Money Management and Dynamic Intraday Position sizing

Money Management of an intraday system is the last piece of the puzzle for me as I always use the same number of contracts. I consider it to be that which will seperate good profits from outstanding profits.

I am actively researching it and I can tell you that in my experience doing it correctly is as hard as finding a positive expentancy system (since you can actually use the money management system as _the_ system in that case by simply only taking "high" probability trades) and I am not convinced that it is possible to do better than fixed ratio of account size if you have designed the system correctly in the first place. In other words, fixed ratio of account equity may be the best you can do because trading (anything other than say options) is not blackjack.

In some sense, you have to have some objective way of assigning probability of succes/failure on a given trade. I have not decided if the information content that you use to decide on a change of size has to be orthogonal to the way you choose to go long/short, or if it is extractable right from the information content that makes you long or short.

For example, say you trade pennants with high volume or a black candle with high volume. Somehow you have to say that this particular patterns rate of success is higher than that one, so maybe you go from one contract to two contracts or vice versa. If you used the moon phases to tell you do double your size on this trade, since this is not part of your systemic decision to go long/short, it would be orthogonal information. If you used the size of the volume bar, this would be information already being used by the system. This all has to be done intraday dynamically [does it ?] Tough....

For my system, I have not found a reliable method of doing this, but I keep looking for that AHA moment. Perhaps I am just not getting it...

Also, there is some theory that if you were actually able to get this information by say studying your equity curve, etc, then your system is not making use of all available useful information to go long/short in the first place. In other words, if a system is truly "complete," applying statistical analysis to any of the risk measurements should return white noise. I am not sure I believe this [mostly for temporal reasons,] but I have heard this theory...

nitro
 
Quote from cornholetrading:

Thanks for the post. I have some questions for you. First when you say you are scaling in and out, are you only scaling in on the way up for a long position or are you averaging down on your position within a defined range?

SO it sounds like your style is trading 100's of times a day. Why do you cut so drastically after 3 losses in a row? Above you said that once you get a winning streak going you raise your size back up. What do you consider a winning streak - 3 trades green in a row or is this not as defined as when you cut your size?

My style is based around trading far less (5-15 times a day), but would seem to be less based on feel as I think scalpers have to be, although there are elements of this feel in my trading.
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Sorry I haven't replied. I had a newborn and things have been hectic around here and finally getting back to the routine.

As to your questions, I never intentionally average down. I always scale in as momentum builds (try to be a part of that building part). The only time I get filled on the way down is if my limit bids are hit consecutively. I always get out right away and reassess. It is not in my plan to average down. I strongly believe that it is the best way to the blowing out.

I do trade a lot. I cut drastically after losses because I believe in "flow". Losses, to me, are just an indication that I'm out of the flow. I try to regain that by staying in the game at the lowest cost so I cut size. This is only until I can get consistent again. I then immediately increase size again. I don't seek to make my day with smaller size. I just use it to get adjusted to the market at hand.

I don't have a defined streak for winning. When I'm in the flow again, I can feel that I'm in the flow of things ("the zone") and I find myself in the right direction prior to the moves. It is difficult to describe. It is easier shown on the screen than described.

Forgive me if this doesn't make sense. Again, my opinion is from the point of view of scalping.

Best wishes.
 
Quote from nitro:

and I am not convinced that it is possible to do better than fixed ratio of account size if you have designed the system correctly in the first place. In other words, fixed ratio of account equity may be the best you can do because trading (anything other than say options) is not blackjack.

nitro
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Hello Nitro,

I too have been trying to find a proper money management "SYSTEM" to put into place intra-day. Ive been doing a lot of research and trying to read up on it, but I think with my style and basically trying to have all trades closed out intra-day. (I say trying because sometimes I'll get caught into the next session), a fixed-ratio on ones account might be the answer. Im just having a tough time coming up with sometihng that looks to be fair enough where im not "stopping" myself out too soon.

Ive done some minor statistical analysis on my daily P/L's and Im trying to come up with and play around with different ratios because I just can't have those big blow-out days anymore. Its been a tough year for me thus far, and a big MAJOR problem is my lack of money management. I had repeatedly told myself after big down days, that something needs to change to prevent this. Besides the obvious look at the system, I feel a strong money management aspect is really whats missing from the system. Im still confident in the system, and nothing is 100%, but for now the positive expectancy is much greater than the negative, except when I let the BIG DOWN days come in and wipe out all the good ones. I guess my question for you (and the board) is, are you using a fixed-account equity ratio per trade, per day, etc. ? and if so would you mind sharing your %'s and maybe reasoning or theories behind them.

Thanks
 
Nitro, you are on to something:
there is some theory that if you were actually able to get this information by say studying your equity curve, etc, then your system is not making use of all available useful information to go long/short in the first place. In other words, if a system is truly "complete," applying statistical analysis to any of the risk measurements should return white noise.

Size could reasonably be based on a number of things, like volatility, trade frequency, intra-setup correlations, etc, but the last thing I would want to use to set my size is recent performance. Isn't that the basis for a number of classic behavioral flows?
It seems to me that the simplest way to look at this is: just like one needs a signal (of positive risk/reward expectancy) to enter a trade, one has to have a backtested "signal" for varying size. And your confidence in the validity of both signals better be ball-park similar. Otherwise, you'll be polluting the better signal.
So let's take an example: assume the outcome of the first three trades actually carries legitimate information that could be used to improve the outcome of the next few trades. Then, in reality one is trading a combination of two different set-ups/systems: one at start of day using a basic set-up and later on adding monitoring of prior success. Then, theoretically, (and simply) one can determine the best mix of the two systems and the proper sizing. The point is that it is not done on the fly and uses the same analytical methodology done to arrive at the original entry signal.
 
IMO, when it comes to intraday it is best to base your money management on fixed fraction. Fixed ratio exposes your account to higher risk in the initial stages than it does when it has grown but if you are continuously drawing on your account then you will not compound it sufficiently anyway so best to stick with fixed fraction.
 
Maybe I confused the terms, but we might be saying the same thing. Your saying (I meant), use a fixed fraction ie. 2% of total account equity always?? And if thats the case do you have any suggestions on a proper fraction to use intra-day? I really don't try to hold onto anything overnight if I can help it.

Im trying to figure one, but having trouble because I don't want it too be too tight and close up shop for the day too early. Then again, I don't want it to be too big either. I know I've had days when Ive been down, went out got a bit of fresh air, came back and ended up scratching the day. However, if I had an intra-day stop-out I would have left and lost that money for the day. Then again, there are those other days that I've compounded it and doubled or tripled the initial draw-down day.

Any reading suggestions would be a great help anyone.

Thanks
:)
 
Hello mamt8r,

I am not sure how to answer you. Like I said in my previous post, I am currently using just 1 contract, whether it be ES, NQ or YM. This is not optimal for me, but it is not too far either given what I am willing to risk overall on the system.

I doubt there is much you can do if you are having big down days. There is no way to predict them, except in hindsight. If your system is unprofitable because of them, the only thing I can suggest to you is that perhaps your system is not viable because of it.

I too have some down days that rock the boat, but I have found that trying to masterming when to turn a system on or off is almost impossible to do. Either it works, or it doesn't, and if mine was not able to overcome the big down days (it usually comes back with some huge plus days of it's own,) I would just shut it down, or perhaps try to come up with another system that somehow, together with the other one, smoothed out the equity curve. The problem with this is comissions start to pile up.

There is no easy answer imo.

nitro
Quote from mamt8r:

Hello Nitro,

I too have been trying to find a proper money management "SYSTEM" to put into place intra-day. Ive been doing a lot of research and trying to read up on it, but I think with my style and basically trying to have all trades closed out intra-day. (I say trying because sometimes I'll get caught into the next session), a fixed-ratio on ones account might be the answer. Im just having a tough time coming up with sometihng that looks to be fair enough where im not "stopping" myself out too soon.

Ive done some minor statistical analysis on my daily P/L's and Im trying to come up with and play around with different ratios because I just can't have those big blow-out days anymore. Its been a tough year for me thus far, and a big MAJOR problem is my lack of money management. I had repeatedly told myself after big down days, that something needs to change to prevent this. Besides the obvious look at the system, I feel a strong money management aspect is really whats missing from the system. Im still confident in the system, and nothing is 100%, but for now the positive expectancy is much greater than the negative, except when I let the BIG DOWN days come in and wipe out all the good ones. I guess my question for you (and the board) is, are you using a fixed-account equity ratio per trade, per day, etc. ? and if so would you mind sharing your %'s and maybe reasoning or theories behind them.

Thanks
More...
 
I am reading the Jones book and the Vince books.

nitro
Quote from mamt8r:

Maybe I confused the terms, but we might be saying the same thing. Your saying (I meant), use a fixed fraction ie. 2% of total account equity always?? And if thats the case do you have any suggestions on a proper fraction to use intra-day? I really don't try to hold onto anything overnight if I can help it.

Im trying to figure one, but having trouble because I don't want it too be too tight and close up shop for the day too early. Then again, I don't want it to be too big either. I know I've had days when Ive been down, went out got a bit of fresh air, came back and ended up scratching the day. However, if I had an intra-day stop-out I would have left and lost that money for the day. Then again, there are those other days that I've compounded it and doubled or tripled the initial draw-down day.

Any reading suggestions would be a great help anyone.

Thanks
:)
More...
 
Quote from twalker:

IMO, when it comes to intraday it is best to base your money management on fixed fraction. Fixed ratio exposes your account to higher risk in the initial stages than it does when it has grown but if you are continuously drawing on your account then you will not compound it sufficiently anyway so best to stick with fixed fraction.
More...
I agree.

nitro
 
I think what you are saying is probably 100% correct. But I am not convinced that the information on how to size the trade comes from some completely orthogonal information content to the origitnal signal. In other words, is it true that the sizing algorithm must use different information than the signal to go long or short? I don't see how this could be true...

I am not sure if this is what you are saying, I may be misunderstanding you...

nitro
Quote from MAD10:

Nitro, you are on to something:
there is some theory that if you were actually able to get this information by say studying your equity curve, etc, then your system is not making use of all available useful information to go long/short in the first place. In other words, if a system is truly "complete," applying statistical analysis to any of the risk measurements should return white noise.

Size could reasonably be based on a number of things, like volatility, trade frequency, intra-setup correlations, etc, but the last thing I would want to use to set my size is recent performance. Isn't that the basis for a number of classic behavioral flows?
It seems to me that the simplest way to look at this is: just like one needs a signal (of positive risk/reward expectancy) to enter a trade, one has to have a backtested "signal" for varying size. And your confidence in the validity of both signals better be ball-park similar. Otherwise, you'll be polluting the better signal.
So let's take an example: assume the outcome of the first three trades actually carries legitimate information that could be used to improve the outcome of the next few trades. Then, in reality one is trading a combination of two different set-ups/systems: one at start of day using a basic set-up and later on adding monitoring of prior success. Then, theoretically, (and simply) one can determine the best mix of the two systems and the proper sizing. The point is that it is not done on the fly and uses the same analytical methodology done to arrive at the original entry signal.
More...
 
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