V.8:12 (476-477): Find your optimal f by Ralph Vince

V.8:12 (476-477): Find your optimal f by Ralph Vince
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Find your optimal f by Ralph Vince

As a computer programmer for Larry Williams, winner of the 1987 World Cup Championship of Futures Trading, I have had the opportunity to analyze many good trading systems. Even the best systems, however, suffer from an as-yet incomplete library of money management techniques. I felt a technique to select the optimal number of contracts to trade in an account needed to be designed. The value of such a system is determined by using the formula for mathematical expectation:

(WP)+[L (1 -P)]=ME


P = The probability of winning

W = The amount you may win

L = The amount you may lose

ME = Mathematical expectation

Suppose someone offers to pay you $2 if a coin toss comes up heads, but you must pay $1 if the result is tails. The mathematical expectation here is a positive 50 cents, because

(2 0.5) + [-1 (1 - 0.5)] = 0.50

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