Money Mgmt Queries ...

[szehao]

Good day,

I thought about this question while I was walking home after FFR class.
Its interesting that I get the most clarity while I am walking/jogging ...

Let's say got this scenario that u very sure that the currency pair will move by 10 pips(excluding spread). p(hit) = 99.999999%
So can I throw all my money mgmt rules out of the window and bet the house on this trade?
Okie ... I know I am going to get scolding for posting such a ridiculous question, because even I was telling myself that in the long run I will get into trouble ... Its a niggling idea in my mind that can't be put to rest.

Bet the house and the house's house and the house house's house on it ... what's the chance of not hiting the profit target, less than a chance in a million.

:) Sihao

[Winston]

sihao!!! i just saw u in class and u posted so fast!!! outstanding!!! .. hahah.. will reply after shower.

[Winston]

by the way ... yeah u r riiigghhhttt..... ARGGGHHH.. what a question!!!...

[Winston]

haah i get my inspiration in the toilet!

Well, most of your 2nd stage actions.. "bet the house".. is based on the one "fact"... that you have a p(hit)=0.99999999.

Yes, in such an event, I would bet the house and all. In fact a couple of houses. Because if it fails, then i just go on and borrow somemore houses.. eventually with a p(hit)=0.99999999, i should make it all back.

However, this p(hit)=0.99999999 .. is 1/infinity, because in this current computing power.. they are not able to process enough multi-variate data to truly create a p(hit)=0.99999999 result.

...

haha.. in short for those, who don't understand our complex discussion...

end point is this.... on this earth, there is no reason, you should ever give up your m/m rules.

hahah

cheers,


winston

[Trade2win]

Hi Winston,
I remembered during the Aug Class that you shorted the AUDUSD, if you have not covered your short trade already, by now you should have netted more than 10%. Today RBA cut interest rate by 100bpd. Congrats!

[Winston]

hey richard,

you've very good memory!!

hahah at this point.. i am tempted to say.. yes yes.. .i kept it through...

hahha but no i didn't.

cheers,

winston

[szehao]

That's a martingale strategy ... and i do not have infinite wealth.
Tks Winston, i understand liao!

:) Sihao


haah i get my inspiration in the toilet!

Well, most of your 2nd stage actions.. "bet the house".. is based on the one "fact"... that you have a p(hit)=0.99999999.

Yes, in such an event, I would bet the house and all. In fact a couple of houses. Because if it fails, then i just go on and borrow somemore houses.. eventually with a p(hit)=0.99999999, i should make it all back.

However, this p(hit)=0.99999999 .. is 1/infinity, because in this current computing power.. they are not able to process enough multi-variate data to truly create a p(hit)=0.99999999 result.

...

haha.. in short for those, who don't understand our complex discussion...

end point is this.... on this earth, there is no reason, you should ever give up your m/m rules.

hahah

cheers,


winston

[szehao]

I just read a book by Nassim Taleb called fooled by randomness.

In it I found an explanation why u should not take a trade that has a probability of 0.99
It all lies in the expectation of the trade.
Lets say this trade, the payoffs of taking this trade is 100 dollars.
But assuming the 0.01 event happened, the amount of money u have to pay to take this trade is 10000 dollars.

Expectation of this trade = 0.99*100 + 0.01*(-10000) = $-1
So in the long run, u actually expected to lose 1 dollars even if the probability of this trade is 0.99
So would u take this trade then?


I think Fooled by Randomness is a very interesting book, it actually challenge me to think about things in very different perspective. I believe it deserves a second read from me.
All in all if your money mgmt rules are followed stringently, emotionlessly then u should be protected from the black swan event :cool:

[Winston]

the black swan event is improbable in its exact definition of a black swan. yet the rationale behind the black swan event is rarely if ever improbable.

it is the writing on the wall, so to speak.

in my opinion, the "black swan event" is an excuse for poor money management.

philosophically speaking, all black swan events can be progressively expected.

From wikipedia;

"He (taleb) gives the rise of the Internet, the personal computer, the first world war, as well as the September 11, 2001 attacks as examples of Black Swan events.[1]"

Did the internet went from nothing to 2 billion users in 1 minute? like how harry potter went to school? no, the process took 10 years!

Sept 11 - aw come on. USS Cole, WTC? Unique probably, but unexpected? What would you do if you were a terrorist?

The very philosophical concept of "black swan" is improbable. There is nothing in this world that is world rocking and truly improbable.

=)

P.s.: for people getting confused with our philosophical discussion - This has absolutely no value to your trading! (remember your money management and stop losses!)


cheers,


winston



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