I stand corrected. You are right, with a win probability of .9 and a win/loss of 1:1 it should be .8. My bad!
Such a high Kelly is like printing money!
Regards,
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How do you get over the fear of increasing position size?
- Thread starter rin4et
- Start date
Such a high Kelly is like printing money!
Regards,
I had a good trading day today. However my position size was $3k. I was told to go big on high probability trades. I have more than 50k in my account that is waiting to be used. This is not margin.
However, I keep telling myself I will go bigger on the next trade.
Would love to hear how others went through the process of increasing position size?
All my trades are with-trend but I accept I have no way of knowing which will turn out to be extended with high % price change. So when entering any such trade I set another equally sized ahead of price. The aim is to keep adding trades ad infinitum until the trend severely weakens. All stop-losses are pushed ahead at the same time each new trade opens.
The downside is that in trends that quickly peter out and fail, you don't get the quick small wins. However, on the trends that keep going, profits grow parabolically. As far as risk is concerned, the tactic loses some unrealised profit from every trade except the final addition: that one's the loser, the one before breaks even and all the others make a cumulative profit. As opposed to simply opening a larger initial trade, the initial risk to capital is never increased under any circumstances.
Excellent post.
All my trades are with-trend but I accept I have no way of knowing which will turn out to be extended with high % price change. So when entering any such trade I set another equally sized ahead of price. The aim is to keep adding trades ad infinitum until the trend severely weakens. All stop-losses are pushed ahead at the same time each new trade opens.
The downside is that in trends that quickly peter out and fail, you don't get the quick small wins. However, on the trends that keep going, profits grow parabolically. As far as risk is concerned, the tactic loses some unrealised profit from every trade except the final addition: that one's the loser, the one before breaks even and all the others make a cumulative profit. As opposed to simply opening a larger initial trade, the initial risk to capital is never increased under any circumstances.
Where does this endless supply of risk capital come from?
If you put all your eggs in one basket you are open to any of the market's whims. The lure is quick hindsight profits, but over time you will encounter why you should diversify, thus dampening potential profits over time. So for most there's no choice and just a question how to manage money properly.
Where does this endless supply of risk capital come from?
Free margin increases as unrealised gain increases. In theory this is endless but in reality all trends stall and weaken, that's when the profit comes out.
I can put some round sample figures in this to make it more plain.
Suppose you buy into an uptrend with £1 per point at 10,000 and put in a 100pt trailing stop-loss. Initial risk is £100. If price goes to 10,500 and then falls back to 10,400 the SL is triggered and you gain 400pts, for £400.
To increase this return, you could go in at say £2/pt, but then your initial risk would be doubled to £200. I'm assuming you have to set your initial SL at 9,900 based on the TA.
My suggestion is to set a new buy at 10,100 as soon as the initial position is opened. Give this also a 100pt SL. When the 10,100 long is triggered, move the SL on the initial trade to b/e, 10,000. Set a new buy order at 10,200, also with a 100pt SL. And keep doing this: add a new trade every 100pts and move all the SL's of the earlier trades up 100pts when it triggers.
Now, when price has risen to 10,500, you will have 6 parallel trades open. If price falls back to 10,400, all the SL's will be triggered, and gain will be £900 instead of £400, at no additional risk to your capital. This is an improvement of 125% over the standard gain from a single long in the same scenario. Of course, as you add further pyramid trades, the % improvement accelerates. As a demonstration, at the (admittedly unlikely) total of 20 trades, a single long would gain £1,800: the pyramid series would deliver £17,000!
Suppose you buy into an uptrend with £1 per point at 10,000 and put in a 100pt trailing stop-loss. Initial risk is £100. If price goes to 10,500 and then falls back to 10,400 the SL is triggered and you gain 400pts, for £400.
To increase this return, you could go in at say £2/pt, but then your initial risk would be doubled to £200. I'm assuming you have to set your initial SL at 9,900 based on the TA.
My suggestion is to set a new buy at 10,100 as soon as the initial position is opened. Give this also a 100pt SL. When the 10,100 long is triggered, move the SL on the initial trade to b/e, 10,000. Set a new buy order at 10,200, also with a 100pt SL. And keep doing this: add a new trade every 100pts and move all the SL's of the earlier trades up 100pts when it triggers.
Now, when price has risen to 10,500, you will have 6 parallel trades open. If price falls back to 10,400, all the SL's will be triggered, and gain will be £900 instead of £400, at no additional risk to your capital. This is an improvement of 125% over the standard gain from a single long in the same scenario. Of course, as you add further pyramid trades, the % improvement accelerates. As a demonstration, at the (admittedly unlikely) total of 20 trades, a single long would gain £1,800: the pyramid series would deliver £17,000!
Interesting. But how would it compare to not a single position at 10k, but a full load based on your risk tolerance? Aren't you giving up a lot right off, lowering profit overall? I mean, sometimes I'll scale as it goes my way, but mostly I want a full boat on any breakout. It's either going to work or it isn't.
Interesting. But how would it compare to not a single position at 10k, but a full load based on your risk tolerance? Aren't you giving up a lot right off, lowering profit overall? I mean, sometimes I'll scale as it goes my way, but mostly I want a full boat on any breakout. It's either going to work or it isn't.
Yes, this tactic is a trade-off. But investing £10k at the very outset, assuming the same set-up and the 100pt SL, incurs a much higher risk to capital. My approach instead sacrifices unrealised gains for the potential of extraordinary profits - but the initial capital risk does not increase above £100.