Kirkpatrick and Dahlquist, CMT1 Chapter 23

Part VII: System Testing and Management

Chapter 23: Money and Risk Management

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• Chapter Objectives
  • Definitions and measurements of risk as it relates to money management
  • The martingale betting strategy
  • Diversifiable versus correlated risk
  • Methods for testing money-management strategies
  • The use of various types of stops to manage risk
  • Methods for determining the minimum capital needed for a system
  • Methods for determining the percentage of capital to allocate toward one system
• Intro
• Risk and Money Management
• Testing Money-Management Strategies
• Money-Management Risks
  • Concepts
  • Drawdown and Maximum Drawdown
  • Theory of Runs
  • Martingale Betting System
  • Reward to Risk
  • Normal Risks
    • Positions size
    • Number of Shares or Contracts
    • Determining Optimal Position Size
    • Risk of Ruin Formula
    • Theory of Runs
    • Optimal f and the Kelly Forumula
      • Calculating Optimal f
    • Final Position Size
    • Initial Capital
      • Initial Capital– Monte Carlo Simulation
      • Monte Carlo simulation projected equity
    • Leverage
    • Pyramiding
  • Unusual Risks
    • Psychological Risk
    • Knowledge of the Market
    • Diversifiable Risk
    • Trade Frequency
    • Temporal
    • Security Quality
• Money-Management Risk Strategies
  • Intro
  • Protective Stop
  • Hard Money or Dollar Stop
  • Maximum Winning Adverse Excursion
  • Trailing Stop
  • Breakeven Level and Breakeven Stop
  • Technical Point Versus Money Point
  • Volatility Stop
  • Maximum Winning Favorable
  • Trend Line
  • Adaptive
  • Other Kinds of Stops
    • Intro
    • Signal
    • Time
  • Targets
  • Execution
• Monitoring Systems and Portfolios
• If Everything Goes Wrong
• Conclusion
• Review Questions

Proceed to Appendix A: Basic Statistics (in Kirkpatrick and Dahlquist)

Chapter list for Kirkpatrick and Dahlquist