Portfolio Management Formulas Mathematical Trading Methods For The Futures Options And Stock Markets Author Ralph Vince Nov 1990 Online
When Ralph Vince wrote Portfolio Management Formulas in 1990, it was considered arcane esoterica—a book for PhDs and pit traders. Today, it is the secret bible of every Systematic Quant and CTA (Commodity Trading Advisor) .
The book is famously difficult to read. Vince is a mathematician first and a writer second. The equations are dense; the examples are abstract. But for the serious trader who works through the problem sets, the reward is enlightenment.
The final takeaway from the November 1990 edition is this:
"You can have a terrible system with a brilliant money management formula and make a fortune. You can have a brilliant system with terrible money management and go bankrupt." When Ralph Vince wrote Portfolio Management Formulas in
Portfolio Management Formulas is dense, math-heavy, and occasionally tedious. It was written for DOS-era spreadsheets (Lotus 1-2-3). But it is also the Rosetta Stone of position sizing.
If you are a discretionary trader who "feels" how much to buy, this book will hurt your brain. But if you want to survive long enough to retire from trading, you must understand that position size is the only variable you can control perfectly. Price movements are random; your bet size is not.
Read this book if: You have a profitable edge and want to maximize its long-term growth without going bankrupt. The book is famously difficult to read
Skip this book if: You want a list of "Top 10 Candlestick Patterns."
"You can have a system that is right only 20% of the time and make a fortune—if you bet big on the winners and tiny on the losers. The math of ruin does not care about your pride, only your f." — Ralph Vince (paraphrased)
Discussion Question for the comments: Have you ever calculated the Optimal F for your current strategy? If so, how far below it do you actually trade (half? a quarter?) "You can have a terrible system with a
Without delving into the iterative calculus Vince uses, the practical definition is: [ f = \textThe fraction of your total stake to risk on a single bet to maximize the geometric mean. ]
To calculate ( f ) for a trading system, you must analyze the historical sequence of profits and losses (HPRs - Holding Period Returns). You find the fraction that, when applied to the worst-case loss in the sequence, yields the highest Terminal Wealth Relative (TWR).
The Shocking Result: For most aggressive futures or stock systems, Optimal ( f ) often lands between 0.15 and 0.30 (15% to 30% of your account on a single trade). To a traditional trader, this looks like suicide. To Vince, risking less than ( f ) is leaving money on the table; risking more than ( f ) is mathematical suicide.