how much live trading is relevant?

Thank you, Rabbitone. I am very grateful for the full, detailed response to the questions.

PS. you got a perfect score on both counts ...

 

Most hedge fund research teams in investment banks are still looking just at equity, because investment banks are stuck in their product buckets says.
Some hedge funds are concerned that the ideas provided have already been circulated to a multitude of other hedge funds, and they might be last in line, by which time the market has moved.
_________________
Easy Forex

 

Apologies, but one more question ... (for 10 bonus points!).

Using your terminology, when you relate "position size" to "account size" with these percentages, which of the following is closest to your meaning of "position size" ...

"position size" = # of contracts (or shares) X position entry price

OR

"position size" = % of account size "at risk" assuming worse case that you get in at the entry price and out at your stop (no slippage)

?

Thanks again

 

Hello Abattia,

What I presented in the last 2 installments (responses from me) was a peek at my printing business. This printing business prints money but is not like the other printing businesses in ET. It uses techniques that are relevant to my business plan (trading plan) and not others.

What I have been writing to you about are some of the specific rules and methods that I have adapted to my business plan (trading plan) to print money. The rules for my printing company in most cases will not work exactly the same in your printing company since we are both going about printing money from different angles and methods.

In the years past when I have gone into detail about items like position size there were always 2 or 3 ET’ers who would jump down my throat and tell me I knew nothing about position size. Most of these traders ran printing companies that had a different set of business rules. Some of these were stock day traders, forex traders, E-mini SP traders but none of them were stock swing traders like me.

Because we all ran different printing companies great verbal battles erupted over what position size really means. But after these great verbal battles we all came to the conclusion position size is the method that protects an account balance from losses which drop the balance at some acceptable rate or percent over a time frame say a week or month.

In my printing company it is based on the rate of months with reviews done each week. To start at the beginning of each month I note the previous months ending cash account balance. My business plan says each transaction must risk only x% of account size. My business plans objective for the next months trading is to have the average loss (the x%) times the maximum projected losers at any one point in time not take out more than 6% of the previous months ending cash account balance.

The 6% rate is what I found I can handle psychologically when swing trading through 4 to 6 months of market trauma in which my methods or systems may not work. My worst case so far was a 26.7% account drawdown when markets changed. Maybe a 4% or 5% max loss rate per month will be my printing company’s norm in the future.

So, the position sizes of ½% to ¾% per trade are based on the previous months ending cash account balance and my expectation that multiple systems are running at any one time. The objective is to obtain this position size in my strategy during optimization in back testing and then forward testing (I enter commission and slippage to obtain the optimum parameter settings). Then I optimize the starting shares or shares being using in each trade until I get the number of shares to trade that gives an average loss that is inline with the percentage loss based on the previous months ending cash account balance.

Now this is how I run my printing company. It is still being tweaked as stats gather over the years. But for many of you this method is probably irrelevant. In some forms of trading like day trading a 4% loss in a week would be a fatal blow. It all depends on the rate that you printing company take on risks and prints money. This is what I constantly monitor.

Thank You. I hope this answers your question.

 

Very thorough answer. Very many thanks.

 

Go to the thread by TalonTrading you will see a system that will work forever because it is based on inherent market character that really can't be avoided unless market shuts down. That is totally different then temporary edges that invlove some pattern in an indicator or price bars. The latter will shut down because it is not capturing inherent character of markets. Do you know which one you have?

I would also second sentiments above regarding position sizing. If you have a reliable system you'll figure out how to make money with it. Position sizing can't fix a crappy strategy. It is fixated on by those who can't develop good edges so they sell and/ or pontificate on stuff that does not require them to know how to get into good trades in the first place. Don't fall into that shell game. Sure it has a place, but its easy to figure out --- the edge is the important part.

 

Rabbitone, I have been following this thread with interest and I appreciate how clearly you lay out your thoughts and practices. And kudos to Abbitia, his fine questions help illuminate the topic.

I am not sure I understand why you consider a 4% loss in a week devastating for a day trader. I currently day trade NQ and a handfull of currencies in a small account and have had weeks where a 6% loss, because it was within my plan's parameters, did not shake me. I didn't like it but it was not an albatross.

Obviously a small account generally takes a higher percentage risk than a larger one and subsequently runs a higher risk of ruin. As in most businesses being under capitalized accounts for both a great many failures and the occasionally dramatic story of great success from a humble start.

Although I wouldn't go so far as to think of it as an edge, I have learned to take my losses quickly (miss some great trades) and live to fight another day. An asset -- an inportant tool -- but not an edge. When you are light on capital you must master taking a quick, small loss and not dwelling on the ones that get away. The two realities go hand and hand.

 

Humpy, You are all heart.

 

backtesting is not a waste of time. backtesting without proper knowledge is worse - a waste of money.

Example: If you use a 5% test for inclusion into some learning algorithm and test 40 variables then on average you will find 2 variables that seem significant, but are in fact not (spurious).

Two fixes for this often repeated blunder:

(1) Adjust your significance level with the number of predictors (variables tested) - "Bonferroni correction"

(2) Be thoughtful in your variable testing and write down the expected impact if it is in fact predictive. If you find reversed sign co-efficients for example (like a negative number when you expected a positive relationship) then dump it or do additional testing.

Just my 2 cents anyway.

In terms of option analytics, I use Livevol Pro. I am on the NYSE ARCA floor as a MM and prop trader. I would say 90% of the floor uses it (note, I also work for them - full disclosure).

can check it out here: www.livevol.com
If you are interested in free trial to pro version contact me please.
ophir.gottlieb@livevol.com (mention the post so I know who you are).

 

You WORK for them, or you OWN them? Why would an employee be a sponsor unless they had a financial interest? "Hi, I am employed by McDonald's, and I am paying a sponsorship to get everyone to eat there..."

Odd...