Optimized Risk vs Reward Equation

@Pippopotamus, the membership fee is to weed out the freeloaders who aren't serious. Time wasters are the worst offenders.. not only are they a waste of time and resource, but they inject noise in subjects they know nothing about.

Think of it like this; if there was a business club where the members include Bill Gates and Warren Buffett... would you want to join the club? Or would you tell them they should just pull up a soap box and speak, and whoever wants to listen will listen and those who won't won't? To me, respect for a person's time is rare these days, and it's something I value.

The other thing is, it must be an Obama thing, because for some reason, now, everybody expects everything for free. I put in THOUSANDS of hours. And I'm expected to give all this out for free? Why? Because I'm a nice guy? If you want companionship, buy a dog. If you want high quality information, be prepared to pay for it. There is nothing unfair about the request to pay for high quality information that has been filtered, distilled, and concentrated for you. You know who won't pay? Those who don't see value in it. I keep telling people that in my lifetime, I have spent close to $10K on speed reading courses.. And 90% of the people I say that to, think I'm an idiot.. Since I do a few hundred books a year, I think it was by far the cheapest ROI in my life. But who sees it that way, or more specifically, who is willing to pay that kind of money??

I would like to put the cost of admission somewhere that would weed out at least 96% of the population. Why? The 64/4 principle. We all know the 80/20, so you just take 80/20 of 80/20 and you get 64/4. I would like to have as its members, the top 4% who provide 64% of the usable content on most forums.

@bigvlada,

I haven't decided yet, but this might be my last post on this forum.. So while debating if it will be or not, I thought I'd throw something at you to help you out. You have been by far the hardest working person on the forum to reproduce my work, so I'm going to tell you a portion of it.

You are having difficulties because you are missing a lambda...

You need to solve using a makeshift Lagrange Multiplier.... Otherwise, you will always be missing a variable that you can't solve for.

With the Lagrange, you can now do it as a multi-step partial differentiation.

Hope that helps you.


@charlyher. If you have solved it, great. Congrats.

Thank you for all the free info you have contributed over the years. I greatly respect your talents/efforts. You have every right to be paid to disclose your discoveries.

I'm reading a few books about Lagrange since last Sunday. That lambda popped out from time to time during my research and I decided it is only fair that we get to know each other better. It appeared at first when I did research on Euler (Lagrange succeeded him as the director of mathematics at the Prussian Academy of Sciences in Berlin) and then again while reading about zero sum two person games with saddle points.

Thank you for the hint, I'll put mr. Lagrange in a room, point a lamp in his face and ask him where's he been at the time of the murder. Who got murdered? My profit of course (The butler is still my main suspect).


If you decide to leave this forum, you will be missed.

For any given value of c, we can use Lagrange multipliers to find the optimal value of f and the point where it occurs. Call that optimal value f0,occurring at coordinates (x0,y0) and with Lagrange multiplier λ0.

The Lagrange multiplier is the rate of change of the optimal value with respect to changes in the constraint.

Remember, the first derivative is rate of change; but 2nd derivative is rate of rate of change.

You have 3 variables, Entry, Exit, SL. We then have a 2nd Entry; and we begin by assuming that Exit and SL are shared amongst the 2 entries (and assuming that the exit is not an exit at all, but next point in which we add more lots) then we have:

Entry1, Next_Add_Location, SL, Entry2. That's 4 variables; Why a straight derivative won't work... With the Legrange, you can solve with respect to X (risk) and then resolve with respect to y, (profit) and then platt/plot them to find optimal point.

The reality of the math is actually a 3D scatter plot, which yields a saddlepoint at some point in time, regardless of axis-viewed.

BTW, I'm a new father.. :-) So I hope to start writing more as I can leave more for posterity.

CONGRATULATIONS!!!

Didi you passed the cigars in the neighborhood?
But be prepared for the fact that for you the sleep will be a rare commodity in next 365 days. One of the things that may help you is the device that simulates automobile engine (sounds and vibrations) thus enabling babies to fall asleep faster. It was in one episode of sex & the city.


This really looks obvious but it took me a while to figure it out. It happened while I was riding a bike (the brain really works like a computer and this process was in background) The problem with my education was overwhelming prevalence of theory over practice. I knew a lot of physical laws and formulas but not all the possibilities where they can be implemented or how. It was revelation to find out how much multi variable functions are used in pharmacy and that Lagrange multipliers are used in utility functions in economy. Using them to find out the maximum volume (i posted that example a few pages back, but it was a different approach), or the amount of aluminum for a can that can hold 10 liters of soup are all real life problems. The key note was the sentence that this method is used to maximize function with a constraint (in our problem, to maximize profit with a constraint that you only risk 0,5;1;2;3%...based on initial terms)


Yap, Lagrange gives you one missing component which enables you to solve problems like these. I watched a very interesting clip on you tube about Lagrange multipliers (although it looks intimidating in the beginning - board full of formulas, like in comic from few pages back in the thread).


I drew a lot of these during experiments in my mechanics class. Time to dig up old notes.

I'll have to solve a lot of problems like those with volume and soup in order to become accustomed in solving problems this way. After that, I'll have the idea how to hmm, articulate the problem so it can be solved like this.(I hope it will take me less time than deep thought for his question )

Congratulations!!!

I think you'll be a great father - at least if you'll be as patient as you are here on this forum, if you'll share your wisdoms in your serene way and ofcourse, if you'll give him a lot of love.

One good example:

The following analogy may be helpful: Governments often use taxes as Lagrange multipliers!

Read on:
How much gasoline I buy affects my happiness. (If I buy too little gasoline then I can't go anywhere, but if I buy too much then I don't have money left to eat.) Let's measure net happiness in dollars: the benefit to me minus the cost of the gas. If x is a vector giving each person's annual gasoline consumption, let f(x) be the total net effect on the population's happiness. f(x) is maximized when each person separately buys the amount of gasoline that makes her happiest. Unfortunately, then the total gas consumption g(x) is too high causing pollution.

To keep g(x)=c while still making happiness f(x) as high as possible, impose a gasoline tax. If the tax is $20/gallon, people's free choices will maximize not f(x) but rather f(x) + (-20) g(x). People who like to drive still buy more gas than people who don't, but everyone buys less than s/he did before. By adjusting the size of the tax (the Lagrange multiplier), the government can indirectly adjust total consumption g(x) until it is at the desired level, g(x)=c. One cannot determine from c in advance what the tax should be.

@bigvlada,

I purchased and prepared a stereo system specifically to play white noise, and pink noise for my daughter. She's got a better stereo system than 99% of the human population, so don't worry about it!

Sleep.. what's that??? ;-)

My wife has the day shift, and I have the night shift. I'm writing an ebook right now, hopefully I'll finish this one tonight..

Writing an ebook about ice tea.. crazy huh? Website selling it will be up soon, perhaps by this weekend.

As I take a look while I'm typing this; I'm up +349 pips for this week so far; I'm a father, and I'm writing about ice tea. My life just kicks ass.. hahahaaa

I have finished my ice tea e-book and it's now up for sale. If you want to know the URL, please PM me.


I am wondering if there is enough interest to make it worth my while to write my big mega book of reversals. It's gonna take a LOT of photoshopping and a lot of screen shots, so I'm wondering if the effort is going to be worth it.

And the 2nd thing would be, what kind of price tag would I put on it?

Otherwise, I'm happy to take topic suggestions... if there is a particular topic you all would like me to write..

Hi, twoblink! Hope you're doing very well. I'm really interested in your reversals ebook. Of course the effort is going to be worth it. If i could help you with photoshopping somehow, let me know please.

And the price tag? It's pretty hard to say, hm?

Free! Of course.

is the thread suppose to be read by math professors only.

could someone translate these to non mathematicians readable language?

iCarumba,

Let me give it to you in a nutshell.

2+ years ago, I theorized that there exists an equation in which once you have entered a position, the equation will tell you where to buy or sell next, how much to buy and sell, and where to put your SL.

This equation does this, and when you apply it, it mathematically puts you optimally maximized in terms of profit; and optimally minimized in terms of risk.

Max profit, Min Risk.

I've spent 2 years on it, and now I am hoping that others will be able to reproduce my work independently to verify it.

@ Ted.. Free? You must be listening to Obama too much or something... NOTHING is free.

I have stumbled occasionally on this thread, and it has amused me quite a lot - after all it is a cloudy Sunday afternoon, and the race is blocking my path to the port, so I sit at home.

I got the impression that twoblink is a very intelligent, and what I would call "internally hectic" person. However, I do not think he is a trader.

So this is puzzling me.

In the reality of trading, the closer your stop will be to the price action and the bigger the position size, the more probable it will be to hit the stop, and the worse will be the fill. If you place your stop in the market, you are assured that it will be hunted if the size is relevant, if you hold it in your hand to execute personally, you may easily run into a sudden price shft problem due to an unexpected flow or news release.

Since the twoblink's formula, which btw could be adding value at a theorethical level, is trying to preserve the profit, it has to establish the point B necessarily closer to point A than the point A was from the point 0. Therefore two things will happen pretty quickly: the new stop loss dstance will converge to zero and the new add on amount will converge to zero as well. Both these phenomena will have reached a zero utility value in real market terms much sooner.

I have traded intensly intraday for a couple of years a while back, and pyramiding was one of my favourite tools to keep the risk small, however in real life pyramiding is dictated foremost by the price action, not by maths. The key, is to isolate an impulsive price movement, and pyramide each retracement up to the point where your total position can still be unloaded with one click - in my case that was a 50 mio EURUSD position, as the interbank platforms were not going over this on continuous streams.

It is also puzzling to me, that twoblink has been so motivated to work out this formula, while he has stated, that he is regularly "pulling out" 600 pips a week from the market. Last year, I had a strategy which has been very successful, but my problem has quickly become the available liquidity, as the banks held back the size at aceptable spreads in fear of losing the money on my flow.

So in practice, the pyramiding can only work well in theory, as the trading costs, market liquidity and need to disclose your risk levels to the market, plus the necessity to lengthen the position time frame and risk news gaps and weekend gaps as your positions grows, will skew against you so much both your mathematical formula expectancy and the actual winning expectancy of the underlying strategy, that it would have to be rewritten as a bound utility formula.

Assuming that what twoblink would like to do in life is trading FX and not teaching newbies, I believe he should simply try to apply his skills to actually converting these 600 piips a week into some serious cash. (So far I have not seen any "twoblink" yacht moored here, in Monte Carlo).

I have been a profesional trader for 20 years, and personaly, I would be extremely happy to be able to pull out at least 50 pips a week on a constant basis. With even the most rudimentary money management, 600 pips a week would make me become the owner of the market in a year.

I would be happy to participate in twoblink trading insights as a reality check element, as I believe this part is missing badly from this Forum, dominated by demo practitioners.

You want other to reproduce it "to verify it"??? Or do you want others to produce it so you can steal it?

If you want others to verify it, why not just tell us the formula? That would GREATLY speed-up the verification process.

Worried about us stealing it from you? Why would you be worried? If you want it to be verified, then you're not even sure if it works. Besides, how would us using it stop you from using it?

Or you could just let the market verify it for you. If you are in fact making 600 pips/week, pretty soon you won't need anything from anybody.

You know, 600-pips a week sounds a lot worse than the 9000 pips a week you were claiming earlier. (http://www.forexfactory.com/showpost...&postcount=147)

That 9000 pips/week was your "first" method. Maybe you should go back to that method. The math is very simple here: 9000 pips > 600 pips

Nice to see there are a few comedians in the house

6000 pips a week train your dog to work along side you clicking the mouse and hey presto you have 12000 pips a week

lol

Yes a few 9000 pip weeks and you can tell Bill Gates to wipe your ass. I love your posts Mathematician.

You would think that someone who spent 2 years developing an equation to optimize risk reward and entry and exit wouldn't need anyone to verify anything for him. Such an endeavor would surely only be completed by a very solitary and independent person who wouldn't need anyone's verification of their work.

Spend 2 years and develop methods capable of 9000 pip weeks and now that same person needs someone to verify their work? Sounds like two completely different people with completely different personalities to me.

Post of the day.