 
3) Utilize a trading system that has 70% + wining trades and a win/loss ratio of over 8/1.
4) Determine target and subtract entry point value to get potential win.
5) Determine the risk point and risk value.
6) Double risk value
7) Divide potential win by double risk value.
 
Example.............Target 743, entry point is 698. Potential win is 45
Risk is 693........five points ........doubled is ........10
This results in 4 or 5 contracts being traded.
 
 
 
 
-------Original Message-------
 
Date: 1/25/2016 10:26:50 AM
Subject: Re: [amibroker] Optimal F
 
 

Hi Howard, and all --

My reply to the original poster intentionally omitted the calculation. 

Your analysis, confirmed by your exchange with Mr. Vince, by my exchanges with Mr. Vince (who has copies of all my books and papers), and with the risk analysis procedures I have devised, described, and posted are all in agreement -- for practical purposes, optimal f is unsuitably high.

The depth of the drawdown you point out for a single example is typical of the drawdown of any system traded at optimal-f.  80% is not at all unusual.  Recovery from an 80% drawdown requires that the account grows to 500% of its drawdown low. 

Recovery is mathematically a function of the number of trades per time period, geometric return per trade, and length of time period. 

Equally important, recovery depends on the relationships that give rise to the patterns that trigger trade entry and exit being stationary.      

For me personally, and for the overwhelming majority of traders and money managers I meet, drawdowns in excess of about 20% are more likely to be indications that the relationships are not stationary, but rather that the regime has changed and the system is no longer safely tradable.

There is no way to determine whether a small drawdown is a normal perturbation or the first indication of a larger drawdown to come.  The response to a small drawdown is to act as a Bayesian -- act as though the most recent results are indicative of the future results.  Reduce position size for the next trades until the trade-by-trade results give more data and more confidence that the system is not broken, then return to larger position size.

There is a use for optimal-f.  If I wanted to place highly in a trading competition and I was allowed to have multiple entries, I could enter many, say 20, accounts, each using a different trading system, each of which has a positive expectation, and each of which was traded at a position size of optimal-f.  Most, say 15, of them would experience serious drawdowns from which they would not recover during the contest period.  A few would be mediocre to reasonable, perhaps with drawdowns that exceed 20%.  One or two might place highly.

Best regards,
Howard

On Mon, Jan 25, 2016 at 9:43 AM, Howard MITCHell Feldman hfeldman@earthlink.net [amibroker] <amibroker@yahoogroups.com> wrote:
 

This response does not answer the original post but I think I have something to contribute to the subject of Optimal f and may be of interest to the group.

I have a great deal of respect for the work that both Howard Bandy and Ralph Vince have undertaken.

The Internet is filled with detractors of Optimal f.  I believe that most people have not labored past the first few chapters, those chapters that describe an empirical method for finding Optimal f.  Those who have read the entire book find a few more techniques that are more in line with reality.

That being said, I agree with Howard Bandy's response to the original post.  And I believe that Ralph Vince would agree as well.  I recently corresponded with Mr. Vince about a system I was exploring that had an Optimal f of 0.80 and a worst case trade of 4% loss.  When I did all the calculations I found that I would have needed more than 13 times my existing equity to trade at Optimal f, a highly impracticable amount.  Ralph wrote back to me and explained that my figures were mathematically correct but that oftentimes we run smack into reality and cannot really trade at the level suggested by our system.

He also explained that if I was able to trade at my calculated Optimal f that when my system actually did encounter a 4% loss on a trade that the real amount of my loss would be a drawdown of Optimal f percent or in my case 80%.  Candidly, I don't think there is enough Pepto-Bismol in the world to relieve that kind of pain.  Such is the nature of leverage. 

Ironically, trading a more modest system produces an Optimal f that is more practical to trade.

Does this mean that we should completely reject Optimal f?  Absolutely not!  We simply have to realize that Optimal f gives us the optimal amount we should trade with a "risk be damned" attitude.  Maybe not very practical, sometimes, but Optimal f does provide you with valuable information about the maximum amount you can expect out of your system.

Howard Bandy incorporates risk into the trading equation and dampens the volatility in a more practical sense.

Both works of research are important but it's important to understand what each is saying on the subject.

...howard feldman

On 01/23/2016 04:38 AM, queiroz_everton@yahoo.com [amibroker] wrote:
 

Hello,


Does anyone have the AFL code of Optimal F by Ralph Vince?



Best Regards


Everton Queiroz




 

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