Money Management

Quote from psytrade:

If you have a portfolio level backtester, test your strategy with % based risk. Use 1-2% risk per trade, though I use 1/2%.

If you use an ATR based strategy, you will find that it grossly underestimates EOD market risk and that you will have hugely inflated positions relative to what the market will throw at you.
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The daily True Range formula does factor-in overnight gaps although I agree it can't nothing against what is referred here as a black swan situation:

Wilder started with a concept called True Range (TR) which is defined as the greatest of the following:

The current high less the current low.
The absolute value of: current high less the previous close.
The absolute value of: current low less the previous close.
If the current high/low range is large, chances are it will be used as the TR. If the current high/low range is small, it is likely that one of the other two methods would be used to calculate the TR. The last two possibilities usually arise when the previous close is greater than the current high (signaling a potential gap down and/or limit move) or the previous close is lower than the current low (signaling a potential gap up and/or limit move). To ensure positive numbers, absolute values were applied to differences.

http://stockcharts.com/education/IndicatorAnalysis/indic_ATR.html
 
Quote from cnms2:

I size my positions in the same way, to be 1% of my trading account, and I open up to 6 positions for a total of 6% of my account. When you wrote (close - stop loss) I assume that you meant by "close" the price at which you opened your position.

What is the maximum number of 0.5% risk positions that you can have at any given time? Also, how did you get to these figures: general accepted guidelines, or did you do an analysis of your average wins, average losses, percentage wins of total trades?
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I'm not sure to understand what you guys are talking about. So let's say I'm average Joe investor (which I am) and planning to invest part of my $10,000 cash savings in the stock market for a couple of years. Are you recommending to buy ($10,000*6%)/125.41 = 4 shares of SPY and get out if the price goes beyond 125.41 - 125.41*0.5% = 124.78? :D
 
Quote from OddTrader:

Perhaps that would be probably why 2xPhDs keep marketing/ selling their elite trading knowledge to us, newbies. :D
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That's right, simplicity is key. I was a trading systems programmer for many years, in one occasion I implemented an equity market neutral risk model for one of the trading groups where I worked. The recipe: 1. Max $ risk per position (that's right, like in real american dollars --period) 2. Calculate positions correlations 3. Calculate positions volatility 4. Adjust your delta exposure with equal amounts of future contracts given the previous 3 variables. 5. Rince and repeat for each portfolio.
 
I don't risk per position more than 2% of my trading account; I usually risk only 1%. My total risk of all my opened positions is 5% to 6% of my trading account.

I.e. $10,000 * 2% = $200

I decide my stop loss based on my forecast of the underlying price and my forecast of the implied volatility of the options I plan to trade. Then I calculate my risk per unit which is the difference between the entry price and the stop loss.

I.e. ($3 - $2) *100 shares/contract = $100

I determine my position size by dividing this risk per unit into my risk per position. If my risk per unit is higher then my 1-2% risk, it means I can't trade that underlying.

I.e. $200 / $100 = 2 contracts
Quote from ilganzo:
I'm not sure to understand what you guys are talking about. So let's say I'm average Joe investor (which I am) and planning to invest part of my $10,000 cash savings in the stock market for a couple of years. Are you recommending to buy ($10,000*6%)/125.41 = 4 shares of SPY and get out if the price goes beyond 125.41 - 125.41*0.5% = 124.78? :D
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Quote from cnms2:

I don't risk per position more than 2% of my trading account; I usually risk only 1%. My total risk of all my opened positions is 5% to 6% of my trading account.

I.e. $10,000 * 2% = $200

I decide my stop loss based on my forecast of the underlying price and my forecast of the implied volatility of the options I plan to trade. Then I calculate my risk per unit which is the difference between the entry price and the stop loss.

I.e. ($3 - $2) *100 shares/contract = $100

I determine my position size by dividing this risk per unit into my risk per position. If my risk per unit is higher then my 1-2% risk, it means I can't trade that underlying.

I.e. $200 / $100 = 2 contracts
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Cnms,

I've read this thread and the rest of ET on the topic, and I don't think that the issue of trading FREQUENCY has ever been addressed. Sure enough, people have talked about keeping the max number of positions opened to not exceed 5-6% or whatever arbitrary level, and that's helpful I'm sure. However, what about intraday traders who only trade 1 trade at a time?

Let's say you choose to risk R per trade, where R = x % of your capital C, say 0.5%* C or 0.05C. If you trade 1 trade setup at a time, on average 4 times a day, would that be equivalent to the swing trader who is risking no more than 2% per trade in his trading?

How can one incorporate trading frequency into that helpful but overly simplistic heuristic of 2% of capital per trade that Van Tharp advocates?
 
Quote from ES335:

Cnms,

I've read this thread and the rest of ET on the topic, and I don't think that the issue of trading FREQUENCY has ever been addressed. Sure enough, people have talked about keeping the max number of positions opened to not exceed 5-6% or whatever arbitrary level, and that's helpful I'm sure. However, what about intraday traders who only trade 1 trade at a time?

Let's say you choose to risk R per trade, where R = x % of your capital C, say 0.5%* C or 0.05C. If you trade 1 trade setup at a time, on average 4 times a day, would that be equivalent to the swing trader who is risking no more than 2% per trade in his trading?

How can one incorporate trading frequency into that helpful but overly simplistic heuristic of 2% of capital per trade that Van Tharp advocates?
More...

Bump...
 
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