Position sizing

[onelot]

Quote from HolyGrail:

The premise is purely logical. What is good for one has to be good for the other. I'm glad that you said "It's not necessarily a bad investment to invest in a company that is highly leveraged". Of course it's not. I never made that claim. [

If being fully leveraged is the only way for a business to make it in this tough world it would seem to me that we should only invest in companies that are highly leveraged. I wonder why the complete opposite is true.

Um, yeah you did. You see, right there bolded in the last sentece of your question.

Your two sentences up at the top in bold are illogical as well by the way. With that logic, we should embrace our wives if they are out cheating and shake the hands of theives of who rob us. Quit while you're, um, behind holy. Or how about just stick to the topic. I'm not interested in these skeptic style arguments. They're just clutter.

Thanks for chimming in Mike. The 2% rule is indeed insane, if it's taken as a whole of net worth. It's insane without context as well. Talking about risk as these glaring generalities is not any help for real world practice.

 

[HolyGrail]

Quote from mschey:

Here's the point you are missing....with trading, one can leverage and deleverage damn near instantaneously. I can choose the time to leverage the balance sheet to take care of short term opportunities, in business, you don't have the same flexibility. As an experienced, profitable trader, the amount of capital that is available to me is on the order of 100 times or more... Now that is true power. Try getting access to that kind of capital at your bank!

Now we are talking. That is a valid point, and I commend you for not attacking while making it.

I noticed though that you said an "experienced profitable trader". I am an experienced profitable trader. Maybe not to the level that you are, but nevertheless I fit that bill. Perhaps you should call it something else.

Having 100 times more capital to trade with sure does sound inviting, but my goal is to risk the least amount of capital for the greatest potential reward. Does that make me stupid? Does that make my methods any less valid than yours? I don't think so.

 

[taowave]

Quote from mschey:



The 2% net rule is a bunch of crap....Who the hell trades based upon there net worth. You're going to tell me your wife is going to let you tap into your emergency savings when shit hits the fan to cover margin calls? Mine won't. She keeps 50k plus in an emergency fund that's only for that, to take care of us should I screw things up. If you plan to use that money to cover trades you are really going to be in a world of hurt.

What about this, I own realestate, a million bucks worth. Lot's of equity, I am able to tap that equity through Helocs, so it really is liquid, should I trade 2% of that too? Answer....NO!

Once you've traded a while, and put some profits on the board, you'll see that when shit hits the fan in the market, all correlations go to one. So the 10 trades you have on with your 100k account, risking 2k on each...will amount to a 20% loss for you. You are taking risk...significant risk! Why 2%, why not 3% and 7 trades, or 4% and 5 trades?

I dont see how you can say the 2% rule is crap,and to be honest i am not sure which case you are arguing..more or less...or just not any hard coded number..

On one hand you argue that correlation goes to 1 in a dislocation,yet you also feel its prudent to put the pedal to the metal and levrage the shit out of positions.And if I am not mistaken,it was you who advised on doubling up at max pain thresholds.

the max amount of equity to bet is a very subjective question..Do you judge trading success by max net profit???Is it a maximising Sharpe or recovery ratios???

Until you define success,this is a meaningless dick swinging debate and you should know that

 

[onelot]

Quote from taowave:

STOP!!!!!!!!!!!!!!!!

Let me interrupt this dick swinging contest for a moment before you guys cross swords....

Risk/stop=$2000/.20 or 10,000 shares

Am I correct that you guys are trading 10,000 shares(1,000,000 notional),on 10-1 margin??

And where did the other poster come up with an $80 stop??

It's not a dick swinging contest. It's just hard to actually communicate anything without people saying things that don't make much sense.

You're right it should be 10k shares. No, I'm not implying anyone is or should be trading that size. My point was that just taking a 2% stop of net worth and not taking other things into consideration (eg, volatility, liquidity, portfolio distribution, etc.) is just dumb. b1s2 when he was saying stuff like there is no need for context with the 2% rule and bla bla bla. I was trying to create a ridiculous example that would show his assertions false. He then changed his assertions later, and now he's talking about margin and being married. Whatever.

I don't know about you, but this could be a good discussion about risk and I'd like to get past the 101 crap.

 

[taowave]

Quote from Buy1Sell2:

$80 would be a $20 dollar stop on 100 shares of a $100 stock. 100 shares would be 10k of the 100k. This would be the maximum prudent loss of $2000 or 2%.

Gotha..The poster originally stopped himself down .20.I was wondering how you came up with 80 for the stop

 

[mschey]

Quote from taowave:

I dont see how you can say the 2% rule is crap,and to be honest i am not sure which case you are arguing..more or less...or just not any hard coded number..

On one hand you argue that correlation goes to 1 in a dislocation,yet you also feel its prudent to put the pedal to the metal and levrage the shit out of positions.And if I am not mistaken,it was you who advised on doubling up at max pain thresholds.

the max amount of equity to bet is a very subjective question..Do you judge trading success by max net profit???Is it a maximising Sharpe or recovery ratios???

Until you define success,this is a meaningless dick swinging debate and you should know that

His rule is to trade 2% of his net liquid capital. Not 2% of his trading account, 2% of his net liquid assets. My point is, it's just a random number he picked out of his ass...and that's fine...but don't tell other traders that's what they should do it's bad advice. Also the 2% number is a bit misleading, in that he is willing to actually risk 20% of his account when shit hits the fan.

For me, I am taking risk and I admit it. I covered everything one needs to know about my MM plan, I am not going to reiterate it here.

The max pain trade, it's just that. One last chance before you throw in the towel. If you've traded for a while, you know that the market has a funny way of stopping you out before retracing. Two recent trades that I used this tool....NSM and DE!

The optimal amount to bet can be calculated using any of the formulas that I discussed previoulsy. The purpose of money managment is to maximize your gains given the level of risk you are willing to accept. So....trading becomse a game of knowing your system, and determining the amount of risk you are willing to accept, and then trying to maximize what you make given your level of risk.

 

[taowave]

Quote from onelot:

It's not a dick swinging contest. It's just hard to actually communicate anything without people saying things that don't make much sense.

You're right it should be 10k shares. No, I'm not implying anyone is or should be trading that size. My point was that just taking a 2% stop of net worth and not taking other things into consideration (eg, volatility, liquidity, portfolio distribution, etc.) is just dumb. b1s2 when he was saying stuff like there is no need for context with the 2% rule and bla bla bla. I was trying to create a ridiculous example that would show his assertions false. He then changed his assertions later, and now he's talking about margin and being married. Whatever.

I don't know about you, but this could be a good discussion about risk and I'd like to get past the 101 crap.

there is no doubt a trader must take into account all the other consdierations you brought up,but i don think 1-2.5% is such a bad starting point.It's very easy to analyse..BUT

It cant be a very meaningful discussion until you define "trading success"....

And your next topic will probably be tight stops vs wide stops..or simply time stops..

What does net worth have to do with risk capital??

 

[sosa1974]

Quote from taowave:


On one hand you argue that correlation goes to 1 in a dislocation,yet you also feel its prudent to put the pedal to the metal and levrage the shit out of positions.And if I am not mistaken,it was you who advised on doubling up at max pain thresholds.

That is straight from the pitbull trader Marty Schwartz. And while I dont recommend it to someone new, sometimes it does work. You really need to have absolute hard stop loss.

Valium anyone?

Trish the dish, look what you started

 

[HolyGrail]

Damn, I must be the most conservative person on this board. I never risk more than 1% of risk capital on any one trade.

 

[Buy1Sell2]

Quote from HolyGrail:

Damn, I must be the most conservative person on this board. I never risk more than 1% of risk capital on any one trade.

Yes, that's a great idea as well! 2 percent is only the maximum, it can considered prudent to have that stop at .5 , 1 or whatever as long as it is 2 percent or less. Nice point there HG!. If 2 percent is the max pain threshold as someone else pointed out, then a lighter position should be used so as to keep you in the trade longer.