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Position size & Money management..
- Thread starter PohPoh
- Start date
You need to start from your financial goal which will give you your Win/Loss ratio, our win % and number of trades needed.
Let say your plan is to have 3R winners and 50% success rate. If you have 50K and want the 2% rule your stop will be $1000. Your win should be $3000.
Now look at the future contract you are trading and the time frame you are trading. If you want to close your position by the end of the day then how big is the daily range based on your system? Let say it is $900. From your entry point how much is left to the top of the daily range? Let say $600. Then you will need 5 contract to achieve your $3000 target and a stop of $200.
If you think that the stop is to close to give you 50% chance then you do not have a trade. You will need:
1. Change your win/loose ration
or
2. Change your Win %
or
3. Increase your capital
or
4. Brake the 2% rule.
or
5. Wait for a better setup (Bigger volatility or better entry point)
or
6 Trade a bigger time frame. This will give bigger range and bigger target profit. But again you will need a good entry point with $200 stop that will give you 50% chance.
Let say your plan is to have 3R winners and 50% success rate. If you have 50K and want the 2% rule your stop will be $1000. Your win should be $3000.
Now look at the future contract you are trading and the time frame you are trading. If you want to close your position by the end of the day then how big is the daily range based on your system? Let say it is $900. From your entry point how much is left to the top of the daily range? Let say $600. Then you will need 5 contract to achieve your $3000 target and a stop of $200.
If you think that the stop is to close to give you 50% chance then you do not have a trade. You will need:
1. Change your win/loose ration
or
2. Change your Win %
or
3. Increase your capital
or
4. Brake the 2% rule.
or
5. Wait for a better setup (Bigger volatility or better entry point)
or
6 Trade a bigger time frame. This will give bigger range and bigger target profit. But again you will need a good entry point with $200 stop that will give you 50% chance.
Not true. Relatively stops in all situations are the same.Quote from PohPoh:
Lets say a setup arises whereby I can buy 1 contract and risk 1000$, or I can buy 2 contracts and risk the same 1000$...or I can buy 5 and risk the same $1000...
Obviously stops are going to be 5 times closer on the 5 lot than on the 1 lot.
Quote from ehsmama:
what works best..Find a good stock. Put all your money in it and enjoy the ride.
It is as good as free lunch. Forget about 1% - 2%. 100K is too small to do anything else with it.
There was almost nothing in this post of value.
Only an idiot puts $100K into one stock.
There is no free lunch
$100K is way more than most ES traders ever have to trade with, so it is plenty for him.
PohPoh-
I understand your thinking, but I don't believe that there is a clear answer.
From my experience in managing money, I like to check the ATR, look for a key pivot support area, check trendline support, and a couple of MA's. After doing so, I come to a subjective level which tells me "beyond this point I will not want to own this position". It is usually a level below a key pivot support/trendline and outside of at least 1 ATR.
After doing so I then know my entry and exit levels and thus my risk per contract. I can then calculate how many contracts to buy with this given level of risk.
I have found that trying for tighter stops only to be able to trade a specific market is the worst trade you can make. You MUST give a market enough room to move against you somewhat before working in your favor. Otherwise, you will simply rack up losses while getting stopped out repeatedly.
I understand your thinking, but I don't believe that there is a clear answer.
From my experience in managing money, I like to check the ATR, look for a key pivot support area, check trendline support, and a couple of MA's. After doing so, I come to a subjective level which tells me "beyond this point I will not want to own this position". It is usually a level below a key pivot support/trendline and outside of at least 1 ATR.
After doing so I then know my entry and exit levels and thus my risk per contract. I can then calculate how many contracts to buy with this given level of risk.
I have found that trying for tighter stops only to be able to trade a specific market is the worst trade you can make. You MUST give a market enough room to move against you somewhat before working in your favor. Otherwise, you will simply rack up losses while getting stopped out repeatedly.
Quote from PohPoh:
Small positions and wider stops, or, larger positions and tighter stops?
Small positions and wider stops increase survivability.
I believe a trading simulator helps me answer these kinds of questions. The parameters change with almost every security price history that I test. Corn behaves different than copper, or coffee, or INTC.
My rule is to risk not more then 0.5% of my equity. On 100K this is $500. Then determine where your stop loss would be. Is it 3, 5, 7 or whatever % loss you are willing to take on the position as long as it is within $500. Then do the back calc to determine position size. Accordigly if you are placing a stop that equals 5% loss from the buy point then your position will be $10,000.
Works for me. Does anyone else employ similar methods? Oh I trade stocks and options.
Works for me. Does anyone else employ similar methods? Oh I trade stocks and options.
Smaller size and wider stops are hands down better.
Think of using an indicator called ATR (Average True Range).
This indicator can save your butt. It simply tells you how volatile the market you are trading is.
(GOOG) ATR is 16.84 where as (GE) is .82. This is there range/volatility for the day. If you placed your stop on (GE) 1.64 below your entry on a long position that would be reasonable.
You may be in the position for days or weeks. A 1.64 stop on (GOOG) you could be in the stock for minutes.
The point here is, you must know the daily range of the stock or the market you are trading in order for your position to be successful. You can use this to calculate your position size.
Example: (GE) trading at $ 37.21. ATR is .82
I use 2x ATR, for stop placement. So your 2x adjusted ATR is $ 1.64 You can buy 610 shares of (GE). $ 1000.00 divided by $ 1.64 equals 610.
Here is the same calculation with (GOOG). (GOOG) trading at 693.00 ATR is 16.84. 2x stop is 33.68. So your risk of $ 1000.00 will allow you to buy 30 shares of (GOOG) Big difference.
Hope it helps!!!
Think of using an indicator called ATR (Average True Range).
This indicator can save your butt. It simply tells you how volatile the market you are trading is.
(GOOG) ATR is 16.84 where as (GE) is .82. This is there range/volatility for the day. If you placed your stop on (GE) 1.64 below your entry on a long position that would be reasonable.
You may be in the position for days or weeks. A 1.64 stop on (GOOG) you could be in the stock for minutes.
The point here is, you must know the daily range of the stock or the market you are trading in order for your position to be successful. You can use this to calculate your position size.
Example: (GE) trading at $ 37.21. ATR is .82
I use 2x ATR, for stop placement. So your 2x adjusted ATR is $ 1.64 You can buy 610 shares of (GE). $ 1000.00 divided by $ 1.64 equals 610.
Here is the same calculation with (GOOG). (GOOG) trading at 693.00 ATR is 16.84. 2x stop is 33.68. So your risk of $ 1000.00 will allow you to buy 30 shares of (GOOG) Big difference.
Hope it helps!!!
Alot of this stuff sounds like kelly bet sizing...
http://www.trading-lab.com/forums/kelly_bet_sizing-t245.html
http://www.trading-lab.com/forums/kelly_bet_sizing-t245.html
Quote from Stockjock223:
(GOOG) ATR is 16.84 where as (GE) is .82.
I think you are using a SMA 14 day ATR. It is better to use an EMA 14 day ATR and the values for GOOG and GE are 17.42 and .84, not that much different anyway.
There is an issue with your approach IMO. Your stop is not determined based on some specific strategy but it is essentially a volatility stop. That can cost you since it is not only volatility that matters in trading but also the direction of price.
It may be better to use a 14 day ATR as a percentage of closing price and the values for GOOG and GE are 2.41 and 2.22 respectively. Now you see that volatility when calculated as a percentage of price is about the same for both stocks.
Ron