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Strategies & Market Trends : Systems, Strategies and Resources for Trading Futures

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To: Tom Trader who wrote (12259)	1/9/1999 5:45:00 PM
From: August	Read Replies (2) of 44573

Tom, this is the Monte Carlo analysis. Have you played blackjack? What you stated is the concept behind winning in black jack. Increase your wager on higher probability hands (derived from counting cards). And wager only the base minimum wager on lower probability hands. In the case of black jack, one have to wager something on every hand as long as he want to sit at the table. In the case of the market, the minimum wager is zero. One does not have to wager at all on low probability situation. That's how I was able to beat the house on black jack (when I was a student). I played black jack in the casino only several times, but I was prepared before I went. In the case of black jack, the odds of winning is a little less than 50% on the average. If you win, you win 100% of the wager amount, likewise when you lose. In this situation, the base wager should be no more than 2% of your capital. Of course, you increase the wager above the base wager when the odds are better. Use the same approach to the market. Investing different amounts based on the risk/reward ratio as well as the absolute level of risk. As for your system, is a signal A signal, or there are signal and there ARE SIGNALS? If all your signals are indistinguishable, then there is little in the way of varying the number of contracts to achieve optimal results. If you can differentiate your different signals, and quantify the risk/reward levels, then you can simply back test different base wager and different ratio for increasing wagers over several years and look at the return vs. maximum drawdown to come up a amounts and ratios that you are comfortable with. There aren't that much to test. Err on the conservative side for preservation of capital, for then you will prevail in the end even under the most adverse conditions.

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