compounding position size, when would it flat-line?

Discussion in 'Risk Management' started by AlmostGotIt, Feb 27, 2008.

  1. theoretically, if you were to increase your position sizing in direct proportion to your capital, and your account kept getting bigger and bigger… at what point would your position size become so big that you could not keep going? …sort of like how it can be difficult to trade low volume stocks, but now the problem is that your position size would be too large to even trade high volume stocks effectively?

    …just a curiosity, i seriously doubt i will ever have this problem
  2. It also depends on your trading style.

    A scalper will hit liquidity limits first.
    Then the day traders.
    Then the swing trader.
    And finaly the long term traders, they will hit the flat line last and can compound the most.

    The reason is the wider stops and profit targets, the longer your outlook the wider these will be, this means you can get more bang per share/contract traded.
  3. good point... i swing trade because i dont have the 25k yet, but i also day trade as much as i am allowed to. the PDT rule has actually helped me out and made me a better trader i think, i have to wait for the best trades because i cant dick around or ill lose money AND waste a day trade.

    my day trades are usually stocks $85 per share or less, and i like high volume around 750k to 1 million avg per day or more. my stops are usually about 25-35 cents wide, depending on where support is of course, and i usually sell 1/2 my shares at a 3-to-1 return on risk, and trail stop a 1/4th of my shares at the prior bar low, and then i manage the final 1/4th using stops under pivots as they form...

    i started trading with less than 15k in capital, and my risk/share sizing has been very small, so its easy to pump up my account quickly... at the rate im going ill be a millionaire in like 4 years, but im not that naive, i know it doesnt really work like that and its not good to think like that either... it will get much harder, im sure of it, but exactly how it will get harder i dunno... thats what i am trying to figure out.

    anyone have any tips for me? im sure this will help a lot of other new traders that might read it too.
  4. MGJ


    Around 1% of average daily volume.

    So if you're trading the stock of Cisco (average daily volume = 68 million shares), you could take position sizes of about 680 thousand shares without having huge market impact. If your stop is 4 points away, you could risk 2.7 million dollars on a position in Cisco without huge market impact. Assuming each position is 10% of your account size, your account could be 27 million dollars.

    On the other hand, if you're trading the stock of Jamba Juice (average daily volume = 1 million shares) with a stop 0.75 points away, you could trade 10 thousand shares (risking 7.5 thousand dollars) per position. If each position is 10% of your account size, your account could be 75 thousand dollars.

    And finally if you're trading eMini S&P futures ("ES") with an average daily volume of 2 million contracts and a dollars-per-point multiplier of 50, using a stop 80 points away, you could trade 20 thousand contracts (risking 80 million dollars) per position. Assuming each position is 10% of your account size, your account could be 800 million dollars.

    Large accounts need (1) large daily volume, (2) wide stops, (3) small %-of-account position sizes, (4) high (price x multiplier).
  5. thats for the input guys, i really appreciate it... but im not quite following what you mean by "huge market impact". is it really possible to move in and out of positions at these lot sizes easily throughout the day?
  6. If you were trading stocks in large blocks (as in the Cisco example) you wouldn't move the market much. Large blocks are not traded by going to the market; instead, they are traded through the likes of a Goldman or Bear who cross them with the other side or, if you're a really big client, they will take the merchandise off your hands for their account before laying it off in whole or parts to others.

    Futures are another story. Investment bank trading desks will not take the other side of a huge trade as a principal, only agent. It's all about risk management.

    The example of the S&P e-mini isn't accurate, because the CME has position size limits for traders.
  7. i see, that clears it up, thank you.