Now, before I catch any flames for this, the title is intended more to promote discussion than my own methods. I will write about my ideas on the topic of position sizing, and will accept any criticism or alternative ideas from the many great minds on this forum (that's serious, not sarcastic).
Okay, to start off, yes I have read the thread on money management in the beginner section. Do I understand it completely? Probably not, but I have the jist (sp?) of it.
Now, as far as position sizing goes, I started off believing in the gambler's fallacy, which applied to forex, states that if I lose with one lot, next time I should place an order with two lots (assuming 1:1 R:R and 50% win rate). If I lose again, then I should place an order of three lots, and so on and so on, until I win, which should put me ahead (although realistically, factoring in the spread, you will still be in the red).
I seem to recall someone saying here on FF that you should not increase position size like this when you lose, but rather when you win. However, the outcome is exactly the same as the gambler's fallacy, only you are waiting for a loss rather than a win. With the gambler's fallacy, applied either to streaks of wins or losses, you will end up on the other side you started on (i.e. you will be black after ending a loss streak and red after ending a win streak). Again, factoring in the spread makes this a losing proposition either way.
This got me to thinking about the logic behind lot optimizing code and whatnot in certain EAs. I ran one simulation of an EA where I had a huge loss on a trade with a position of 40 lots, which caused the code to "optimize" my lots for the next trade at 0.1! Of course the next trade was a win of equal magnitude in pips, but I was still way down in terms of equity, thanks to the "optimized" position size.
Now I am still not sure what the answer to all of this is, but I believe it lies somewhere in increasing position with each rise in equity, but keeping it the same after losses. I know in extreme losing streaks this could cause you to go bust, I think that this is on the right track to the "true" optimized lot figure.
I am open to any and all suggestions,
andersenws
Okay, to start off, yes I have read the thread on money management in the beginner section. Do I understand it completely? Probably not, but I have the jist (sp?) of it.
Now, as far as position sizing goes, I started off believing in the gambler's fallacy, which applied to forex, states that if I lose with one lot, next time I should place an order with two lots (assuming 1:1 R:R and 50% win rate). If I lose again, then I should place an order of three lots, and so on and so on, until I win, which should put me ahead (although realistically, factoring in the spread, you will still be in the red).
I seem to recall someone saying here on FF that you should not increase position size like this when you lose, but rather when you win. However, the outcome is exactly the same as the gambler's fallacy, only you are waiting for a loss rather than a win. With the gambler's fallacy, applied either to streaks of wins or losses, you will end up on the other side you started on (i.e. you will be black after ending a loss streak and red after ending a win streak). Again, factoring in the spread makes this a losing proposition either way.
This got me to thinking about the logic behind lot optimizing code and whatnot in certain EAs. I ran one simulation of an EA where I had a huge loss on a trade with a position of 40 lots, which caused the code to "optimize" my lots for the next trade at 0.1! Of course the next trade was a win of equal magnitude in pips, but I was still way down in terms of equity, thanks to the "optimized" position size.
Now I am still not sure what the answer to all of this is, but I believe it lies somewhere in increasing position with each rise in equity, but keeping it the same after losses. I know in extreme losing streaks this could cause you to go bust, I think that this is on the right track to the "true" optimized lot figure.
I am open to any and all suggestions,
andersenws
"Youth is the trustee of prosperity." - Benjamin Disraeli