Wise Words from Ralph Vince – Expand your degrees of Freedom
If there is a particular recommendation I could make to assist your trading endeavors….it is this. Read as much as you can from proven experts in their field. What may appear to have no relevance to your trading has a sneaky way of infiltrating your thoughts and before too long, what was previously regarded as having no consequential bearing on your endeavors…..suddenly begins to take center stage.
Ralph Vince is a recognized authority on applied principles of money management and has had a significant role to play since the early 1980’s in highlighting the utmost importance of position sizing to systematic trading. More from Ralph here.
I thought that I would share a ‘cracker’ from Ralph that has started to dominate my thought processes…..so here goes.
“The key to ensure that you have a positive mathematical expectation in the future is to not restrict your system’s degrees of freedom.
This is accomplished not only by eliminating, or at least minimizing, the number of optimizable parameters, but also by eliminating, or at least minimizing, as many of the system rules as possible.
Every parameter you add, every rule you add, every little adjustment and qualification you add to your system diminishes its degrees of freedom.
Ideally, you will have a system that is very primitive and simple, and that continually grinds out marginal profits over time in almost all the different markets.
Again, it is important that you realize that it really doesn’t matter how profitable the system is [by itself], so long as it is profitable. The money you will make trading will be made by how effective the money management you employ is.
The trading system is simply a vehicle to give you a positive mathematical expectation on which to use money management. Systems that work [show at least a marginal profit] on only one or a few markets, or have different rules or parameters for different markets, probably won’t work real-time for very long…”