Customer Reviews

The Mathematics of Money Management: Risk Analysis Techniques for Traders

5 star:		(4)
4 star:		(2)
3 star:		(2)
2 star:		(2)
1 star:		(1)

 

 

This book intelligent and is well written. However, it's discussion is contingent on accepting that maximizing the geometric growth rate (i.e. logarithmic utility) is the best objective function for a trader. This produces a very aggressive betting strategy. I would advise finding out a little more on "Kelly Betting" (try Blackjack resources) before going ahead with this.

I just read the "not for the innumerate" review on this book, and I agree. But I would like to clarify why the book disappoints. It's not that there are too many equations, but that there are too few equations and way too much jargon-laden hand waving. The hand waving, unfortunately, does not compensate for the clarity sacrificed by omitting the math. Vince's thesis that optimal f will maximize geometric returns is a valuable one, as is the concept of trading at dynamic fractional f to control risk. Unfortunately, he does not get specific enough to show us how to define and use optimal f in real life stock trading. I have an extensive math background, but I cannot get convincing quantitative results in Excel using his presentation, even after re-deriving for myself all the equations he deigns to show us. Perhaps if I had a futures trading background I would find his prose easier to follow, but I would have been much better off with the equations, in an appendix at least.

Optimal F is Ralph Vince's baby but it doesn't take into consideration that there is a trade out there that will take you out of the market. I trade professionally and would never trade anywhere near with the risk he talks about. The best traders I know are always prepared for the worst case secenario and just want to keep playing the game. Optimal F will take you out of the market very quickly.

I would have given this book 5 stars if it was written with more examples to demonstrate the theories and formulas that it contains. The author certainly doesn't "spoon feed" his material to the reader. If you are innumerate stay away from this book. Of course, if you are innumerate stay out of trading the markets. What the author has to say regarding the correct amount of contracts or shares to buy based upon the calculation of optimal f is very important in order to keep from going broke and to receive expotential gains. It is loaded with concepts to facilitate the money mangament element of trading. I would say that a good prerequisite for reading this book would be an engineering degree something like advanced rocket science.

... I must have close to a 100 trading books and this one is a gem. As Elder points out in one of his books there are three legs that support successful trading: Trading Strategy, Psychology and Money Management. Optimal F which is well explained in this book is the best measure of your Risk/Reward. Knowing the optimal f of a trade allows you to compare apples and oranges. I can tell if trading a stock option with a potential return of 1000% is better than trading a stock with a potential return of 20%.

Set aside all your pre-concieved notions of money management being about risk/reward. Whilst it is definately a good idea to keep r&r in mind, it's not very mathematically defined. Everything Ralph Vince presents in this book is applicable to trading at an optimal level (for maximum gains).

He begins the book by reviewing the concept presented in his previous book on empiral optimal f. This serves as a primer to the coming chapter where the idea of parametric optimal f is detailed, allowing any trader (even without empiral data) to determine his/her optimal quantity to trade. Vince makes a clear distinction between the classical portfolio theory of defining optimal weights, with the notion in mind that optimal quantity and optimal weights are different for leveraged accounts. Following on from parametric optimal f, we are introduced to the 'optimal of the optimal' theory where he combines optimal f with modern portfolio theory (markowitz e-v theory) to obtain a construction for an unconstrained geomtrically optimal portfolio. Vince discusses the Black-Scholes Options Pricing Mode, and the Black Futures Option Pricing Model, among other things to incorporate into his framework for this 'optimal of the optimal' portfolio.

This is definately not a book that can be read in a few days, unlike the majority of books I've encountered on trading. It would serve the reader best if he/she were to summarise the ideas Vince presents, along with following what he is doing by creating their own statistical representations (in Excel, Minitab,... though this did pose a problem because some ideas are very challenging to formulate into a statistical package). Finally I thought that I should point this out - I am quite confident in the fact that Vince makes a mistake with one of his partial derivatives in the introductory chapter on E-V Theory (when employing the Lagrange method).

Vince's work is the very best available for the topic of money management in futures trading. If you have ever wondered how many futures contracts you should buy to optimize account growth, what the maximum downside risk is and how to control damage then this book is a must for your trading library. The book is mathematically oriented but if you invest the time to really understand it your ability as a money manager will greatly increase. A must for any serious trader!

Ralph Vince is a good teacher, good lecturer who it seemed to be capable of making decent money in an ideal market scenario where there is no transaction fees, no liquidity risk and bad things happen to an amount that you can "manage" them. If you manage money like him in a real world then you go bankrupt very quickly.

This book must have been the best I've red on money management (position sizing). The author illustrates in a mathematical way how we can maximize the growth of our equity using his optimal f* formula. I think most people with a basic background in mathematics (and statistics) can understand the explenation on how optimal f* is determined and how we can calculate it. The math behind isn't that complicated (it's actually all sumarized in his equation 1.13 on page 31).

For the people having trouble to apply this method on backtested results, I advise Thomas Stridsman his book (How to build winning trading systems). He illustrates how to do this in MS Excel.

I'm currently using his optimal f* as a method to determine the maximum portfolio heat for my trading systems, but not immediatly applying it to position size al my entry orders. You can also use the f* to score your trading system.

Definitly advised to people with an interest in money management for trading systems.

The book is well written, reflecting level of education. The author is no dummy.

However, the community is better served to realize that there is a divide between Modern Portfolio Theory, followers of quantitative methods ad infitum, and those followers of Practical Portfolio Theory, who are more or less followers of the Edwards & Maggee/Wyckoff schools of trading thought.

My recommendation is to identify to which school of thought you belong and simply lay to rest the other quack books that come along.