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The Mathematics of Money Management: Risk Analysis Techniques for Traders [Hardcover]

Ralph Vince
3.2 out of 5 stars  See all reviews (8 customer reviews)
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Book Description

May 1 1992 0471547387 978-0471547389
Every futures, options, and stock markets trader operates under a set of highly suspect rules and assumptions. Are you risking your career on yours? Exceptionally clear and easy to use, The Mathematics of Money Management substitutes precise mathematical modeling for the subjective decision-making processes many traders and serious investors depend on. Step-by-step, it unveils powerful strategies for creating and using key money management formulas--based on the rules of probability and modern portfolio theory--that maximizes the potential gains for the level of risk you are assuming. With them, you'll determine the payoffs and consequences of any potential trading decision and obtain the highest potential growth for your specified level of risk. You'll quickly decide: What markets to trade in and at what quantities When to add or subtract funds from an account How to reinvest trading profits for maximum yield The Mathematics of Money Management provides the missing element in modern portfolio theory that weds optimal f to the optimal portfolio.

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Product Details

Product Description

From the Publisher

Permits traders in the futures, options and stock markets to create profitable trading formulas based on the rules of probability and modern portfolio theory. Shows how to develop and utilize key formulas which minimize losses, maximize profits and avoid excessive risk. Reintroduces the idea of ``optimal-f'' and its use in weighing and assigning values to the components of a trader's portfolio. Includes a computer program for immediate hands-on usage of techniques described.

From the Inside Flap

Until now, money management practices have been driven by a loose collection of highly subjective rules of thumb. By failing to accurately understand the outcomes of their potential actions, many traders and serious investors have been operating blind. The Mathematics of Money Management injects a new degree of precision into your trading strategies. Based on the rules of probability and modern portfolio theory, it shows you how to create and use these money management techniques in the futures, options, and stock markets. And you don’t need to be a PhD to exploit these strategies. Every equation and formula is easy to understand, and practical examples are provided for immediate hands-on use of the trading techniques discussed. By wedding the precepts and practices of modern portfolio theory to the concept of optimal f, The Mathematics of Money Management shows how to gauge the payoffs and consequences of every potential trading action, before you take it. Armed with this information, you’ll obtain the greatest potential investment growth for your specified level of risk, no matter what your chosen market. You’ll use these time-tested strategies to:
  • Evaluate the risks and rewards of any potential trading decision
  • Accurately weigh and assign values to the components of any portfolio
  • Determine exactly how many contracts to trade for a specific market and/or system
  • Maximize profits under reinvestment trading
  • Prognosticate future system performance
Now you can bid good-bye to unreliable money management assumptions and faulty decision making. Here’s the money management tool for making mathematically correct trading decisions.

Inside This Book (Learn More)
First Sentence
Whenever you enter a trade, you have made two decisions: Not only have you decided whether to enter long or short, you have also decided upon the quantity to trade in. Read the first page
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Front Cover | Copyright | Table of Contents | Excerpt | Index | Back Cover
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Customer Reviews

Most helpful customer reviews
2 of 2 people found the following review helpful
1.0 out of 5 stars mathematical myopia Nov. 1 2001
In my view trading is NOT about fancy mathematics any more than running a business is about knowing tax laws (of course, I am assuming that a basic knowledge of statistics and probability concepts is not considered 'fancy' here). Trading is about trading, you have to have a basic concept of math but you don't have to be a quant, unless you are trying your hand at some high powered form of arbitrage. Ralph Vince's theory is off in its assumptions because it overlooks the fact that controlling risk is the absolute number one priority, NOT optimization. This very topic is discussed and wrapped up nicely in a few paragraphs in Jack Schwager's interview with scientist/money manager William Eckhardt in 'New Market Wizards' (Eckhardt has a few hundred million under management; I don't know how much Vince does, if any).
I am not a math superstar, I was a literature and philosophy major in college. But even a liberal arts joker like me can see that the math element is way overdone here. The idea that money management is a mysterious and complex issue is proliferated by books like this. I can sum up effective money management in two steps: First take your worst case loss scenario, which will be based on a run of lossses with a less than one percent probability of occurring, as calculated by your expected win/loss ratio. For example, if you reasonably expect to win 40% of the time and lose 60% of the time, there is a less than 1% or "worst case" probability, that you will see ten losses in a row at some point in your trading (this may look like hard math but the calculations are actually grade school level). Next, determine your max desired drawdown. What's the biggest hit you could possibly stand? Ten percent down? Twenty five? Fifty?
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2.0 out of 5 stars Some gems, but very poorly presented Aug. 6 2000
By A Customer
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.
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4.0 out of 5 stars Not For the Innumerate Jan. 24 1999
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.
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By A Customer
... 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%.
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