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Portfolio Management Formulas : Mathematical Trading Methods for the Futures, Options, and Stock Markets

Average customer rating:

Top notch
Excellent coverage of a difficult topic
Beware applying optimal f to actual trading
full of fluff, platitudes, generalities, and inaccuracies
Simply the best investment money management book out there

Portfolio Management Formulas : Mathematical Trading Methods for the Futures, Options, and Stock Markets
Ralph Vince
Manufacturer: Wiley
ProductGroup: Book
Binding: Hardcover

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The Mathematics of Money Management: Risk Analysis Techniques for Traders
The New Money Management: A Framework for Asset Allocation
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Money Management Strategies for Futures Traders (Wiley Finance)
The Handbook of Portfolio Mathematics: Formulas for Optimal Allocation & Leverage (Wiley Trading)

ASIN: 0471527564

Book Description

Explores two neglected mathematical tools essential for competing successfully in today's frenzied commodities markets: quantity, which shows the proper amounts a trader should trade for a given market and system, and intercorrelation of returns (diversification), which shows not only which markets and systems to trade, but how to diversify with respect to trading the right quantities for each market. By using these lesser known tools in conjunction with the more popular trade/system selection tools, readers will see mathematically how success in the markets can be achieved, and how ``success'' without using all three is most likely incidental. In addition, non-stationary distribution of profits and losses and drawdowns are incorporated into the discussions to expose traders to the highs and lows of commodities markets and how best to leverage their assets.

Customer Reviews:

Top notch.......2005-08-03

I found this book to be amazingly good. Equities traders should be forwarned that "Optimal f" is employed here for commodities traders that can make use of big margin, but Vince may have addressed this issue in his more recent books.

It seems a quite a few people get angry or perplexed by optimal f, and the reasons boil down to a handful: Objection: Employing Optimal f will introduce you to levels of risk (large drawdowns) you find disagreeable. Response: That's OK, the mathematical reasoning is not invalidated by the extent to which one is risk averse. If you don't like using the largest historical loss to calculate Optimal f, you can use far larger datasets to produce more radical outliers, or even estimate catastrophic (percentage) losses.

Objection: The whole scheme seems a little too radical. Response: This is the very thing that makes the book so refreshing. Vince has done his own thinking, and he has done quite a bit of thinking very carefully. I wish I had him on my team.

Objection: The book contains too much math. Response: yes, this is mathematical stuff we are dealing with. You can trade more simply, but some of us want ideas for a better edge.

Objection: The book contains primitive math. Response: this is a product of the author's kindly tone. He is not attempting to astound you with his knowledge, but advancing new ideas in plain language, and try to keep the stragglers up with the main pack as they read. I found the tone conciliatory and courteous.

Throughout, Vince does his own thinking, and the burden of the book is not what you usually find. Most trading books I have read contain a little useful material, but seems to have been launched mainly to gain the author fame and income. This book is different. Vince has real ideas, thinks way beyond the "safe zone" and the book has completely reshaped my understanding of money management.

Excellent coverage of a difficult topic.......2000-11-20

... this book is incredible. I have a degree in mathematics and the principles expressed are extremely sound -- but far more important than the formulas are the first couple of chapters which cause you to view trading in a very different, and statistical, manner. Although the theories in this book can really only be applied to a trading system (which I haven't really used), after reading this book over several times I understand that there is a mathematical certainty that I will eventually lose my trading capital if I don't start approaching trading in a more systematic fashion. Anyway, I highly recommend it -- the sections on gambling theory alone are worth buying it.

Beware applying optimal f to actual trading.......2000-03-02

The problem with optimal f is that the calculation is highly dependent on the largest loss on a trade (not drawdown) experienced in backtesting. If you use optimal f and the largest loss in actual trading is greater than the loss experienced in backtesting, you will go bankrupt. Vince deals with this problem in an offhanded manner by suggesting that the actual f you use should be "padded". OK, so in the end you don't even use the actual optimal f, you pad it. And how much do I pad it by? Vince is silent on this question. So the purpose of optimal f - to decide by formula how much capital to allocate to a trade - is totally negated by the fact that you must "pad" optimal f. And you must pad it by a qualitativly determined amount because, again, Vince gives no formula on how much to pad it by. Optimal f is totally useless for system traders or any other trader for that matter.

full of fluff, platitudes, generalities, and inaccuracies.......1999-10-08

"This book is about mathematical tools". That's the first sentence of Vince, who as it turns out markets his books as heavy on math. I'd bet that he never had college classes in math, or physics, or finance for that matter. His book is full of mathematical depths like explaining why 1+2*3 is equal to 7, not to 9, or giving four reasons why asterisks is the best symbol for multiplication. Another brilliant example is when he illustrates how to combine three assets with different weights: 10% of A, 10% of B, 80% of C; 10% of A, 20% of B, 70% of C, and then three more pages of other different combinations. General math level of this book is a level of B-student in the seventh grade who has never derived a mathematical formula or proved mathematical fact. Then, considerable part of the book is authors comments on trading wisdom, like "first loss is the best loss". Then, there are some ramblings on normal ditributions and Capital asset pricing theory. About 60 pages are appendices on completely irrelevant topics like he writes Black-Scholes formula, or normal distribution, or his grandiose program duplicated in C and Basic.

The "stuff" of this book, which is the so-called "f-ratio" is explained on about ten pages. You can understand it, although it is not a clear explanation. Better probably to read it where the author got it in the first place. It is difficult to say if f-ratio has much practical importance because of assumption of indefinite divisibility of trading contracts.

Most of all this book reminded me a project done overnight for a school or college class where you put a little stuff in the middle and then pad it for volume with anything you can come up with because you need to satisfy the minimum length requirement.

Simply the best investment money management book out there.......1999-07-26

I bought this book about 4 years ago and put it on the shelf for later reading (I collect books in this subject area). I sure wish I read it thoroughly at an earlier date. Concerning the area of money management as related to investing, this is simply the best book I have ever seen, and like I said, I collect books dealing with this subject. While this book at first seems oriented towards the futures markets, its principles may be applied to any market. Personally, I invest in stocks, not futures. Just this weekend, using the theory discussed in this book, I set up a spreadsheet that I feel confident will greatly improve my trading returns in the future. Highly recommended. The material is explained very well and very thoroughly and is very convincing.

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