Position Sizing

[LondonUSTrader]

For those traders that day trade futures successfully I was wondering if you would be willing to share your position sizing strategies. I think position sizing is perhaps one of the keys to successful trading long term.

How do you decide the size of your positions. I guess there could be a number of different approaches to this question.

(1) On the basis of overall market conditions. IE we are in a downtrend on the daily chart so you take larger size on your sell positions than your buy positions.

(2) On the basis of overall net equity. You are having a good month so at some point you increase your position size as you are playing with the house's money.

(3) On the basis of probability of win or loss. Some of your tradesetups are higher probability than others so you trade more contracts on the higher probability setups.

(4) Scaling in. As a position moves in your favour you add more contracts.

If I have left out any other ways to position size please add and please share your experiences with what your position sizing approach is and how it has worked for you.

Cheers.

 

[FuturesTrader71]

Quote from LondonUSTrader:

[...]
(1) On the basis of overall market conditions. IE we are in a downtrend on the daily chart so you take larger size on your sell positions than your buy positions.

(4) Scaling in. As a position moves in your favour you add more contracts.

[...]

Point 1 and 4 above are the main factors for me although the others are relevant accept the equity based one. I don't trade bigger just because I'm up for the month. Trading bigger, for me, has to be dependent on volatility, level of confidence/comfort and winning streak.

 

[spreadem]

I keep the same number of positions for months at a time. Keeping the same number of positions gives a certain level of confidence so that you can "trade like a machine". It keeps the emotions out of trading. If your overall system is a good one then you'll be fine in the long run.

Changing sizes frequently introduces too much uncertainty into the equation ... imo.

 

[realtor]

Position sizing is the key. My wife didn't want me to be a trader because it's "gambling." Yet, says I, casinos build multi-million dollar structures to lure gamblers every day. They also have to answer to their shareholders. Why would they do this if it wasn't profitable for them to gamble? In other words, gambling, *is* profitable to *someone* !

The answer is that the casino controls the game (rules) and they have the edge. On average, they make 4.5% of all monies bet, although they can't guarantee which bets will be profitable for them.

I offered her 2 supposedly contradictory truths: 1) the results of any one trade are entirely random as to direction, time, and depth, and 2) with an edge, you will be profitable over many trades.

We will be the casino.

She bought it.

Van Tharp, Ph.D., (www.iitm.com) completed a study with an always-in-the-market trading system that was 38% accurate for entry, and made money in 10 random markets over the course of a year by using position sizing. He used a coin toss to determine what direction to go in each market, and when he was stopped out, he would flip the coin and go back into the market.

His website has a game you can download and play for free that is based on position sizing. It only uses stocks but the principle is the same. The goal is to double your capital in 70 trades.

If you can find a high-probability system, and there are many, you can use Optimal F or Kelly to determine the position size, or even use a fixed fraction such as 3%. I don't think you would ever want to trade with more than 5% of your capital.

 

[Cheese]

Quote from LondonUSTrader:
.. I think position sizing is perhaps one of the keys to successful trading long term. ..

You got it buddy. Probably accidental on your part.

Its about getting the Holy Grail solution. And next step (or part of multiplying your capital): position sizing. You can move up the scale to the optimum liquidity the market offers. You are talking mega returns at this point and you cannot ultimately be the market.

OK.

Digest.

 

[psytrade]

Check it out and see. Its for daytrading or for EOD as long as your stop size increases accordingly. Youll see you may trade size larger than your account, thats why you use prop firm leverage.

Eric

 

[NihabaAshi]

Quote from LondonUSTrader:

For those traders that day trade futures successfully I was wondering if you would be willing to share your position sizing strategies. I think position sizing is perhaps one of the keys to successful trading long term.

How do you decide the size of your positions. I guess there could be a number of different approaches to this question.

(1) On the basis of overall market conditions. IE we are in a downtrend on the daily chart so you take larger size on your sell positions than your buy positions.

(2) On the basis of overall net equity. You are having a good month so at some point you increase your position size as you are playing with the house's money.

(3) On the basis of probability of win or loss. Some of your tradesetups are higher probability than others so you trade more contracts on the higher probability setups.

(4) Scaling in. As a position moves in your favour you add more contracts.

If I have left out any other ways to position size please add and please share your experiences with what your position sizing approach is and how it has worked for you.

Cheers.

I strongly agree that Position Size Management is one of the keys to successful trading.

Thus, traders that use the same size for all trades as the market traverses from one trading day to the next trading day...

In my opinion will be less efficient in their trading in comparison to those that use some form of position size managment.

With that said...your number #4...I only add to a profitable position if I get another trade signal and not because of some fixed price point.

Another method of position size management is to know what time of the day you loose money or overtrade.

Example is if someone knows that they are not profitable between 2pm - 3pm est...

Probably wise to not trade in that time duration.

Thus, not taking a trade under certain market conditions is also a form of Position Size Management because you have statistical proof in your trading that merits such a stay on the sidelines reaction.

Another example...I know someone that no longer trades on FED announcement days because its his worst trading day of that week in comparison to the other trading days of that particular week that involves the FED announcement.

Once again...knowing when not to take a trade eventhough you have a valid trade signal is also a form of Position Size Management

NihabaAshi