I've been reading a lot about equity, counter-equity, the profit formula, the gambler's loss theorem (very inspiring).

I've been reading a lot about equity, counter-equity, the profit formula, the gambler's loss theorem (very inspiring).

I've been buying stocks and bonds for a long time, but I haven't had any money in my hands. I've got a scholarship to Australia, so I can finally play this thing freely. I've chosen a foreign exchange guarantee. I'm not going to write anything about this thing until I earn it. But a recent series of flooding sensations made me feel the need to keep a record of my recent mental activity.

In the last six months, I've been using a mini account, and I've been trading four times. In the process, I've experienced all kinds of drastic psychological changes, greed, fear, uncertainty. The ugly side of my humanity has been exposed. I've also become a crazy tech researcher. I've been collecting all kinds of information, studying various trading systems, indicators, etc. I've tried before and after the average line, RSI, woodies CCI system, KDJ and short line scraping combined with short lines, Japanese technical maps, etc.

Of course, the result, as every stockbroker says, is inevitably a loss of money. After four or five months of trading, I gradually started to really understand the meaning of leverage. I used to have a mini account, which is the equivalent of no money management, and what I did was exactly what many stockbrokers describe: I thought I was smarter than everyone else, so I didn't listen to the advice of the old man, I thought I could find a perfect system and then use him to profit, so I used extremely high leverage, over-trading, and people said I was crazy, but I didn't think so at all, because I thought I was smarter than everyone else.

So I couldn't escape the prophecy at all, and the losses kept getting worse and worse.

In the past few weeks, I've gone from $250 to $1,200 for the fourth time, to losing straight to 0 for the fourth time. Long-term losses have made me numb to losing money and have greatly improved my psychological resilience. I began to reflect on my practice.

So I started a crazy search for something related to root capital management and trading philosophy. Until I saw these days, and then the feeling of watering the top of the last few days reached its peak.

Some things you can understand formally when someone tells you before you do them, but you can never understand them physically, but you can only really understand them when you have done them yourself and then look back at what others have told you. This is like watching a lot of movies when you are a kid and it feels very different when you grow up. Playing musicology before learning musicology and playing musicology after learning musicology are also very different.

In a nutshell, here are a few of the conclusions we have seen over the past few days:

Let's say there's a game of chance - a coin toss, you can bet randomly, face up, double down, reverse down, lose all bets.

Intuitively - losing and winning should be flat and not possible to keep profitable. However, in practice this is not the case, you can lose all your money and you can become a billionaire if you use different strategies.

• (1) Equivalent betting, like the Arabian pirates in the legend, where each time you bet, if you lose, you double your bet the next time, and so on until you win.

  The premise is: you must have a lot of money.

  A variation of the equity theory is the strategy of the general person who does not know how to manage money. For example, $1,000 of capital, after losing $100, how much does he bet next? Many people have $100 left, so he actually has only $900 left. That is, he has increased the percentage of his total capital that he bets on.

• (2) Anti-equity theory, a fixed proportion of the remaining money is strictly placed on each bet. Thus, assuming the money is infinitely divisible, then he can lose countless times, because he can take half of it, and the world can't get enough of it. However, after winning money, he still bets according to this fixed proportion, that is, the more money he wins, the bigger the bet.

  The point of the hypothesis is that, ideally, the first type, the equivalent hypothesis, is that money can be made, and the ideal hypothesis is that you have infinite money.

  However, the nature of humanity is to follow the strategy of parity betting. That is, the nature of humanity is that the more you win, the smaller the bet, because you want to keep the profit, the more you lose, the bigger the bet, because you want to double down. This is exactly what becomes a parity betting strategy.

  To further illustrate the issue, here is the gambler's loss theorem: that is, the ideal gambler, that is, the gambler without a profit goal, will lose all his money early or late, because he does not know when to stop, but his money is still limited, so he must have a probability of touching this bottom line of all his money, once he touches, he loses, no bet will continue to play.

  Note that the essence of the gambler's loss theorem is that in the direction of losing money, he has a bottom line, and once his total amount of money touches this bottom line, he is game over. For the game of coin tossing, the probability of winning and losing money is the same. Since the gambler does not know how to withdraw, one day the total amount of money reaches the inverse of the amount of money he won, which is his death.

  The counter-price hypothesis is able to stabilize profits because it reverses the direction of the bottom line and puts it on the side that wins, while the side that loses the money gets half of it.

  If we always bet even, then we'll never lose our money, and we can bet an infinite amount of money. So, since we can bet an infinite amount of money, then the probability of winning a billionaire, no matter how small, as long as he's right, must one day be reached.

  Because, we can -- infinite slope down slope.

  This is the mathematical support of the theory of money management.

  A more detailed explanation of this is the profit formula.

  It is said that Gailey was a researcher at Bell Labs who studied the mythology of telephone signals. Since there is a certain probability that the signal transmission cannot be transmitted, he calculated a set of strategies to obtain the greatest probability of the transmission of the signal. Later, his formula was discovered by the gambling industry, so gamblers, gamblers, lottery industry, etc., many people applied it to gambling. Gailey's article was published in 1956 and his original can be downloaded on the Internet.

  Profit formula: What percentage of each bet is the fastest profit in an anti-equity betting strategy?

  The answer:

  K = W - (1-W)/R

  K: The percentage of the total amount of each bet, W: the odds of your strategy winning, R: the odds of your bet

  So we're playing a coin toss game, where W is equal to 0.5 and R is equal to 2, so K is equal to 0.5- (−0.5) /2 is 0.25.

  In other words, in a coin betting game, as long as you keep the odds of being a millionaire at the fastest rate that you can, and always keep the odds of being a millionaire at the fastest rate that you can, as long as you bet a quarter of your total capital every time.

  The formula is based on a risk management article by Ed Seykota.

  What about the foreign exchange and futures markets? We refer to the basic equation of the profit formula:

  K = (W*R-1)/(R-1)

  The definition of K, W, R is the same.

  So, we find that there is a basic premise of profitability, which is that your odds of winning times your odds of losing must be greater than 1, otherwise it's impossible to be profitable anyway. In coin betting, W*R=1, the expected value is exactly flat. But since we never lose money, and we always have a day when we stop betting, we can choose to stop when we make $100 million, so it's still possible to become a billionaire.

  Consider the forex and futures markets according to the basic equation of the profitability formula.

  Let's say my odds for each hand are W = 0.5, and the ratio of stops to losses for each hand is 2:1, that is, the odds are R = 3.

  Thus, according to the basic equation of profitability, K=<0.5*3-1) /<<3-1) = 25%, i.e. it is optimal when 25% of the total capital needs to be reached for each single position setup.

  If the odds are 0.4, then K is 10%.

  If the stop loss ratio is 3 to 1, then the odds R is 4, and the odds W is 0.4.

  K = (0.4*4-1)/(4-1) = 20%

  If the odds of w = 0.3

  K = (0.3*4-1)/(4-1) = 6.7%

  Looking at this, I think you should understand why countless forex and futures veterans tell us: "You can put 10% to 20% of your money into the market, and set your stop-loss ratio to 2:1 and 3:1, so even if your winning odds are 40% or even 30%, you can still make a steady profit!"

  This is the mathematical basis of the most common money management technique - the profit formula!

  If you look at this, you might say, if it's that simple, why is it that 90% of people in the stock market lose money?

  Note that the profit formula has only strategic guidelines, not operational meaning. The only value that can affect the specific operation, or - technology, in the profit formula is the W - winning rate. According to the profit formula and opinion, you have a higher chance of winning, as long as it is not 100%, then you will lose sooner or later if you bet according to the equity strategy.

  Only a strict execution of the counter-equivalent strategy can and must be able to stabilize profits; and counter-equivalent strategy is against human nature; because he makes you lower your bets when you lose money and increase your bets when you win money, which is the exact opposite of the human nature - greed, fear. A fatal human nature is: too much pursuit of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty of the uncertainty.

  I think you should understand why technology is only 20% and money management is 80%; because, money management, strict trading discipline, is the same as executing the profit formula itself, and trading technology is just a W value in the profit formula. This W is a little bit bigger, it doesn't really matter, as long as the multiplication of W and R is greater than 1, then you must be able to make a stable profit!

  Many beginners have gone astray because they have no idea what they are doing.

  • First, they intuitively think they can find a strategy with a W=100% chance of winning.

  • 2) They are unable to control their greed, fear, and self-control when they are executing the profit formula, so they end up adopting an equity strategy.

  • Equity hedging strategy: losses are spread out! profits are also spread out, but losses are more rapid than profits spread out!

  • Anti-equity strategy: losses are concentrated! gains are spread! so as long as you stick to the equity strategy, you can definitely become a millionaire!

    This idea, if you go up a bit, involves being human. Because technology is only a small part of it. The vast majority of the reason lies in whether or not a person can control himself very well. This means that we often say that defeating himself means defeating everything.

    So we say, make money, work first, work first, work first.

    When we're young, we don't have to make money to make money, but to keep improving our human skills. This process of improving our human skills is the process of executing the profit formula of life, which is painful, however, once we successfully execute, our wealth, like the result of the profit formula and counter-price strategy, grows more and more, never explodes, and ultimately makes us billionaires. (Millionaires, billionaires, billionaires, it depends on when you quit, since you never lose anyway, so when you quit, of course, it doesn't matter)

    And I was just thinking about all this, and I took all the money out of my mini account, and I opened an account that I could make a 0.01 hand and continue playing with $300. This is also the most basic condition that countless experts say I can practice money management. One expert said, trade in five phases. The second phase is what I've been through for the past six months. This second phase is the hardest, because of people, then a year, then 10 more years. The fourth phase is starting to make some money, and how much money can I make. I'm at the end of the second phase.

• ================================================================================================================================ This is a very good article.

  Someone: I spoke to my BF today about money management, and he asked a question: what is the 30% to 40% success rate, what is the stability? As many researchers have said, risk is a fat tail distribution in any market, and once the fat tail probability occurs, how much impact does it have on the entire portfolio?

  Author: zhang, assuming there is a certain stage of winning rate below the WR = 1 criterion, then if it is still equal to the bet, the money is still not a loss, so it can still be won back later. Consider the fluctuation in the direction of losses, that is, some people will experience several big losses, the last one is a loss, some people are not a big loss, the last one is a win.

• ================================================================================================================================================================================================================================================================================================================================================================================================ This is the first and only time I've read this column in one of your pages.

  The foreign exchange is the foreign exchange!

  After summarizing my forex trading in the BOK earlier, I started using the counter-equilibrium strategy to re-enter the market, and followed the guidance of an expert in a forum to make a mid-range list. The effect is quite good. The current results are, three months, tripled, and still growing steadily, with slight fluctuations.

  And what's even more interesting is that I recently found out that the senior technician in our family, the tall, skinny Scottish guy, who was originally a hipster, he also knew about the principle of countervailing. And my younger boss was convinced that the stock market couldn't make money. But after discussing the countervailing strategy and Kelly's formula with me, he became interested in it, and we talked about it from time to time.

• ——————————————————————————————————————

  Some of the insights of a senior citizen on the Kelly formula are very inspiring.

  Individuals feel that Kelly's formula applies to casinos, but not to transactions, for the following reasons:

  • 1, the odds of winning each fall in the casino are relatively fixed (e.g. the roulette wheel at any time is 36:1) and known in advance. The trade has no constant fixed odds of winning, the odds of winning derived from historical data statistics are only a description of a past period, not necessarily repeated in the future. Given the uneven distribution of the market, the results of past statistics and the possibility of a large discrepancy in the future are very likely.

  • 2, the odds of winning in the casino are consistent with the normal (Gaussian) distribution, the frequency of extreme events decreases exponentially with increasing degree, and the casino is limited, which determines that the maximum of extreme events in the casino is extremely limited (at most within the maximum maximum odds of the maximum bet), while the transaction presents the typical form of a sharp-edged tail, and the possible future extreme events cannot be evaluated by historical data retrospection at all.

  Long-term capital managers are dead in the water on this fallacy: they think the market should be in a normal Gaussian distribution, so they use historical data to assess the maximum risk of their system, and then the actual adverse events are far greater than their worst estimates, and they believe too much in historical statistics, thinking that this is just a temporary market irrationality that will return to normal sooner or later, so they continue to die and keep accumulating, and finally the fund managed by two Nobel laureates in economics went bankrupt.

  So one of the prerequisites for using Kelly's formula is that the odds of winning are fixed and known in advance, so that Kelly's formula can give you an optimal balance of efficiency and risk. Speculative trading obviously does not have this feature, and if you blindly calculate an over-advanced position based on historical statistics using Kelly's formula, then a loss that exceeds the historical maximum is enough to hit the account. My personal experience of doing quantitative modeling has found that the maximum withdrawal size is also larger as the cycle of retesting data increases, which means that the longer a person's trading career, the larger the size of the black swan he may encounter.

  The closest thing to gambling and trading is Texas hold'em, which has a lot of unpredictable odds and extreme odds. So how not to be beaten by a black swan and win with a black swan is the whole trick of playing Texas hold'em.

This is from Shareholder Candy's blog.