thanks for sharing...one more q from me...do/did you primarily trade stocks very short term ? like you would options.
Money Management
- Thread starter cnms2
- Start date
thanks for sharing...one more q from me...do/did you primarily trade stocks very short term ? like you would options.
the ad was giving me the willies...I'd rather the lady get fried than the cat
In my own stock trading I now use two factors in determining my position size: my distance to the stop loss , and a bet-sizing algorithm.
Email me and I can direct you to a spreadsheet for this.
Email me and I can direct you to a spreadsheet for this.
These trades lasted from 1 to 10 days (swing trades), and they were exclusively directional trades. I generally avoid earnings announcements, and I check the options' implied volatility for its 1 year and 3 month percentiles and seasonal patterns.
Some opinions on the other comments:
Selling options has the same expectancy as buying them, across strikes. You have to forecast the underlying's price action and your options' implied volatility over the life of your trade.
Futures and stock trades are exposed to outlier losses more than options. Over the years I traded successfully and extensively several options strategies, but currently I use options mostly as stock surrogate.
Buying OTM options for directional trading is more aggressive than ITM, and the results are similar to comparing ITM with trading the underlying (slippage is higher). Selling OTM is an ineffective way of playing directionally because it limits your profits (when you're right) and exposes you to higher risk (when you're wrong).
Poor money management (position sizing) will ruin you eventually. Kelly, optimal f, etc. help you better understand and control your trading's risks and exploit its potential.
I use stop loss orders for capital protection, not for exits.
Some opinions on the other comments:
Selling options has the same expectancy as buying them, across strikes. You have to forecast the underlying's price action and your options' implied volatility over the life of your trade.
Futures and stock trades are exposed to outlier losses more than options. Over the years I traded successfully and extensively several options strategies, but currently I use options mostly as stock surrogate.
Buying OTM options for directional trading is more aggressive than ITM, and the results are similar to comparing ITM with trading the underlying (slippage is higher). Selling OTM is an ineffective way of playing directionally because it limits your profits (when you're right) and exposes you to higher risk (when you're wrong).
Poor money management (position sizing) will ruin you eventually. Kelly, optimal f, etc. help you better understand and control your trading's risks and exploit its potential.
I use stop loss orders for capital protection, not for exits.
From a recent thread:
- -- Position sizing: Risking 1% equity per trade (http://www.elitetrader.com/vb/showthread.php?threadid=69147)
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Posted by a529612 on 05-14-06 11:50 AM:
Position sizing: Risking 1% equity per trade
Say the account equity is 100k and you place your stop loss when any position moves against you by 1k. Does position sizing like that sound right to you if my goal is to minimize drawdown?
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Posted by traderdragon on 05-14-06 11:59 AM:
If your systems average max excursion typically takes you beyond 1%, then placing a stop anywhere near 1% would be death.
There are many factors involved in position sizing. I use simulation to determine size.
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Posted by cnms2 on 05-14-06 01:16 PM:
Re: Position sizing: Risking 1% equity per trade
It's not that simple. It depends of your trading performance in the markets you're trading. Search ET and / or google for money management, drawdown, Kelly, etc..
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Quote from a529612:
Say the account equity is 100k and you place your stop loss when any position moves against you by 1k. Does position sizing like that sound right to you if my goal is to minimize drawdown?
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Posted by cnms2 on 05-14-06 01:22 PM:
http://www.elitetrader.com/vb/showt...mula#post916204
Calculate the probability f of never seeing an a% drawdown for a given x=1/Kelly:
f=1-a^(2*x-1); i.e. a=0.7, x=5, f=0.9596
Calculate x=1/Kelly to have a probability f of never seeing an a% drawdown:
x=1/2*(1+ln(1-f)/ln(a)); i.e. a=0.7, f=.96, x=5.012
You may find the whole document here.
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Posted by psytrade on 05-14-06 05:12 PM:
a529 for any market traded look at the Average True Range for the period being traded and position size in accordance to that. Chances are the position size will be way below your kelly criterion.
Position Size in $ = (.01 * Equity) * BuyPrice / (3 * ATR(10));
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Posted by bundlemaker on 05-14-06 05:41 PM:
Re: Position sizing: Risking 1% equity per trade
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Quote from a529612:
Say the account equity is 100k and you place your stop loss when any position moves against you by 1k. Does position sizing like that sound right to you if my goal is to minimize drawdown?
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My group has used exactly this method for many years and it works fine in all markets.
__________________
I know you believe you understand what you think I said, but I'm not sure you realize that what you heard is not what I meant.
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Posted by dac8555 on 05-14-06 06:06 PM:
1% is fine. you can get fancy.... but for me it complicates the issue. But i subscribe to group psycology analysis in trading more than i do algorithims and such.
Now let me specify...that is for intraday for me. Longer term, i have to open it up a bit. in a swing position, i may do 5%, in a holding position, i will do up to 8% of the most recent high.
I got 8% from the CANSLIM methodology.
good luck
__________________
Dan
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Posted by AmbushHillbilly on 05-14-06 06:09 PM:
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Quote from traderdragon:
If your systems average max excursion typically takes you beyond 1%, then placing a stop anywhere near 1% would be death.
There are many factors involved in position sizing. I use simulation to determine size.
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I think he is talking about risking 1% of his account per trade, not placing his stop 1% away.
And, yea, 1% will work most of the time and is a teeny bit on the conservative side. But it really depends on the frequency of your trades and the type of system (mechanical or discretionary - still a "system") you trade. Some people use .5%, some 2%, and some have some fancy, self-adjusting method of sizing.
I used to use sizing based on the security's volatility, but found the 1-2% rule usually worked out about the same for me and was quicker and easier.
To each his own.
__________________
"..so often times it happens that we live our lives in chains, and we never even know we have the key."
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Posted by cnms2 on 05-14-06 06:48 PM:
Shoe size and money management
I don't mean to be ironic, but so far this discussion is like a...... is saying: "I'm 5'11". Is it ok to buy on Ebay running shoes size 11?". Most replies advised him to buy the size 11 for various reasons.
Maybe the size 11 is right for a......, but most likely it's not exactly his size. If his shoe size is smaller, he'll be able to walk, but not to run. If his shoe size is larger, he'll not even be able to walk too far.
Best advice: measure your shoe size, then buy accordingly.
In this case, good money management means to buy the right size in order to be able to concentrate only on running at your best.
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Posted by horribilicus on 05-14-06 07:36 PM:
traderdragon is correct. The simplest procedure is
Simulate system with risk=0.2%. Write down the max drawdown.
Simulate system with risk=0.4%. Write down the max drawdown.
Simulate system with risk=0.6%. Write down the max drawdown.
Simulate system with risk=0.8%. Write down the max drawdown.
Simulate system with risk=1.0%. Write down the max drawdown.
Simulate system with risk=1.2%. Write down the max drawdown.
Simulate system with risk=1.4%. Write down the max drawdown.
Simulate system with risk=1.6%. Write down the max drawdown.
Simulate system with risk=1.8%. Write down the max drawdown.
Simulate system with risk=2.0%. Write down the max drawdown.
Study your list of risk% versus drawdown. Choose the risk% that gives a drawdown you can live with.
Done
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Proportional betting (Kelly) makes sense because compared to all strategies with the same risk it maximizes the median of the wealth. So it is an optimality criterion. Risk aversion is controlled by the proportion you are willing to bet in each trade (fraction Kelly).
Good and Bad properties of the Kelly criterion
(+) Asymptotically maximizes the growth rate of our wealth.
(+) Asymptotically minimizes the time we need to reach a goal.
(+) Maximizes median logarithmic wealth.
(+) We don¢t risk ruin.
(+) On average we are never behind in wealth level after n=1,2,…. repetitions of the bet from anyone following a different strategy.
(+) We follow an optimal ¡myopic¢ policy (we only need to consider in every step what kind of bet is available).
(+) If we want to achieve lower drawdown risk, at the expense of greater time to reach our goal, then all we have to do is bet fractional Kelly. That is equivalent to having a negative exponential utility function d*omega^d with d<0. The relation between d and Kelly fraction k is k = 1/(1–d).
(-) Equal number of wins and losses gives us lower wealth than the initial. That¢s because (1+f)(1-f)*W = (1-f^2)*W ≤ W.
(-) When the expectancy of a bet is high and the observed risk is very low, the optimal betting fraction may become unrealistically high.
(-) If there is uncertainty or erroneous estimation about how high our advantage is then it may be possible that we will over bet.
(-) Over betting will lead to ruin. In the fixed coin flip case, betting double Kelly will make our logarithmic growth rate of wealth zero, and betting even more will make it negative.
(-) It can take a long time for a Kelly bettor to dominate an essentially different strategy.
(-) It is possible to have very poor return outcome if a bad scenario is realized.
(-) If we win the expected number of bets then our average rate of return converges to half the arithmetic rate of return. In other words we do not seem to win as much as we expect.
Good and Bad properties of the Kelly criterion
(+) Asymptotically maximizes the growth rate of our wealth.
(+) Asymptotically minimizes the time we need to reach a goal.
(+) Maximizes median logarithmic wealth.
(+) We don¢t risk ruin.
(+) On average we are never behind in wealth level after n=1,2,…. repetitions of the bet from anyone following a different strategy.
(+) We follow an optimal ¡myopic¢ policy (we only need to consider in every step what kind of bet is available).
(+) If we want to achieve lower drawdown risk, at the expense of greater time to reach our goal, then all we have to do is bet fractional Kelly. That is equivalent to having a negative exponential utility function d*omega^d with d<0. The relation between d and Kelly fraction k is k = 1/(1–d).
(-) Equal number of wins and losses gives us lower wealth than the initial. That¢s because (1+f)(1-f)*W = (1-f^2)*W ≤ W.
(-) When the expectancy of a bet is high and the observed risk is very low, the optimal betting fraction may become unrealistically high.
(-) If there is uncertainty or erroneous estimation about how high our advantage is then it may be possible that we will over bet.
(-) Over betting will lead to ruin. In the fixed coin flip case, betting double Kelly will make our logarithmic growth rate of wealth zero, and betting even more will make it negative.
(-) It can take a long time for a Kelly bettor to dominate an essentially different strategy.
(-) It is possible to have very poor return outcome if a bad scenario is realized.
(-) If we win the expected number of bets then our average rate of return converges to half the arithmetic rate of return. In other words we do not seem to win as much as we expect.