A Question about position size and trade duration

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illiquid

I thought it would be easier to present the issue in a hypothetical:

It's a slow and sunny afternoon, perhaps a Friday before a 3-day weekend. Many traders have already left their offices to get a head start on the traffic.

You see a setup, a signal, a breaking headline -- something that requires your immediate entry. You realize not many have seen what you've seen, and you will be among the first to act upon it. For whatever reason (a chart formation, prior price action, etc) you feel pretty confident market X will probably move 3 pts, eventually, on this trigger.

Your usual position size for this market and time frame, based also on your personal risk parameters, is 500 shares. But you see that there are at least 2000 shares available to lift within a certain range you consider acceptable for entry. Given the above, you now realize you have certain options to achieve the same result:

1. Buy 500 shares, target 3 pts (as initially determined)

2. Buy 1000 shares, target 1.5 pts (for the same result as 1)

3. Buy 2000 shares, target .75 pts (same result)

(assume liquidity is adequate for exiting 2k shares without excessive slippage)

500 shares is your preset "comfort" level with this stock, but would doubling the size, cutting the target in half, and reducing duration of the trade be equivalent in risk? I'm guessing most of you would already say "take the 2k and go for original target of 3, if the market is going there it will go regardless" -- but let's not get into that for now. Right now, your initial trade intention is 500 x 3pts; your alternatives are 1000 x 1.5, 2000 x .75. Discuss.
 
you leave your position size max per your underlying capital. inside that limit you can create modifiers to your position size. Ive found some edges with modifying the size based on some signal or lack thereof, but its hard to turn into a robust strategy across even different types of equities and different regime - up down sideways equity markets. its one of those ideas thats simple on the outset, but terrible hard to analyze, quantify and implement. theres no easy money here, but perhapse after a few years of effort, you'll get close to a superior position size adjusting strategy.
 
Quote from illiquid:

1. Buy 500 shares, target 3 pts (as initially determined)

2. Buy 1000 shares, target 1.5 pts (for the same result as 1)

3. Buy 2000 shares, target .75 pts (same result)
More...

These represent three different trading systems with different risk parameters. A trading system consists of:

(1) Entry signal method
(2) Exit signal method
(3) Risk management (position size)

As you can see (1) - (3) are different systems. The system determines the target, not your position sizing. This mistake is so basic that so many make it.:)
 
Quote from illiquid:

...you feel pretty confident market X will probably move 3 pts, eventually, on this trigger.

Your usual position size for this market and time frame, based also on your personal risk parameters, is 500 shares....

Discuss.
More...

You should only change your position size if you saw something in the price action that changed the risk.

Change in Risk = Position Size Change

However, you said the following and that implies you should stay with your 500 contracts because you saw something in the price action to believe you could achieve the 3 points goal as in the risk has not changed.

Quote from illiquid:

...you feel pretty confident market X will probably move 3 pts, eventually, on this trigger.

Your usual position size for this market and time frame, based also on your personal risk parameters, is 500 shares....

Discuss.
More...
 
Cant fluctuate the initial bet…this is not counting cards in BJ.

Better off to add to the winner while maintaining the same initial risk…
 
Quote from intradaybill:

These represent three different trading systems with different risk parameters. A trading system consists of:

(1) Entry signal method
(2) Exit signal method
(3) Risk management (position size)

As you can see (1) - (3) are different systems. The system determines the target, not your position sizing. This mistake is so basic that so many make it.:)
More...

Quote from wrbtrader:

You should only change your position size if you saw something in the price action that changed the risk.

Change in Risk = Position Size Change

However, you said the following and that implies you should stay with your 500 contracts because you saw something in the price action to believe you could achieve the 3 points goal as in the risk has not changed.
More...

Gonna zero in on these 2 (good) points:

"The system determines the target, not your position sizing."

"Change in Risk = Position Size Change"

Ok now let's change things up a bit. Same situation; however this time you're not sure what the target would be. All you know is because of X event anyone who can buy at the price currently at the Ask (Y) will be able to sell higher to others very shortly -- but the upside is uncertain.

Trader A buys 500 and offers out 3 pts higher.

Trader B, who also trades market X and sees the same news, price action, charts etc, then steps up and buys the other 1500 -- and offers out 1 pt higher, in front of Trader A.

Is Trader B's risk 3 x higher than Trader A, based purely on his position size? What if we assume the term "risk" also includes "profits at risk", not only possibility of loss?
 
Quote from illiquid:

Is Trader B's risk 3 x higher than Trader A, based purely on his position size? What if we assume the term "risk" also includes "profits at risk", not only possibility of loss?
More...

It depends what you define as "risk". If you define risk as a percentage of your bankroll you are willing to lose on a trade, then the risk of A and B depends on their bankroll. Unrealized profit is not part of risk under this definition.

However, I can see the merits of the concept you described but I do not know how to quantify "profits at risk". Basically what you are looking for is a function that allows you to determine position size based on allowable bankroll risk AND allowable "profit at risk". It is an interesting thought. I have to think more about it.
 
Never think in term of potential PROFITS for position sizing, instead you have to think in term of RISK and how you manage your trade when you have large position on and how P/L swing affects you. So you have them backwards.

Assume your usual 500 shares, 3pts loss risk, and the question should be that you see a “great” set up:

1. Buy 500 shares, risk 3 pts (as initially determined)

2. Buy 1000 shares, risk 1.5 pts (for the same RISK as 1)

3. Buy 2000 shares, risk .75 pts (same RISK)

Target is 3 points, maybe more, depending upon price action after entry.

For us discretionary traders, our biggest problems are: (a)Inability to cut loss when we have loss and especially when we have a large position on and it is going against us (b) Our love to cut winner short and especially when we have a large position on.

Let's say now you buy 2000 shares, and despite you thought it was a higher probability entry (After 10years, I am sure you know market can do anything), now it is moving against you. Ask your self what will you likely do:

Will you stop out when it moves 0.75 pts against you as planned?
Will you let it moves 3 pts against you since you think it is such good set up and your “usual” stop loss is 3 points anyway?
Will you freeze and even add another 2000shares trying to get back b/e, there is No Way it will move lower?

Will you take b/e after it moves 1 pts against you first because you are scared?
Will you take 0.75 pts profits when it moves in your favor but pauses?
Will you ever instead of taking 3 pts profits, adding another 1000shares when it moves 3 pts in you favor and now the market is clearly trending in your farvor and all the shorts are bailing and adding to the fuel?

Cut Loss, Let Winner Run and keep bet size small.
Why keep bet size small? Because it lets you trade emotion free so you can Cut Loss and Let Winner Run.

Will I ever double even triple my size on occation? Sure, only if I can manage my risk mentally. But I am much prefer adding to winners and have my risk in balance.
 
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