Money Management

trhudson

trhudson

I would like to know what you guys think is the best way to manage your positions. I have 3 different scenarios that I have been working with and while all are pretty good, what do you think is the best. The type of trading I do, takes multiple stocks both long and short and it is intra-day trading only.

Here are the three scenarios that I would like comments on:

1. Trading same size (shares) per position
2. Trading same/similar $ amount per position
3. Risking the same $ per trade

One would think that #3 would be the best scenario, however it often comes out on bottom in terms of % ROI on a short-term trading basis. Would anyone have a suggestion for why this might happen?

Thanks
 
I say add a fourth option, that is vary your bets according to your expectation on the trade.

I have a strategy I trade that has never had two losers in a row. So when I have a loser, I will trade about 3X my normal size. Does that mean it can't have two losers in a row? NOPE, but I am still willing to bet upon it as long as the strategy seems to be performing normally!
 
I would not go with any of those options. My position size depends entirely on the volatility of the instrument you are trading. i.e. When trading something like WFMI I will only trade 100-200 shrs at a time, but something with a .50 daily range I'll trade 1000-2000 shrs. It all depends on the range of the stock, not price.
 
I always use a % of the stocks daily volatility as that is usually my stop and profit target.

So, what I do is stop-out all when down that much or cut 1/2 up that much. But, I also use this to determine my risk on the trade. However, the strategy of risking the same amount per trade is much, much less profitable. For instance in today's trading, it falls far behind the other strategies for money-management. While I currently trade the same risk strategy, it is up .05% ROI, while the other two are up over .25% ROI

Is this because I am holding the winning stocks down, with the losers?

Basically, I guess my question boils down to this, if you have many positions and the probabilities of each are roughly the same, would you rather risk the same amount per trade or would you rather give EACH trade the probability to make money, no matter what the risk...because the risk is defined when I enter the trade.

Thanks
 
Quote from trhudson:

I always use a % of the stocks daily volatility as that is usually my stop and profit target.

So, what I do is stop-out all when down that much or cut 1/2 up that much. But, I also use this to determine my risk on the trade. However, the strategy of risking the same amount per trade is much, much less profitable. For instance in today's trading, it falls far behind the other strategies for money-management. This strategy is up .05% ROI, while the other two are up over .25% ROI
Are you saying that your stops and targets are an equal dollar amount? I normally look for a least a 3-1 rr and the dollar amount I risk on any trade is pretty close to the same regardless of the security traded. My risk on each trade is close to $100, and the reward varies on how well a trade is working, I don't usually close out a winner until the momentum shifts.
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I have found that a good combo works for me.

After the mkt closes I take the 21perATR from all stocks in my watchlist and import to excel. From there it calculates my position size accordingly.

1%(or whatever you want just keep it fixed) of equity risked per trade. I always use a fixed rolling %. By doing that the only way I blow up is by a complete lack of discipline....ain't gonna happen..been there done that..unpleasant.

Distance from entry to stop is a fraction of ATR..same with TGT.

Position size according to that % of equity risked and distance to stop.

I don't figure expectancy into the mix because I fully expect the unexpected to happen. :D

Good trading to you.
 
Quote from JORGE:

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Are you saying that your stops and targets are an equal dollar amount? I normally look for a least a 3-1 rr and the dollar amount I risk on any trade is pretty close to the same regardless of the security traded. My risk on each trade is close to $100, and the reward varies on how well a trade is working, I don't usually close out a winner until the momentum shifts.
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My initial profit target and stop-loss are actually an equal amount away. I enter a position and sell all at certain amount down or sell 1/2 at the same amount up and that would risk the same $ amount per trade (150). The remaining shares I hold or stop-out at break-even if I took a profit. I know that it doesn't seem as though it would work, but it does basically because it's a momentum trade, but this money management really has me baffled. Over time, giving each trade the opportunity to be successful, which in my opinion is trading equal share amounts comes out way ahead, no matter how much was at risk. However, the risk is usually a lot less than when trading 20k positions.
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Quote from TrueRange:

I have found that a good combo works for me.

After the mkt closes I take the 21perATR from all stocks in my watchlist and import to excel. From there it calculates my position size accordingly.

1%(or whatever you want just keep it fixed) of equity risked per trade. I always use a fixed rolling %. By doing that the only way I blow up is by a complete lack of discipline....ain't gonna happen..been there done that..unpleasant.

Distance from entry to stop is a fraction of ATR..same with TGT.

Position size according to that % of equity risked and distance to stop.
More...

Thanks,

That's a great idea, but I only trade intra-day and I don't have the luxury of being able to tell which stocks will make the trade and which won't. But definitely a good idea. My spreadsheet does something extremely similar in that I us a % of stocks avg range and I determine the risk from there, which determines my size. I however do not use the ATR, because I am only concerned with the intra-day average move.

Does anyone have any idea why the other money management strategies outperform the one using the same risk? I used the same risk to avoid so much volatility in the pnl, but I am finding that it seems to be just as volatile if not more so. It seems as though the same share amounts is the most stable and most profitable?

Can anyone explain why this might be the case?

Thanks for the help!
 
Makes sense that the returns would be higher with equal share amounts, because you are not limiting yourself when trading higher priced more volatile names. I usually opt for the lower risk strategies, but to each his own. While I'm always disciplined when it comes to limiting losses, money management varies day to day based on market volatility (only taking what the market offers), and how well I'm doing. Good trading to you.
 
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