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Test for newbies

  • #1
  • First Post: Nov 26, 2005 2:03pm Nov 26, 2005 2:03pm
I have a test in money management. I believe experienced traders will make right choice. I need newbies' desicions.

The task is as follows:

You have to choose one of two scenarios, a 80% possibility to win 4000$ (hence 20% risk of not winning anything) versus a 100% possibility of winning 3000$. which one will you choose?

and

a 80% possibility to lose 4000$ (hence 20% risk not losing anything) as one scenario and a 100% possibility of losing 3000$ as the other scenario. which one will you choose?
kiss the trend
  • #2
  • Edited 4:55pm Nov 26, 2005 4:21pm | Edited 4:55pm
Quoting fx-trader777
I have a test in money management. I believe experienced traders will make right choice. I need newbies' desicions.

The task is as follows:

You have to choose one of two scenarios, a 80% possibility to win 4000$ (hence 20% risk of not winning anything) versus a 100% possibility of winning 3000$. which one will you choose?

and

a 80% possibility to lose 4000$ (hence 20% risk not losing anything) as one scenario and a 100% possibility of losing 3000$ as the other scenario. which one will you choose?
777,

I think that my answer would depend on my account size. If I had only $4,000 in my account then I would have to choose the 100% option both times so I would know that I would break even. Any other choice could wipe out my account.

If on the other hand I had $250,000 in my account, I "might" choose to risk 2% of my account to possibly win on both sides.

Hope I pass the test.
Please let me know. Cool test by the way, really makes you think.

Jimmy
  • #3
  • Nov 26, 2005 5:30pm Nov 26, 2005 5:30pm
Merlin,


Why did you delete your reply??
  • #4
  • Nov 26, 2005 6:12pm Nov 26, 2005 6:12pm
I'm not sure either Electric,


Perhaps 777 can clarify?

Jimmy
  • #5
  • Nov 26, 2005 7:38pm Nov 26, 2005 7:38pm
Quoting fx-trader777
I have a test in money management. I believe experienced traders will make right choice. I need newbies' desicions.

The task is as follows:

You have to choose one of two scenarios, a 80% possibility to win 4000$ (hence 20% risk of not winning anything) versus a 100% possibility of winning 3000$. which one will you choose?

and

a 80% possibility to lose 4000$ (hence 20% risk not losing anything) as one scenario and a 100% possibility of losing 3000$ as the other scenario. which one will you choose?
Did you get this out of 'Trade Your Way to Financial Freedom" by Van K. Tharp ??
  • #6
  • Nov 26, 2005 9:17pm Nov 26, 2005 9:17pm
Quoting fx-trader777
I have a test in money management. I believe experienced traders will make right choice. I need newbies' desicions.

The task is as follows:

You have to choose one of two scenarios, a 80% possibility to win 4000$ (hence 20% risk of not winning anything) versus a 100% possibility of winning 3000$. which one will you choose?
Let's compare the 2 situations. You have a 80% chance to win $4000 and a 100% chance to win $3000.

In the first scenario, every 1% of winning probability will give you $50.
In the second scenario, every 1% proability will give you $30, so you go with the first scenario of the 80% probability because for every unit of winning probability you win more in the first case than in the second case.

Quoting fx-trader777
and

a 80% possibility to lose 4000$ (hence 20% risk not losing anything) as one scenario and a 100% possibility of losing 3000$ as the other scenario. which one will you choose?

In this case:

In the first scenario every 1% of probability of losing will make you lose $50.
In the second scenario, every 1% of probability of losing will make you lose $30.

So you go with the second scenario of the 100% probability because every unit of losing probability will make you lose less in the second case than in the first one.

This of course is my opinion from a pure mathematical point of view...


Thanks,

Nader
  • #7
  • Nov 26, 2005 10:38pm Nov 26, 2005 10:38pm
Are the scenarios a one-time event or do the re-occur indefinitely? Being armed with crucial piece of information would affect my decision.
"Do or do not. There is no try" ~Yoda
  • #8
  • Nov 26, 2005 11:45pm Nov 26, 2005 11:45pm
$3,000 for both.
  • #9
  • Nov 27, 2005 4:11am Nov 27, 2005 4:11am
Quoting fx-trader777
I have a test in money management. I believe experienced traders will make right choice. I need newbies' desicions.

The task is as follows:

You have to choose one of two scenarios, a 80% possibility to win 4000$ (hence 20% risk of not winning anything) versus a 100% possibility of winning 3000$. which one will you choose?

and

a 80% possibility to lose 4000$ (hence 20% risk not losing anything) as one scenario and a 100% possibility of losing 3000$ as the other scenario. which one will you choose?
I think I have to clarify. Just forget about forex and account size.

First task: 3000$ with 100% possibility is in your hands that is one scenario on the other hand you can get 4000$ with 80% possibility and 20% possibility not gaining anything and not losing as well. So in first task you have to choose risky 4000$ or risk-free 3000$.

Second task: 3000$ with 100% possibility is your loss or you can choose 4000$ loss with 20% possibility not losing anything. So in the second task you can choose take 3000$ loss or wait may be you will not lose anything but if you lose your loss will be 4000$ and its possibility is 80%.

I think now everything is clear.
kiss the trend
  • #10
  • Nov 27, 2005 4:16am Nov 27, 2005 4:16am
Quoting Pip Daddy
Are the scenarios a one-time event or do the re-occur indefinitely? Being armed with crucial piece of information would affect my decision.
They are one-time event
kiss the trend
  • #11
  • Edited 3:28pm Nov 27, 2005 1:25pm | Edited 3:28pm
I would guess the gamblers decision would be to take the high probability trade of 80% to get 4,000...and the 100% loss of 3,000. In other words, he's gotta an 80% chance of gaining 1,000...and a 20% chance of losing 3,000. A 20% chance of losing 300% more than the $1,000 you would gain on your 80% bet.

Of course, you could take the $3,000 and take an 80% chance of losing $4,000. Basically giving you an 80% chance of losing $1,000, and a 20% chance of winning $3,000.

Me, I'm no gambler. I take the break even trade and wait for a better setup.

Or better yet...I take the $3,000 in the first scenerio...turn off my 'puter and quit for the day.

SF
  • #12
  • Edited 8:14pm Nov 27, 2005 7:05pm | Edited 8:14pm
It sounds like a break even proposition either way. If you take80% chance to win you are risking 800 and if you chose to give back 3000 you would risk 800 to get 1000. On the other hand 80% chance to win 4000 and 80% to lose is break even, and taking 3000 and giving it back is break even. On the other hand if you took the 3000 sure thing and went for the 80% chance to lose 4000 your risking 800 to get 4000,If I was using somebody elses money I would take the 4000 deal, both sides
  • #13
  • Nov 28, 2005 5:55am Nov 28, 2005 5:55am
OK the right answer or right choice is:

The main pricniple of psychology and money management: "Cut losses short, let profit run"

I think now all of you understand which one to choose.
kiss the trend
  • #14
  • Nov 28, 2005 5:57pm Nov 28, 2005 5:57pm
Quoting fx-trader777
OK the right answer or right choice is:

The main pricniple of psychology and money management: "Cut losses short, let profit run"

I think now all of you understand which one to choose.
fx-trader777, I’ve seen the kind of question you've asked used before, quite often in the context of rational decision making... and I suspect this is what Pip Daddy was getting at when he asked whether it’s a one-time event. Because if the pairs of scenarios are repeatable indefinitely, then the most rational decision is the choice of 80% chance of $4000 gain for task one, and 100% chance of $3000 loss for task two... because after an indefinite number of attempts, the average gain will be $200. (4000*0.8 – 3000*1.0 = 200).

For the sake of friendly debate, I don’t agree with "Cut losses short, let profit run" as a generalization, because it’s not necessarily true. You can let your profits run and cut losses short and still lose money if the odds aren’t in your favor. Conversely, you can have lots of small winners and the occasional big loss and come out ahead if the odds are on your side. What it comes down to is having a statistical edge, and then building a system around it.
  • #15
  • Nov 28, 2005 6:29pm Nov 28, 2005 6:29pm
The word "possiblity" ...

1 a:Being with in the limmits of ability, capacity, or realization. b: Being what "may" or "may not" occur according to nature, custom, or manners. And being something that may or may not be true or actual.

so a 100% possiblity is an oxymoron.:

I know thats not the point but its the first thing I thought of when I read it. I chose to "sit it out"....you know when in doubt. Because in forex there is no 100% so i figured it was a trick question

Dave
  • #16
  • Nov 28, 2005 9:29pm Nov 28, 2005 9:29pm
You didn't say if there was any money at risk. So I'll take 80% CHANCE TO WIN 4000 AND 80% CHANCE TO LOSE IT.
  • #17
  • Nov 29, 2005 12:29am Nov 29, 2005 12:29am
Quoting xxDavidxSxx
I know thats not the point but its the first thing I thought of when I read it. I chose to "sit it out"....you know when in doubt. Because in forex there is no 100% so i figured it was a trick question

Dave
why when you have unrealized profit is not it 100% yours if you cover position?
kiss the trend
  • #18
  • Last Post: Nov 29, 2005 12:34am Nov 29, 2005 12:34am
Quoting mrcooldude
For the sake of friendly debate, I don’t agree with "Cut losses short, let profit run" as a generalization, because it’s not necessarily true. You can let your profits run and cut losses short and still lose money if the odds aren’t in your favor. Conversely, you can have lots of small winners and the occasional big loss and come out ahead if the odds are on your side. What it comes down to is having a statistical edge, and then building a system around it.
Statistical edge, yeah, that's a statistical edge "cut losses short and let profit run"
All top traders in Schwager's book say so. So that's really statitically confirmed.
kiss the trend
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