You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Position sizing: Risking 1% equity per trade
- Thread starter a529612
- Start date
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.
There are many factors involved in position sizing. I use simulation to determine size.
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..
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?
http://www.elitetrader.com/vb/showthread.php?s=&postid=916204&highlight=formula#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.
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.
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?
My group has used exactly this method for many years and it works fine in all markets.
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
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
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.
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.
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.
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.
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