Tuesday, October 15, 2013

A Sneak Peak Into My Money Management Spreadsheet

This is my spreadsheet set to help manage your money and correlation and to adjust for fees given a specific strategy with certain expectations.
My spreadsheet going forward will focus on that.


The data is based upon a leveraged trade with lots of time value following the best trader I know. I have a LOT of work before the spreadsheet is ready to simulate a sequence of all possible outcomes and determine the probability of achieving a certain result after "X" number of trades. For now it just gives you "expected return" but if it says a return of 100% after 50 trades, it could easily be a somewhat small to moderate chance of being up dramatically such as 1000% and a very strong chance of being down slightly. If you plan on preparing for retirement in 5 years, you would want to maximize the chance you can achieve a certain result in those 5 years... Or perhaps reduce chance of falling under a certain amount if you are close to, or in retirement, as opposed to maximizing your return. Not even someone in their 20s is likely to live forever and they will have a time when they plan to retire. The maximization of return is thus not as valuable as maximizing the probability of achieving a certain threshold by retirement date.

For now the spreadsheet is exciting because it can still draw powerful conclusions based upon data, particularly for someone with a lot of time. For those that understand the nature of the kelly criterion, they can still seek a very powerful advantage by using it to achieve their objectives of lower risk and more bets, provided the return is still acceptable after accounting for fees. Some early conclusions? If you are doing a "stock trade" with a $5000 account, you probably want only 2-3 trades at once with about 40-60% of capital on the side in cash. This is a very aggressive strategy, but fees are very detrimental.  Doing only 1 trade at a time risking maybe 30-35% of your bankroll is probably a bit safer since less capital is at risk, but not by much since you are so leveraged to that one trade's outcome. Even if you have $50,000 in a stock portfolio the above shows you still shouldn't really have more than 5 names. This was the shocking information that really made me rethink everything.

However, further analysis also shows that risking significantly less capital is better than risking slightly more than suggested Until I come up with a way to simulate a ton of trades in a short period of time and draw conclusions quickly about position sizing and probability of certain results I won't be able to verify any of this though.

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