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Thread: Can you stand the heat in the trading crucible?

  1. #1
    Administrator Jim's Avatar
    Join Date
    Apr 2010
    South West England

    Can you stand the heat in the trading crucible?

    This is the first post in a new section of the forum, designed to pull together the various snippets of information about money management being bandied about elsewhere on the forum.

    There's been some discussion recently about such esoteric money management matters as Ed Thorp and the "Kelly Criterion", along with Ralph Vince and his "optimal f". At this juncture I'd like to introduce into the discussion the name of a notable theoretical and practical exponent of the art of trading. According to Ed Seykota, in a brief "white paper" entitled "Determining Optimal Risk":

    This heat test shows optimal performance for heat around 140% (about 28% per each of five instruments), at which point the system delivers about 55% return per annum with average drawdown around 40% per annum and maximum drawdown over 90%. In actual practice, few investors would have the stomach for such an optimum. Most would prefer less drawdown and less gain.
    Would you happy trading the size suggested by Ed, Ed or Ralph's theories, whether using your own money or somebody else's? How would your stomach feel looking at a real money equity curve displaying a drawdown of 40%? How about 90% instead?
    Reality is merely an illusion, albeit a very persistent one - Albert Einstein

  2. #2
    Junior Member
    Join Date
    Nov 2011
    I try being bold and often end up feeling very old in a short space of time ! bearing out the well-worn adage of there being old traders and bold traders but no old, bold traders. I keep hoping this surely can't be true !?!
    Last edited by silverado8; 01-29-2013 at 10:28 PM.

  3. #3
    Senior Member
    Join Date
    Dec 2011
    London, UK
    Thanks for adding this thread Jim.

    I've just added some money management to a new incarnation of the Random Trader....

    Dr T

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