Suppose I have a portfolio consisting of N amount of positions each with R% risk and risk/reward=k. Suppose that positions are independent from each other cov(pos1, pos2)=0. Find relationship between amount of positions N to profit, and overall risk to portfolio.
Motivation behind the question: I could open 10 positions (different instruments) with 2% risk of each, so that in the worst case scenario it yields -20% to my account. I feel that those positions are loosely correlated* and thus it is very unlikely to being stopped out on all positions. Such practice increased my overall profit, however I do not quite understand “the math” behind it and the risk I take.
* also a new important question arises: on which time frames positions or under what circumstances positions will not be correlated. I feel that the shorter the timeframe the less correlation.
I think this question requires more precise formulation, please share your thoughts below. Your answers would be highly appreciated.
Komen
timwest
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In crisis, all markets correlate. There are no absolutes, only you have to navigate without getting caught in a crisis. 6-sigma events happen from time to time, and far more often than equations would suggest. I'd suggest not worrying about the "math" when you have to pay attention to your P&L daily and watch the markets and "see" when your systems and methods are all acting the same. I think you can see that Van Tharp has been recommended. Since I learned from Tharp in person, I can recommend his work.
IvanLabrie
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It is a complex question. I'd rather not risk 2% per trade to begin with, unless I only take one trade at a time. That's a lot of risk.
xiiimik
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Could you recommend any book on this topic?
xiiimik
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If you know any good books, you can recommend "math intense" books.