Blashkiv Oleksandr

Faculty: Computer Science and Technology

Speciality: Economical cybernetics

Theme of master's work:

Development and research of the subsystem dynamic money management

Scientific adviser: Smirnov Aleksandr

Abstract for the theme of master's work

Development and research of the subsystem dynamic money management

Introduction

Money management is the process of managing money. It is also called investment management. Money management is a strategic technique employed at making money yield the highest of interest-yielding value for any amount of it spent. The idea of money management techniques is developed to plummet the amount individual, firm and institutions spends on items that add no significant value to its living standard, long-term portfolios and asset-basins.

Money management is used in Investment management and deals with the question of how much risk a decision maker should take in situations where uncertainty is present. More precisely what percentage or what part of the decision maker's wealth should be put into risk in order to maximize the decision maker's utility function [1].

For a speculative investor, there are two aspects to optimizing a trading strategy. The first and most important goal of a trader is to achieve a positive expected risk-adjusted return. Once this has been achieved, the trader needs to know what percentage of his capital to risk on each trade. The underlying principals of money management apply to both gambling and trading, and were originally developed for the former [2].

Urgency of a theme of research

Nowadays there is a great diversity of money management dynamic methods which are used by stockbrokers for their aims. But most of them are not reliable enough and vary much from each other in speed of reaching some definite goals and complicacy of implementation [3].

Aims and objectives of research

The purpose of master's work is the development and study of the subsystem of dynamic money management. To achieve this goal it is necessary to perform these tasks:

1. To determine the location of the dynamic money management in the CTS.
2. To calculate the characteristics of the trading system with using well-known algorithms of dynamic MM.
3. To research a new algorithms dynamic MM.
4. To make multi-criteria comparative analysis of the dynamic money management of the Computer trading system.
5. To determine the effectiveness of the developed subsystem of CTS.

Object of research: The dynamic money management of the computer trading system.

Subject of research: Influence of dynamic money management’s algorithm on general efficiency of computer trading system.

Scientific novelty

Money management is a new science in Ukraine, it is at the stage of development. A lot of traders don’t pay attention to the subsystem of dynamic money management. But it is necessary to mention that the value of open position directly influences the rate of increasing the trading account [4].

For the effective money management is need those algorithms of the F_opt’s estimation that will have minimal variance in its ratings in the time interval of its definition, and the rate of change P & L should be minimal [3].

So the scientific novelty of this work consists in development of these algorithms of dynamic MM.

Expected practical results of the research

The future results of the work while used in money management can provide stockbrokers with some reliable data of ways to maximize future profits of investment portfolio minimizing its risks or staying within some restrictions (of maximal acceptable loss, amount of capital involved, time restriction etc.)

A review of research on the subject

There are many works on similar topics: optimization of computer trading systems, research in the field of technical market analysis [12]. The basic principles of money management have been developed and used in gambling [2].

Many works are devoted to this area of research in the European Union, the United States. The most well-known authors: R. Vince (Ralph Vince), Karatzas (Karatzas), Shreve (Shreve), McDonnell (McDonnell), Michaud (Michaud) and others.

In Ukraine this topic has been studied by following scientists and economists: I. Zhdanov, M. Babich, A. Gurnak, V. Kovalev, A. Tereshchenko, A. Smirnov.

Summary of own results available at the time of completion the abstract

Ralph Vince has written several theoretical books on the topic of money management in trading. Vince outlines a concept he calls Optimal f. Optimal f in short is a money management scheme that assists in determining the correct amount of shares or contracts to buy or sell (or to own or not own at a given time). In his work "The Mathematics of money Management. Risk Analysis Techniquesfor Traders" he criticizes the Kelly's formula and introduce his own criteria "optimal f"- percentage for reinvestment [4].

He introduced such notions as:
- holding period returns (HPR);
- profit or loss of an investor (P &aimp; L);
HPR = 1 + P &aimp; L , if profit
HPR = 1 - P &aimp; L , if loss

The ratio of initial and ultimate investor's funds is designate as TWR (Terminal Wealth Relative):

Without any sufficient mathematical proves by means of reflection R. Vince introduce the notion of a share of invested funds а which according to his point of view is "optimal f" for TWR_max.

where:
- f - percentage of funds to be reinvested;
- (-P &aimp; L) - profits and loss with opposite sighns;
- P &aimp; L_{j min} - the biggest loss;
- f_opt - one of the values of f , when TWR = TWR_max.

Figure 1 - The curve TWR and the optimal f »

(Gif-animation: 24 frames, 7 rep, 96 KB, made by the program mp_gif_animator)

The value of f (0 <= f <= 1) is the magnitude that is inverse to the risk. It shows the fear of the investor before the probability of loss. In the case of the minimum investment risk f = 1, and the investor can afford to use all capital because the risk is almost zero. In the case of significant ongoing investment risk f = 0 [1].

Pitfalls of using optimal f

The first pitfall is making the assumption that future results will match those of the past. This all comes down to your testing methods. The most important figure is the estimate of the largest loss. The risk level set when using fopt, means we‘ll never have a larger loss. Unlike gambling, where the outcomes are known and probabilities constant, in trading we have a multitude of random outcomes with undetermined probability of winning. The maximal loss is a nondescreasing step function, with random amplitude leaps occurring at random moments. There is then a real problem picking what the exact loss should be. [9,10]

Another danger area is the volatility of returns. Optimal f will show you the number of contracts to trade to maximise profits. However drawdowns can be significant, particularly if you experience sequential losses. Anyone using Optimal f should be prepared for this.[9,5,6]

The Optimal f method of position sizing shows incredible results over and above any other method of sizing. Ultimately, however, the benefits rest entirely on the accuracy of the parameters used in the calculation. While Vince's work is thought provoking, it is also a bit theoretical and not applicable to real world trading. The problem with optimal f is that the calculation is dependent on the largest trading loss and you can never know when that is until it happens [11].

For the effective money management is need those algorithms of the F_opt’s estimation that will have minimal variance in its ratings in the time interval of its definition, and the rate of change P &aimp; L should be minimal [3].

Conclusion

Money management is still a new science in Ukraine, which is at the stage of development. A lot of traders don’t pay attention to the subsystem of dynamic money management. But it is necessary to mention that the value of open position directly influences the rate of increasing the trading account. For empirical researchers, the conclusion that capitalization and money management may play a role in determining the success or failure of speculative traders cannot be ignored. The underestimation of any strategy drawbacks can result that the propensity for account balances to be reduced to zero by undercapitalizing futures trading positions and possibility of this is quite high and may contribute to the failure of many speculators. Finally, many works on the performance of technical trading models have reported results for a single futures contract for simplicity/comparability or for other reasons. The research presented here allows greater reconciliation between planned results and the trading performance more likely to be encountered by traders with respect to risk attitudes observed in behavioral finance characteristics and the reinvestment of profits in speculative trading [11].

References

1. Money Management [Электронный ресурс] en.wikipedia.org/wiki/Money_management


2. Martin Sewell "Money Management" Department of Computer Science University College London, May 2007.


3. Блашкив А.А. "Об эффективности алгоритмов динамического управления капиталом". Тезисы доклада.


4. Винс Р. Математика управления капиталом. Методы анализа риска для трейдеров и портфельных менеджеров: Пер. с англ. – М.: Альпина Паблишер, 2001. – 400 с.


5. Смирнов А.В., Гурьянова Т.В. Об «оптимальном f» Ральфа Винса. Научные труды Донецкого национального технического университета, серия «Информатика, кибернетика и вычислительная техника», вып. 9 (132), Донецк, ДонНТУ, 2008. - С 216-220
6. Смирнов А.В., Гурьянова Т.В. Новое в динамическом управлении капиталом. Научные труды Донецкого национального технического университета, серия «Информатика, кибернетика и вычислительная техника», вып. 10 (153), с. 230-233


7. Смирнов А.В., Гурьянова Т.В. Многокритериальный анализ эффективности алгоритмов ДУК. Научные труды Донецкого национального технического университета, серия «Информатика, кибернетика и вычислительная техника», вып. 10 (153), с. 320-323


8. Гурьянова Т.В. Сравнение эффективности алгоритмов ДУК по функции мощности. Научные труды Донецкого национального технического университета, серия «Информатика, кибернетика и вычислительная техника», вып. 12 (155), с. 106-110


9. Guy Bower "Maxmising Trading Profits with Money Management" [Электронный ресурс] http://guybower.com/?p=122


10. Bennet A. McDowell “Fine-tuning your money management system”/ Technical Analysis of Stocks & Commodities magazine. 2004.


11. Кравченко П.П. Автореферат на тему «Сравненительный анализ эффективности методов динамического управления капиталом» [Электронный ресурс]/ Портал магистров ДонНТУ, – http://masters.donntu.ru/2009/fvti/kravchenko/diss/index.htm


12. Евтюшкина А. Б. Автореферат на тему «Исследование влияния подсистем копьютерной торговой системы на ее экономические характеристики» [Электронный ресурс]/ Портал магистров ДонНТУ, – http://masters.donntu.ru/2010/fknt/yevtiushkina/diss/index.htm

Important:

Master's work has not completed when this abstract was written. Completion of the master's work: December 2011. Full text of the work and materials on the topic can be obtained from the author or her supervisor after that date.

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