Tag Archives: Evolution

General Business

The Evolution of Secure F


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Kelly F, Optimal F, and Secure F are all money management strategies used by many traders. While the strategies may seem different, Optimal F and Secure F are actually evolutions of Kelly F. To better understand the strategies themselves, it is helpful to know how they got to where they are today.

There are a few popular variations of fixed fractional money management that look for optimum fractions in order to generate the greatest returns possible when trading. These variations are the Kelly formula, Optimal F, and Secure F.

Kelly F was a concept that came from a Bell Labs researcher. This researcher, John Kelly, found that there was an analogy between growth rate of a trading account, and the rate of information transmission through a communications channel, such as a telephone line. This led to the Kelly formula. The formula is used to determine a fixed fraction that will maximize equity growth. A Kelly formula, however, assumes that losses and wins will stay the same. This means that if you are betting the same, risking the same amount, and you are looking to see the same return, it could be a great formula to use. Larry Williams used a variation of this formula when he won his world cup trading challenge. There are problems with the Kelly formula, however, which Optimal F tried to address.

Optimal F is a strategy that was made popular by Ralph Vince. Optimal F, just like Kelly F, assumes that there is an ideal fraction of equity that must be risked to maximize equity growth. Optimal F is, therefore, just an optimal fraction that can be used. The Optimal F fraction is based on a series of trades, and actually looks at the largest loss over a historical period. This number might provide a very nice fraction that can be used if everything is going right, but it does not address drawdowns. Secure F was created to address the problem of drawdowns.

Secure F is a calculation that is similar to Optimal F, but is based on the max drawdown instead of the largest loss. The creators of Secure F found that the Optimal F value typically led to a position that was not appropriate for a trader. Although Optimal F was based on the largest loss, if a drawdown occurred the Optimal F value was often too aggressive. The Secure F value was made to be more conservative. Keep in mind that a Secure F value will never be larger than an Optimal F value. And this makes sense because a largest loss does not account for a drawdown, which is a series of trades. That series of trades or that drawdown could be substantially higher than the largest loss. If you are basing your fraction, or your money management, on the largest loss it could be a little too aggressive for your trading and your account.

The advantages of using these variations and looking for an optimum fraction are that in an ideal situation nothing is better. With other forms of money management, if you trade with too small a position you are going to make money too slowly, and it might not be as efficient as using a more aggressive fraction. On the other hand, if you trade too large a position there is a possibility that you will blow out an account when you have an unexpected loss or drawdown. In theory, Secure F or one of its variations would be the best solution because it would maximize your money management and the potential returns that you could have on your trading account based on historical information. However, these money management methods can often lead to positions that are too large for many traders. These money management methods should be studied carefully before being implemented, but are generally not suitable for beginning traders.

Market Analysis

Forex And The Evolution of Direct Market Access

The Forex market is a decentralized market which has been historically fragmented. This has resulted in inconsistent trade execution on the part of most brokers since they operate in various capacities. Direct Market Access (DMA) now enables traders to transact their orders directly with sources of liquidity or primarily Interbank participants.

A Forex DMA broker acts in an agency capacity as opposed to being a market maker. The complete transparency of a Forex DMA offers many benefits:

Forex DMA orders are only based on two variables – (1) Price and (2) the time that the order is placed. The result is efficient execution where requotes are rare regardless of the market conditions.

Forex DMA pricing is based on institutional standards of 1/10th of a pip pricing as opposed to ½ or 1 pip pricing. Retail brokers typically quote using ½ to 1 pip to capture the difference in their favor.

Forex DMA brokers also offer trading anonymity which gives the trader a level playing field.

Unlike traditional brokers that offer fixed spreads, a Forex DMA broker offers variable pricing that reflects the true market conditions in the Interbank Forex market. Brokers that offer fixed spreads are most likely acting in the capacity of a market maker and taking the risk on the client orders. While this is not inherently negative, it reduces transparency and calls into question the order handling process. DMA brokers eliminates this concern.

Until recently, DMA trading has only been available for larger institutions and hedge funds. With a vast improvement in trading technology, DMA can now be accessed by the trading public through the DMA brokers.

Forex DMA via Currenex is offered by Divisa FX which acts in an agency capacity to channel customer orders to 11 top tier banks within the Interbank market.

Market Analysis

Evolution of The Commodity Trading Market

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The primary reason why commodity trading market has evolved is because there was a desperate need to make sure that there was a continuous supply of agricultural crop that was seasonal. Japanese merchants were known to store their warehouses with rice in particular so that they could use it in future. So that they could have a raised cash warehouse holder for the rice that was stored! The rice was also known as the rice ticket that later turned to be a general commercial currency that also helped in the standardization of the commodity trading in rice.

19th century Chicago was where the commodity trading concept came about and Chicago itself eventually turned to be a huge hub for the telegraph and the rice road. After noticing the benefits of commodity trading farmers and dealers too began getting into a commodity trading contract. The farmers and traders would enter into contracts that would help the farmer sell a particular produce (rice) at a future date at a price that was already agreed upon. As a result this kind of contract between farmers and dealers etc rose to popularity, and every farmer and dealer got into this kind of arrangement. However it grew so popular that the produce changed hands through contracts even before that particular produce was delivered. However this was a great risk, especially if the produce was not as expected or anticipated. The farmers found a way though this as well, and in case of adversity they would make arrangements that the produce was delivered though another farmer, however there would be slight modification to the contract. Over a period of time the contract was modified into a kind of instrument that would protect parties who faced adverse factors like damage to crops, unfavorable climate condition, and unexpected rise in price. This called for traders to enter into the future commodity trading markets who had no intention of buying or selling wheat or any other produce. They however formed a body that would help regulate rules and keep a strict supervision over the contracts.

After this the CBOT also known as the Chicago Board of Trade was established in 1848. Chicago was chosen since it was considered to be a common place where sellers and buyers could meet, negotiate and then move forward with the contacts. Later on similar regulatory bodies for other products like the USA Chicago board or trade and Chicago merchant exchange, Sugar and Cocoa exchange worldwide, The New York commodity trading exchange and New York Coffee etc were established.