Money Management Software Model

Uploaded by OneStepRemoved on 30.03.2012

Hi everybody this is Shaun Overton with
in this video I am going to give you a light introduction
to our position size analysis software the goal is just to show you
over if you know what the expectation of you system is in terms of
percent accuracy and payouts we can give you a model of what kind of returns you
might expect purely due to random chance I am going to go over the parameters in
this software and then in future videos we are going to go over different combinations
that you can consider to analyze your trading system and even random luck so to
start the first Colum here is the initial balance and that ought to be straight forward
it’s the amount of money in your account the next one is the winning percentage
I think that’s also straight forward here we are going to win 50% of the time
and we lose 50% of the time the R multiple is the ratio of the wins to the
loses that’s the amount you win divided by the amount that you lose in this case
I am setting it to 1 and if you are still not comfortable with that you can take it
straight from your backtest if you are familiar with NinjaTrader you will notice that
there is an analytic here that says the “ratio average win / average loss“ in this
case it's 0.68 that is the R multiple it’s exact same thing here it’s we win dollar we
lose a dollar in this next tab it's the amount of risk so for a $100,000
account balance we are risking 1% that means when we win we are going to
make a 1000bucks and if we lose we are going to lose a 1000bucks if we
set it to 2% it means we make 2grand or lose 2grand est. the next
two tabs are a little more tricky the “trades per run” and the “number of runs”
so the trades per run is analogous to a coin toss game so with our 50-50 odds and
1 to 1 payout I am going to flip a coin 200 time whenever I come out
heads I am going to record that I up the balance by a grand and whenever I come
out tails I deduct a grand after I have done that 200 time I will record the
final balance so maybe it comes out to $95,000 I record that and I save it now I am
going to go on to the second trial I flip a coin 200 times I record the change in
the account balance over and over again once I get to the final result then I am
going to write it down on my list say we round up at $102,000
now I am going to do that 2,750 times that if you
notice that this times this is going to wind up to the number of random numbers in
our file and what we want is we want to make this number as large as possible
in order to give us the expectations over certain number of trails to put that in trading
terms if you do 200 trades and you have a sad expectation that might be
the equivalent of your trades per year if you trade less that once per day if you
day trade and you do 5 trades per day then this is the expectations that you would
expect after 30 trades per week times 10 weeks is about 300 so about
6 ½ weeks is what you expect you return to be after this much trading its going to
fluctuate due to random chance and that’s the whole goal of using this software
the last thing I want to explain is how the random numbers in the software work
we are reading them from a file and the file was generated from atmospheric noise
so what that means is you just take the noise you come up with a bunch of bits and
you turn it into a random number between 1 and 10,000 we read the first
number for our trade and we say okay we have a 50% winning percentage
if the number is between 5,000 and 0 then we are going to accept that as
a winner and if the number is above 5,000 we will through it out as a loser
if we change our winning percentage to 65 then we would say if the number
is between 1 and 6,500 it’s a winner and if it’s more than it’s
a loser and so on and just by having that random chance we can very accurately
model the accuracy and because we control the account balance we can come up
with very accurate expectations on how random luck can either work for us
or against us and I am going to push calculate just to put the number up on the graph
and you will see here that we did our analysis on over ½ a million random
numbers in this case 550,000 with numbers between
1 and 10,000 and it give us this nice little statistical analysis that verifies the
results that we would expect so the average winning run is exactly 2 and the
average losing run is almost exactly 2 as well that's perfectly balanced which is what
we expect here you have a random run of 17 consecutive winners purely due
to random chance with 19 consecutive losers this number is never going to
precisely equal 50% it should just be very close and here we are accurate within
hundreds of a decimal place its very good and it's enough for the analysis
so I will leave the video here and in the next video we are going to actually talk about these out comes
and how a 50-50 coin toss game can make or break your account if you are risking too much
My name is Shaun Overton, Thank You for listening.