How do you determine your max bet size?
- Thread starter ScoobyStoo
- Start date
Good question...If it is mentioned here next week it will apear in the book of some author who has never traded.
I have tried most known and some unknown methods. I decided to stick to very small risk percent per trade. I think the emphasis should be placed on finding a system that generates a large number of high probability signals for placing your "bets" with low risk percent. This is the secret IMO.
For outrights:
1. Judge how good the trade is and how much conviction I have.
2. Choose the % of capital to risk, based on point 1
3. Work out how much the market would have to move against me to prove my idea wrong.
4. Make sure that in the event of point 3 happening, I don't lose any more than what I chose in point 2.
For options:
1. Judge how good my trade is likely to be, especially on the timing and size of any potential move
2. Choose the % of capital to risk, based on point 1
3. Find the most leveraged out-the-money option that also has decent liquidity.
4. Spend the % of capital in point 2 on said option.
1. Judge how good the trade is and how much conviction I have.
2. Choose the % of capital to risk, based on point 1
3. Work out how much the market would have to move against me to prove my idea wrong.
4. Make sure that in the event of point 3 happening, I don't lose any more than what I chose in point 2.
For options:
1. Judge how good my trade is likely to be, especially on the timing and size of any potential move
2. Choose the % of capital to risk, based on point 1
3. Find the most leveraged out-the-money option that also has decent liquidity.
4. Spend the % of capital in point 2 on said option.
There are some "unconventional" (or equivalently, "seldom used") positionsizing methods that are nevertheless well known.
- Ryan Jones's "Fixed Ratio" which seeks to equalize ($profit / total#lots traded since the beginning of time) LINK
- Trade Goodness positionsize modification. This supposes you have an indicator that can suggest which trades are likely to be good, versus which trades are likely to be Great, versus which trades are likely to be STUPENDOUS. (For example, you might think that the higher Welles Wilder's ADX indicator is, the better the trade shall be). Now you calculate a positionsize using conventional means (% of account, etc.) and then MULTIPLY positionsize by the Trade Goodness indicator.
- Christian Smart's feedback control system approach to re-linearizing the (semilog axis plotted!) equity curve, see LINK
- Van Tharp's "Timid/Bold" approach. At fixed intervals (say, on January 1 of each year), declare that Bold Equity equals zero and Timid Equity equals the total account value. All new profits or losses are added to Bold Equity. Each new trade gets a position size of (f% of Timid Equity PLUS g% of Bold Equity) where g>f. In effect you bet a bigger fraction of New Profits ("the market's money") than old equity ("your money"). You keep this up for a year, and then sweep all Bold equity into the Timid bucket and start afresh.
- The square root of equity approach, discussed in Ralph Vince's first book and attributed to Ed Ziemba. Make positionsize proportional not to total account equity, but instead to (the square root of (total account equity)). This means you take bigger risks, in percentage terms, when your total account equity is small. And you take smaller risks, in percentage terms, when your account is big. When you ain't got much, bet it all. When you're stinking rich, act conservatively. Of course this suggests generalizing to "the X power of equity" approach for any arbitrary exponent X. You don't have to stick with X=1 (fixed fractional) or X=1/2 (Ziemba square root). You can use any value of X that your little heart desires!
I'm not into betting but there are some serious aspects of the compromizes a trader must make.
I go for leverage because the rewards are best.
In position trading, keeping the money velocity requires that only high beta stocks be used and the liquidity has to support my upper limit of shares number. Ir is 100,000.
To trade a stream I never do a partial fill greater than the T&S block size. As partials are completed I do not interlace the partials any faster than 10% of the cummulative volume when taking or leaving a position.
I also cross over trade to exit stocks that cannot compete with the potential buy for the day. This does two things: keeps my overall money velocity high and makes doing partial fills just a matter of swaping where the capital is at a given moment.
For stocks, and position trading, my limit is running about 12 streams in parallel. I sweep excess capital out and then plant it in Sector Stock Rotation where there is no uper capital limit per stream and only 4% a week is likely (for 4 to 5 weeks per turn). It is just a dumping ground for money.
Intraday is determined by the market capacity in futures indexes. Only so much capital is tradable for an account. All capital used is all profits. Any surplus would be swept to stock trading. Interleaving partials is how it turns out. I trade @ market and just go with the flow. since price is a laggard and there are several leading indicators, anticipation of the next two or three profit segments is just the routine that is going on .
OODA the fighter pilot strategy is a betting thing and it is inductive. You do that; I am very risk adverse so I do not bet at all. I use deduction in four step of a rapidly repeated routine employing only finite and non probabilistic math: Monitor, Analyze, Decide, take timely Action (MADA). The market is always right so I do what it says when it "tells".
trade Management comes down to trust. Trust is in the Trader/market partnership because of how it is allowed to come into being.
Betting is not related to trust. Trust is absent in betting as you do. what you do is risky.
For me the partnership I am in operates as a circle:
Market "tells">>>>I accept>>>>>>Trust appears>>>>the value of the trust appears>>> anopther tell>>>>I accept>>>> etc.
after a period of time, things get very cool. A person like me is on "automatic and the market is in high gear with the "tells"...
I feel most people never even see the market and most of the time they are scared shitless. they certainly bet and they certainly have all their money on the sidelines most all of the time...
It is very very funny to watch this bullshit they are engaged in...
I go for leverage because the rewards are best.
In position trading, keeping the money velocity requires that only high beta stocks be used and the liquidity has to support my upper limit of shares number. Ir is 100,000.
To trade a stream I never do a partial fill greater than the T&S block size. As partials are completed I do not interlace the partials any faster than 10% of the cummulative volume when taking or leaving a position.
I also cross over trade to exit stocks that cannot compete with the potential buy for the day. This does two things: keeps my overall money velocity high and makes doing partial fills just a matter of swaping where the capital is at a given moment.
For stocks, and position trading, my limit is running about 12 streams in parallel. I sweep excess capital out and then plant it in Sector Stock Rotation where there is no uper capital limit per stream and only 4% a week is likely (for 4 to 5 weeks per turn). It is just a dumping ground for money.
Intraday is determined by the market capacity in futures indexes. Only so much capital is tradable for an account. All capital used is all profits. Any surplus would be swept to stock trading. Interleaving partials is how it turns out. I trade @ market and just go with the flow. since price is a laggard and there are several leading indicators, anticipation of the next two or three profit segments is just the routine that is going on .
OODA the fighter pilot strategy is a betting thing and it is inductive. You do that; I am very risk adverse so I do not bet at all. I use deduction in four step of a rapidly repeated routine employing only finite and non probabilistic math: Monitor, Analyze, Decide, take timely Action (MADA). The market is always right so I do what it says when it "tells".
trade Management comes down to trust. Trust is in the Trader/market partnership because of how it is allowed to come into being.
Betting is not related to trust. Trust is absent in betting as you do. what you do is risky.
For me the partnership I am in operates as a circle:
Market "tells">>>>I accept>>>>>>Trust appears>>>>the value of the trust appears>>> anopther tell>>>>I accept>>>> etc.
after a period of time, things get very cool. A person like me is on "automatic and the market is in high gear with the "tells"...
I feel most people never even see the market and most of the time they are scared shitless. they certainly bet and they certainly have all their money on the sidelines most all of the time...
It is very very funny to watch this bullshit they are engaged in...
2% of capital (or individual account size)/2 times the 20 day Average True Range
Ah yes, Dr Smart's "Suffer a nervous breakdown in 10 days" approach to position sizing...for those people not satisfied with the horrendous drawdown and risk of ruin presented by trading optimal F.
Given that he published this in 2007 I wonder if there's anyone out there still using this approach who hasn't blown up yet. Still staggers me that people place all their trust in statistical maths based on normal distributions when it has been proved market movements obey power laws.
Lol, very true, everyone using optimal bet sizing has probably blown up. Power laws are normal distributions only at the limit of infinite trades, which implies infinite capital resources.
http://mathworld.wolfram.com/BinomialDistribution.html
Indeedy. Makes me laugh these days when I read the musings of these people. I can usually get a feel within the first paragraph as to whether they have ever seriously been involved in the activity of 'trading'. The vast majority of people out there writing about this game have never actually had a drawdown in their life. Their theorising is worthless IMHO.
You actually learn much more reading the more constructive comments on sites like this. At least the people here are actually trading!