V.16:7 (318-323): Secure Fractional Money Management by L. Zamansky, Ph.D., and D. Stendahl

Secure Fractional Money Management by Leo J. Zamansky, Ph.D., and David C. Stendahl

Here's how to find a new fractional value of capital to invest in every trade to maximize returns subject to a constraint on drawdown, using a variation of the optimal f money management strategy.

Over the past four years, we have developed and applied evaluation software to trading systems that use money management techniques and have studied the impact of these techniques on trading systems. A new money management strategy called secure f is one of the outcomes of that work, and here, we will demonstrate how to find a new fractional value of capital to invest in every trade to maximize returns subject to a constraint on drawdown.

Secure f can be a conservative strategy or an aggressive one, depending on the level of acceptable maximum drawdown selected by the trader in question. It is a modification of the optimal f strategy that was introduced by Ralph Vince in his Portfolio Management Formulas. Secure f differs from optimal f because it takes historical drawdowns into account and uses information about the prices of the underlying security.

OPTIMAL F

Optimal f is a money management strategy that can be used to improve and maximize system performance by finding the best percent of capital to invest in each trade. This strategy determines which percent of equity invested in a trade would have yielded the highest return based on a sequence of past trades. Because traders are able to employ a variety of money management strategies, it can be useful to know what would have been the optimal amount to invest in each case. The concept of percent or fractional strategy itself comes from the Kelly formula, which estimates the percentage of your capital to trade when the amounts won and lost are not equal: