Single Market Factor #1 Optimal f in Share Market

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As an example, if the largest losing trade within aparticular trade listing was $2,lacoste outlet,000 and the optimal f value turns out to be0.40, then the suggested capital amount would be $5,coach purses,000 ($2,000 / 0.4).According to this theory, if you were only going to trade one contract of thisone market using this one trading approach, then you should place $5,000 intoyour trading account. If future results mirror past results your percentagerate of return will be maximized by trading with $5,000. Also, according to thetheory, if you trade with less than $5,ed hardy,000 you will likely “tap out” and if youtrade with more than $5,000 you may trade profitably in Stock Market. However, your rate of returnwill be far inferior than if you had traded with $5,000. Needless to say thisis a bold theory. This approach makes the assumption that future tradingresults will be similar to past results. If future results are far inferior topast results then the end result using optimal f can be disastrous. However, intesting using trading systems that have a positive expectation, and for whichfuture results were similar to past results, optimal f has definitely shown theability to increase profits exponentially compared to simply trading a presetnumber of contracts. Unfortunately, the reality of the situation is that usingoptimal f to trade one market is generally not practical. The big problem witha strict usage of optimal f is that it does not consider drawdowns in itsanalysis. The only measure of risk that is used is the single largest losingtrade. While the case can be made that this is statistically correct, the factof the matter is that using this method alone will invariably result in largepercentage drawdowns at some point in time. Because the drawdowns that canresult on a single market basis can be huge in percentage terms, most traderswill not adhere to this approach long
• Trading using the “correct” amount of capital willmaximize the profitability experienced without sustaining a total loss ofcapital in Stock Market.
Single Market Factor #1: Optimal f in Share Market In his1990 book titled “Portfolio Management Formulas,” Ralph Vince popularized aformula known as optimal f. The theory behind this method is that:
• There is a “correct” amount of capital to apply to anycontract using a particular trading approach in Stock Market.
• Trading with more than the suggested amount of capitalwill result in an exponential decrease in the percentage return compared tousing the “correct” amount. In brief, using a listing of actual and/orhypothetical trades generated by trading one market using a given approach, acalculation is performed and a value is arrived at between .01 and 1.00. Thelargest losing trade within the listing of trades is then divided by this valueto arrive at the suggested amount of capital with which to trade one contract.
• Trading with less than the suggested amount of capitalwill likely result in a total loss of capital in Stock Market.
enough to enjoy theexpected benefits in Stock Market. However, the goodnews is that this methodcan be very useful when applied across a portfolio of stock markets.