different HPRs and consequently different TWRs for different test runs or trading
sequences. To calculate the HPRn, Ralph Vince suggested the following formula:
HPRn= 1 f* (Profitn/ WCS)
Where:
fthe fixed fraction of your capital to risk in all trades.
Profitn= The profit or loss from trade nin dollars on a constant-shares-
invested basis.
WCS = The historical worst-case scenario in dollars on a constant-shares-
invested basis (expressed as a positive number).
According to the terminology used by Ralph Vince, the value of fthat pro-
duces the highest TWR is the called the optimal f. The best way to find optimal f
is to build a spreadsheet in which the results are dependent on f. In other words,
the spreadsheet should be designed so that typing in a new value for fchanges the
values in all other cells. This is how a recommended risk level is determined for
the Trading Systems Lab in Active Tradermagazine.
Figure 25.1 shows a small part of such a spreadsheet that allows you to test
either a random or an actual trading sequence of 100 trades. The result from each
trade is typed or imported into cells B13 to B112. If you use a random series just296 PART 4 Money Management
FIGURE 25.1
Spreadsheet data used to calculate optimal f.