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Square Root Rule & Additional Investment
#467130
07/17/17 15:42
07/17/17 15:42
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Posts: 1,609
DdlV
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Hi all. Looking to expand my understanding... The manual contains a description of the Square Root Rule for withdrawing and/or reinvesting: http://zorro-trader.com/manual/en/kelly.htm.Once before in the Forum the question of adding additional funds to one's account came up, and the response was to simply treat this as a negative Withdrawal (W in the manual's formulas). (Unfortunately, can't now seem to find that thread/post... ) The question now in my mind is whether or not that's correct. Treating new investment funds as a negative Withdrawal has the effect of immediately subjecting them to the Square Root Rule, so that the mere action of depositing new funds makes a portion unavailable for withdrawal, which doesn't make sense to me. For example, if I'd instead opened a new account with those new funds, wouldn't they have their own life and their own Square Root Rule progression? So, bottom line: If new funds are added, whether to the same or a different account, doesn't each investment have its own independent timeline, Square Root Rule calculations, etc.? Thanks.
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Re: Square Root Rule & Additional Investment
[Re: jcl]
#467415
08/01/17 14:58
08/01/17 14:58
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DdlV
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Re: Square Root Rule & Additional Investment
[Re: MatPed]
#467574
08/14/17 03:22
08/14/17 03:22
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DdlV
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Hi jcl, MatPed,
I thought more about this over the weekend, and my thoughts have shifted as follows:
a) While from the time point of view different capital fundings are different, in fact Balance is being used as a proxy for time & number of trades, and so time is absent from the formulas. If Balance is then pro-rata'd over the fundings, and Withdrawals as well, then the square root formula gives the same f factor for all capital fundings, regardless of when they were done!
b) One could drop down from the account level to the individual trades, since at the time of an additional capital funding it has obviously no trades and until a new one is opened all Profits apply to the old funding's trades. This would, however, be a lot of extra work for probably not really much benefit. Especially since over some likely relatively short time all the old trades would be closed, at which point everything is pro-rata again.
What should really be done when multiple fundings are involved? How should time be incorporated?
Put another way in terms of the manual's example:
Capital of $1000 has grown to $1300 account balance. The investment grew by factor 1.3; the square root of 1.3 is 1.14. Therefore $1140 must stay and $160 can be withdrawn.
But what if the $1000 came from $500 invested 9 years ago and $500 invested last year? How does this change things? Should 90% of the $300 Profit be allocated to the 1st $500? Or...?
Thanks.
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Re: Square Root Rule & Additional Investment
[Re: MatPed]
#467581
08/14/17 12:55
08/14/17 12:55
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DdlV
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Thanks MatPed. I'm in the same boat - lacking the framework/understanding/statistics skills to answer this... According to the manual, the real statistical issue under the Balance proxy covers is time/number of trades. Therefore it seems to me that the $500 that's been trading for 9 years will have a higher risk of larger drawdown than the $500 that's only been trading for 1 year. Therefore, it seems I would need to leave more $$$ in the account to protect the older $500 than the newer $500. From the withdrawal perspective, I can't withdraw as much for the older $500 as the newer. Now what does this really mean? Some possibilities are: - $300 is the right withdrawal amount, $150 to each $500, and the underlying statistics just works out fine, somehow. - $300 is the right withdrawal amount, spread in some way between the 2 $500's based on time or ??? - Less than $300 (how much?) is the right withdrawal amount due to the increased drawdown risk of the older $500. - Other??? Hopefully jcl can clarify. Thanks!
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