How "Pros" size their trades

Quote from Yana:

All:

You often hear people say allocate no more than 5%/2%/1% of risk capital per trade. But when you read through market wizard type interviews, you find guys recounting their rags-to-riches stories of how they made it through a few big trades. e.g. between Druckenmiller and Soros:
"How big a position do you have?" he asked.
"One billion dollars," I answered.
"You call that a position?" he said dismissingly. He encouraged me to double my position. I did, and the trade went dramatically further in our favor.

Now ET community already has many discussions on Soros so no need to focus just on him. What I'm curious about is why these guys who made it through huge size trades tell people they should be very prudent with capital per trade.

Am I getting the wrong impression? Do the Pros size their trades like how people are suppose to or do they "go for the jugular" more often than they would like to admit?

What do you think?
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It depends a lot on the process you use to identify trades, and where you lie on the spectrum between fundamentals/macro/investing and technical or systematic edge-grinding. Personally I base most of my trades strictly on technicals, but on those occasions where a technical setup triggers in line with my fundamental or macro beliefs (and this is of course only going to be on larger timeframes, daily+) I will certainly risk several times more than on a normal trade.

That said, these special cases represent only a tiny minority of trades: certainly less than 10%, maybe as little as 1%. For 99%+ of active or aspiring small retail traders it's far better to focus on robustness and sustainability over time. Be open to a blindingly obvious opportunity to bet somewhat more than normal (homebuilder stocks in 2007 for instance) but don't make it a centerpiece of your strategy to put everything on black hoping to emulate Soros.
 
Quote from panzerman:

For every Wizard who bet the farm and won, there are probably 1000 who bet the farm and blew up. It's called survivorship bias.
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That's exactly right. People only recognize those who made it.

It is like buying lottery tickets. Very few won millions and their initial investment was only few bucks. Please do not call it a method. That's just dumb luck.
 
Trade futures at a reasonable clip (10-15 RT per session). FWIW, have used fixed fractional sizing for the last ~7 yrs with much success. It is indirectly tied to volatility as the strategy portfolio (5-6 strategies) is structured to directly adapt to volatility.

When starting out, I risked upwards of 1.5% r. Now that I have much capital to loose and want to protect, have gradually throttled back to ~0.35% over the yrs. This % is also somewhat tied to liquidity road-blocks you naturally run into as you approach x size with x frequency strategy. Loss size is drawn from actual transaction data. Some strategies it is looking at average (plus outlier std) loss size of say last 1000-1500 trades, others around 250-500. If I had to estimate, typically never more than 10-12 months back in historical transaction.

I have run most of the popular sizing criteria, such as 1/2 kelly, optimal f, % volatility, at some point. Always find myself at home with fixed frac, and it may be partially tied to psychological aspect of having long periods of past success with it. It is equity growth optimization and control risk built into one rudimentary principle. Some would argue the discretionary r (%) leaves room for danger, but one could argue such for any sizing method. When push comes to shove, it's all best guess.

Basic rule of thumb: in a consistent unwavering manner you are increasing size during increasing trading returns, decreasing during poor. One thing I've noticed in the retail world, everyone talks about too much leverage (extremely critical, of course), but very few talk of under-leveraging. It is a silent killer. Strategy half-life, opportunity-cost, commission burn for higher pace trading (faster you get to volume, less cost impact), etc etc... it's a slow painful death, be cognizant of it and take strong advantage of hot streaks.
 
Most of the wizards recommended keeping max risk at 5% or less. For example Druckenmiller said most bets should be risking 0.5-1% of capital. Obviously a trade of the year (or decade) candidate is going to be worth betting bigger, but I am not aware of any wizards saying bet >5%.

Bear in mind that a 1 billion dollar position with a 10% stop, on a 3 billion fund, is only risking 3% of capital if wrong.

Quote from Yana:

All:

You often hear people say allocate no more than 5%/2%/1% of risk capital per trade. But when you read through market wizard type interviews, you find guys recounting their rags-to-riches stories of how they made it through a few big trades. e.g. between Druckenmiller and Soros:
"How big a position do you have?" he asked.
"One billion dollars," I answered.
"You call that a position?" he said dismissingly. He encouraged me to double my position. I did, and the trade went dramatically further in our favor.

Now ET community already has many discussions on Soros so no need to focus just on him. What I'm curious about is why these guys who made it through huge size trades tell people they should be very prudent with capital per trade.

Am I getting the wrong impression? Do the Pros size their trades like how people are suppose to or do they "go for the jugular" more often than they would like to admit?

What do you think?
More...
 
Quote from Yana:

Did Quantum have 30b aum back in 92 when they shorted the pound? I think they were much smaller back then. The whole hedge fund industry barely had 40b aum combined back in early 90s.

There are a lot of other guys talking about how they pulled off big trades early on and after they were made man they all of a sudden started cautioning everyone to be mr. prudent.

Maybe they are trying to tell everyone these are lucky results of survivor bias and their paths are not replicable
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They had 3 billion in equity and wagered a 10 billion position with a 3% stop on the underlying. So their total risk if wrong was 9% of capital (if sterling rallied to the top of the ERM band. They were covered because sterling would not go above the upper ERM band, plus they had giant conviction so they bet a lot bigger than normal.
 
Quote from goodgoing:

Pros and firms use special algos to size trades that seek for liquidity and do partial filss so that the effect on prices is minimized. Their objectives are different, the subject is too complicated and the math too complex for most people without a Ph.D. But you should at least know that.
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Can these algos be purchased ready to go or do they need to be developed by the firm?
 
Am not a pro trader but most of the pro traders for sure would size their trades according to the capital money which they have and have some strict money management in their trades to manage their capital money more efficiently.
 
I'm not sure how useful it is asking how so-called "pros" size their trades.

I can name several "pros" who blew up by committing every mortal trading sin known to man. Nick Leeson comes to mind right off.
 
hmmm but if you use a system every trade should be the same.....so how can one rade be much better than the other one? Unless you are like S.A.C.?

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You have what you perceive to be "routine, grind-out trade" plays... and then there are some perceptions of "bigger opportunity".... and therefore bigger position seems warranted. It's an art when to go bigger... and of course should always use a stop in case your perception is wrong.
 
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