Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 884: Money management with optimal stopping of losses for maximizing the returns of futures trading

Christian Lundström ()
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Christian Lundström: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden

Abstract: By using money management, an investor may determine the optimal leverage factor to apply on each trade, for maximizing the profitability of investing. Research suggests that the stopping of losses may increase the profitability of a trading strategy when returns follow momentum. This paper contributes to the literature by proposing the first money management criterion that incorporates optimal stopping of losses. In an empirical trading study, we are able to substantially improve the profitability when using this criterion, relative to the existing criteria. We conclude that money management should incorporate stopping of losses when returns follow momentum.

Keywords: Kelly criterion; Vince optimal f; Leverage; Position size; Commodity trading advisor; Managed futures hedge funds

JEL-codes: G11; G14; G17; G19

21 pages, May 6, 2014

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