Download presentation

Presentation is loading. Please wait.

Published byOsborn Wilkins Modified about 1 year ago

1
Market Analysis & Position Sizing (Both Equally Necessary) = We have a plethora of market analysis, selection and timing techniques…..but We have no method, no framework, no paradigm, for the equally important, dark nether-world of position sizing.

2
Part 1 Optimal f

3
f = | Biggest Losing Outcome for 1 Unit | / f$ f$ = Account Equity / Units Example: -$10,000 Biggest Losing Outcome, $50,000 Account, and I have on 200 shares, (2 units ): f$ = 50,000 / 2 = 25,000 f = | -10,000 | / 25,000 =.4 Where: Everyone, on Every Trade, on Every “Opportunity” Involving Risk, has an f value (whether they acknowledge it or not): (also f$ = | Biggest Losing Outcome for 1 Unit | / f

4
f$ and GHPR Invariant to Biggest Loss BiggestLossf f$GHPR – – – – –

5
Trajectory Cone (Bell-Shaped on all 3 Axes)

6

7
The distribution can be made into bins. A scenario is a bin. It has a probability and An outcome (P/L)

8
2:1 Coin Toss

9
Mathematical Expectation 2:1 coin toss: ME =.5 * * 2 = =.5

10
f value example – 2:1 Coin Toss $10 stake Worst Case Outcome -1 I’m wagering $5 (5 units) f$ = 10 / 5 = 2 (one bet for every $2 in my stake) f =|-1| / 2 =.5 When biggest loss is manifest, we lose f% of our stake – 50% in this case

11
The Mistaken Impression Multiple made on stake = 1 + ME/|BL| * f (a.k.a Holding Period Return, “HPR”)

12
Optimal f is an Asymptote

13
The Real Line ( f )

14
f after 40 plays

15
40 Plays 1 Play

16
f after 40 plays At.15 and.40, makes the same, but drawdown changes At f=.1 and.4, makes the same, But drawdown changes!

17
f after 40 plays Beyond.5, even in this very favorable game, TWR (multiple) < 1, meaning you are losing money and will eventually go broke if you continue

18
f after 40 plays Points of Inflection: Concave up to concave down. Up has gain growing faster than drawdown.(but these too migrate to the optimal point as the number of holding periods grows!)

19
f after 40 plays

20
Most Favorable Blackjack Condition Optimal f =.06 or risk $1 for every $16.67 in stake

21
Part 2 The Leverage Space Portfolio Model

22
Modern Portfolio Theory

23
Why The Leverage Space Model is Superior to Traditional (Modern Portfolio Theory) Models: 1.Risk is defined as drawdown, not variance in returns. 2.The fallacy and danger of correlation is eliminated. 3.Valid for any distributional form – fat tails are addressed. 4.The Leverage Space model is about leverage, which is not addressed in the traditional models.

24
Leverage has 2 Axes – 2 Facets The instant case of how much I am levered up How I progress my quantity with respect to time / equity changes f

25
The fallacy and danger of correlation Fails when you are counting on it the most – at the (fat) tails of the distribution. Traditional models depend on correlation – Leverage Space model does not. -cl/gc (all days) r=.18 (cl>3sd) r=.61 (cl<1sd) r=.09 -f/pfe (all days) r=.15 (sp>3sd) r=.75 (sp<1sd) r=.025 -c/msft (all days)r=.02 (gc>3sd) r=.24 (gc<1sd) r=.01

26
f after 40 plays

27

28

29

30

31

32

33

34

35

36

37
Why The Leverage Space Model is Superior to Traditional (Modern Portfolio Theory) Models: 1.Risk is defined as drawdown, not variance in returns. 2.The fallacy and danger of correlation is eliminated. 3.Valid for any distributional form – fat tails are addressed. 4.The Leverage Space model is about leverage, which is not addressed in the traditional models. (on both axes of “Leverage”)

38
Part 3 The Leverage Space Model Software Implementation

39
Link for how to gather your data and create scenarios & probabilities:

40

41
Here is the data I am using (this is from the link example from the previous slide) :

42
Date,Equity Jan-07, Feb-07, Mar-07, Apr-07, May-07, Jun-07, Jul-07, Aug-07, Sep-07, Oct-07, Nov-07, Dec-07, Jan-08, Feb-08,813.00

43

44
Get java at:

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65
Part 4 The Leverage Space Model Using The Paradigm

66

67

68
We have seen how position sizing is equally as important as market analysis, selection and timing. The Leverage Space Model is both a (Superior) Portfolio Model, but also a Paradigm for examining “Position Sizing.” With this paradigm, we need no longer operate in this dark nether-world, riddled with heuristics, misinformation, and essentially mere alchemy (e.g. 1% rules, “Half Kelly,” “Fixed Ratio,” “Modern Portfolio Theory”).

69
Market Analysis & Position Sizing (Both Equally Necessary) = We have a plethora of market analysis, selection and timing techniques…..but We have no method, no framework, no paradigm, for the equally important, dark nether-world of position sizing.

70

Similar presentations

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google