Position sizing
- Thread starter Trish
- Start date
Hi Trish,
I've tried many different types of position sizing models.
1. All-in one initial entry, scale-out.
2. Scale-in (based on multiples of ATR), exit everything on predetermined exit criteria.
3. All-in one initial entry, exit everything on predetermined critiera.
I like the 3rd one best (simple and consistent), but many traders use versions of the other two.
Theoritical Max risk of Loss should never be more than 5% of your total account of any one trade (example using the e-mini's since that is what I trade).
Protective Max Stop Loss for 1 E-Mini Contract with an account of margin of $4,000 would be $200, because:
4,000*5%=200.
It's a decent risk methodology to start with. I am sure the concepts are applicable to any instruement which is being traded.
Best,
JJ
I've tried many different types of position sizing models.
1. All-in one initial entry, scale-out.
2. Scale-in (based on multiples of ATR), exit everything on predetermined exit criteria.
3. All-in one initial entry, exit everything on predetermined critiera.
I like the 3rd one best (simple and consistent), but many traders use versions of the other two.
Theoritical Max risk of Loss should never be more than 5% of your total account of any one trade (example using the e-mini's since that is what I trade).
Protective Max Stop Loss for 1 E-Mini Contract with an account of margin of $4,000 would be $200, because:
4,000*5%=200.
It's a decent risk methodology to start with. I am sure the concepts are applicable to any instruement which is being traded.
Best,
JJ
All do respect, you don't know what you're talking about! As I've said, the leverage issue is not a problem when you know the dynamics of your system strategy. Time frame also makes a big difference when it comes to leverage. Some of the best traders on here, trade with leverage of 50 or 100 times...and have not blown out and will be unlikely to ever blow out...because leverage is not the problem. It's understanding your system and managing your risk that is the key to making money...and we are talking guys that make consistent 6 figure incomes here.
All of the big blow ups involve leverage and NOT MANAGING RISK AND TAKING LOSERS! Folks there's the key to successful trading....manage your risk. Leverage has nothing to do with it!
Which begs the question, what is it you do best?
The challenge with scaling into positions is that you will always have a full position on in your losers, and some of your best trades will only get a partial position on before it moves in your favor.
An example, I have a system that I created that is a fantastic system for short term trading. It wins anywhere from 35 to 60 % of the time, typical for a trend following strategy. Often times, it's one or two trades that make the strategy viable. It' catching that 1 trade that moves 10% in your favor that makes it worthwhile. If you miss that trade, it skews the results, the system would only become marginally profitable. Scaling in would litterally cause me to have bigger size on my losers, and smaller size on my winners.
I have found two interesting concepts in support of scaling in. The first involves adding to profitable trades after a fixed amount of time. The second involves adding to a winner on breaks to new highs/lows after a period of consolidation. As a systemic approach it works well.
For trades you manage manually, I find that adding to losers and scaling out can work well. I am unable to do anything with it on a systemic basis.
I think it is rather silly to say you pay a heavy price for being too conservative. What price is that? If you are playing a net losers game how can being too conservative ever be a bad thing? If you are consistent over the long run that is really the only thing that matters. I would rather err on the side of being too conservative than aggressive in your money management.
Let's not overrate the importance of money management. It is important, but not the most important thing. Like psychology, money management is only important once you have a method that has a positive expectancy. With no positive expectancy and good money management you will simply die a slow death, rather than a quick one.
The bottom line with money management is do you have a money management method that will keep you alive as long as possible in this game? That's it. If you combine that with consistent trade results you will do very well.
Scaling in or out is rather problematic. The reason for this is that it reduces your returns over time when the probability of a successful trade remains the same. That is a mathematical fact. I think where it can help is if you assess that the risk is greater then you may want to adopt a scaling approach to reduce risk.
Perhaps I should add that the above example is for e-minis (eg YM). So a maximum position of .02% for a trading capital of $2500 is a $5 bet or stake (ie $100,000 capital=max stake of $200). Also, obviously, your betting stake rises as you capital increases from net market gains. That is not a such a slow process if you have a very accurate trading methodology.Quote from Cheese:
Simplistically, set a maximum position aligned to those precautions which ensure that any unexpected loss cannot damage your intended program of capital accumulation (ie continuously adding net profit or net gain).
First the background assumption is an accurate methodology. Consider an example for day trading
1. Max stake (ie bet or position size) at any one time set to .02% of trading capital inclusive of margin.
2. No overnight or longer holds.
3. Have planned position sizing tactics for your methodology up to your allowed max - never larger.
What I find that's silly, is that you can't figure out the cost of being too conservative, you had better spend some more time studying money management and geometric growth functions.
The purpose of money management is not to keep you alive, it's to make you money. To maximize your growth in the account given the levels of risk you can tolerate.
With all due respect, and this may sound a bit harsh, but you have a losers mentality. The first paragraph, you say that trading is a net losers game. Then you speak of money management as a way to keep you alive as long as possible. In both cases, the presupposition is that you will eventually lose, and die. If that's what you believe about the markets, you will never be successful. I suggest you get on Ebay and pick up a copy of "Get the Edge" by Tony Robbins. It will help you address your issues about the market.
Scaling in and out is not problematic, but it does impact returns. I have found that Scaling out will reduce your returns in terms of dollars made, however, it also serves to reduce your risk. Adding to winners, increases the amount of money made, but it comes at a price, the price is increased drawdowns. Scaling out of winners, reduces the amount of money made, but also reduces the drawdown. In that sense, it comes down to a question of preference and utility. How much risk are you willing to accept? Once you know that you then choose the form of money management that will maximize your growth given your level of risk.
scalin' in and out does a lot of good if employed with an aggressive approach...if i am into somethin' that's trendin' in a predictable fashion i try to take advantage of every gyration[rally/pull back] buildin' my pos at the base and cuttin' part of it short at a spike; then begin the process all over but with a constantly bigger overall position.
But you would need to understand the range of the progression ie volatility for scaling to be be evaluated.
and lets not even introduce time frame.
and lets not even introduce time frame.