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pitboss
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Never go busted!

Postby pitboss » Fri May 16, 2008 4:36 am

Have you ever wanted to know what amount of your bankroll you should risk at any given time?

Most people either take on too much risk or don't take enough risk relative to optimization of their bankroll.

First of all you must compute your expectation. Expectation is, for every dollar you risk, you will receive a return of x, either positive or negative. If you don't know exactly what your expectation is, you are risking ruin, whether you are winning (have more than you started with) or losing.

To compute your expectation:
T = Total number of wins and losers
WPC = Total number of wins divided by T
LPC = Total number of losers divided by T
WA = Total dollars won divided by total number of wins
LA = Total dollars lost divided by total number of losers
WF = WA divided by LA
Expectation = WF times WPC minus LPC

Example:
98 total results, 50 winners and 48 losers
$5,000 total won and $4,850 total lost
T = 98
WPC = 50 / 98 = .51
LPC = 48 / 98 = .489
WA = $5,000 / 50 = $100
LA = $4,850 / 48 = $101
WF = $100 / $101= 0.99
Expectation = 0.99 * .51 = .505 - .489 = .016
For every $1,000 risked you yield $16
Risk is the LA or average lose amount - not what you purchased

In this example, if you never risked more than 1.6% of your bankroll at any given time, you'd never go broke and you would optimize the return on your bankroll. If you risked more than 1.6% your risk of going broke increase expotentially - if you risk less then your bankroll is under perfoming.

Once you know what your expectation is, you can calculate how much principal you can withdraw periodically. You can also compute how much of a bankroll would be required to achieve financial objectives.

How much capital would you need to draw an income of $2,500 per month before taxes and allow zero for inflationary errosion of capital with your having an expectation of 3.5%,:

$2,500 / .035 = $8,333 /.035 = $2,380,952

If you had a bankroll of $30,000, how many lots of GBPUSD could you buy at $1.9473 pair price with a 3.5% expectation:

$30,000 * .035 = $1,050 (risk)
1,050 * 100 = 105,000
105,000 / 1.9473 = 53,920
53,920 / 10000 = 5.4 lots

Now for a little quirk in the expectation formula. If you are buying mulitple pairs at a time, the amout you risk is increased but not 1 to 1. The ratio is:

1 pair = expectation * 1
2 pairs = expectation * .70 each
3 pairs = expectation * .53 each
4 pairs = expecation * .44 each

With a bankroll of $30,000, how many lots of GBPUSD at $1.9473 and USDCHF at $1.0555 could you buy with a 3.5% expectation:

GBP:
$30,000 * .035 * .70 = $735 (risk)
735 * 100 = 73,500
73,500 / 1.9473 = 37,744
37,744 / 10000 = 3.8 lots

CHF:
convert to dollars = 1 / 1.0555 = .947
$30,000 * .035 * .70 = $735 (risk)
$735 / .947 = 776
776 * 100 = 77,600
77,600 / 1.0555 = 73,520
73,520 / 10000 = 7.4 lots

Total risked $1,470 as opposed to $1,050 in the first example for a single pair.

Well, as Bugs Bunny says, "Th - That's all folks ". :)

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TheRumpledOne
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Postby TheRumpledOne » Fri May 16, 2008 6:06 pm

Thank you for posting.
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!

Please do NOT PM me with trading or coding questions, post them in a thread.

pitboss
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Postby pitboss » Sun May 18, 2008 3:31 am

TRO, I have been in casino mgt for over 30 yrs.
I'm constantly asked, "How do you beat this game or that game"?
My response is, "Don't ever make a bet!"

One fact is crystally clear, most people give a lot of lip service to 'wanting to win' but ignore or block out the true facts. The fact is they are in a negative expectation situation when playing any casino game.

Ergo, the reason for my lengthly posting regarding computing expectation. Any person who is seriously 'making a play' on the forex (or any market for that matter) had best have a detailed record of what they have been doing.

If when they calculate their expectation and it is negative, they had best immediately begin looking for another method or system because just as certain as the good lord made little green apples, they are going to go broke!

If their expectation is positive and they are over 'betting' their bankroll relative to their expectation, they are prone to go broke, even though the method itself is a winner.

It is like a mechanic or plumber, if they lose their tools they can't work and make any money. In this business our tools is our bankroll - lose it or seriously impair it and we can't make any money!

pitboss
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Postby pitboss » Sun May 18, 2008 4:52 am

I whipped up an Expectation Calculator that you may use:

http://forex.azrewards.com/expectation.php

(nope, not selling anything, no ads, no popups - just a freebie!!)

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TheRumpledOne
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Postby TheRumpledOne » Sun May 18, 2008 4:16 pm

Thanks again, pitboss.
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!



Please do NOT PM me with trading or coding questions, post them in a thread.

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