Max % of avergae daily volume position sizing for swing trading

Discussion in 'Risk Management' started by Faramond, Dec 7, 2009.

  1. Faramond


    I used to read these forums often many years ago and found lots of helpful info back when I was getting started day trading. I was hoping someone with some experience swing trading might help offer some general guidelines on swing trading.

    I am helping a hedge fund develop a trading plan at the moment. I traded profitably for many years as a day trader and have a good gut for dealing with thinner issues intraday but am not sure for swing trades.

    I am using fairly wide stops, about 10% usually. I am hoping to come up with a maximum % of average daily volume as a guideline for position sizing in some of the thinner ETFs. The offering memorandum has my hands tied in some respects, so I need to unfortuantely trade some thinner things which I would usually stay away from.

    Can anyone give about how much one should limit one's position size to relative to the average daily volume in order to not get killed when I am on the wrong side?

    Thanks in advance!
  2. (3 day avg price x 3 day avg volume) x 0.03 = Max. Cash Size


    $10 x 500k x 0.03 = $150k = 15k shares
  3. Faramond



    I appreciate it.
  4. 3% of the 3-day average volume?.....That's fine by itself. I don't understand why it should be "price sensitive" in the equation. :cool:
  5. Liquidity is measured in cash movement, not just volume.

    Say I want to move $500k of *cash* into an equity:

    ABC @ $2/share 500k ADV = $1mil of transactional volume.


    XYZ @ $20/share 500k ADV = $10mil of transactional volume.

    In ABC, I'm taking 50% of the available liquidity. For XYZ, I'm taking 5%. That's a substantial difference...
  6. IMO this is bad money management in principle. Your position size should be based on your allowable account risk rather than on volume. Given that your stops are more or less predefined, the position size determines the risk and vice versa. The way you want to account for size can result in way too large of a risk per position and it can lead to ruin fast if you are hit by a few consecutive losers.
  7. Faramond


    Thanks Intraday Bill,

    The reason is that my allowable account risk per trade is much too large for the market in many cases, thus I need to limit my positions in these based on average volume (if you are too big in a given market your "stop" is meaningless because the price at which you are able to get completely filled will be much worse if you are on the wrong side of the market.

    The maximum cash value I can trade in a given ETF at given point in time is important to me as well because position sizing is based on the fund's value at the time of initiating the trade, so this will obviously be always changing as well will the average volume, thus I really like the guidelines posted above.

    Thanks everyone for your help and input.
  8. It is an issue much more complicated than that and I faced it in the past. Now I trade very liquid markets only. You should consider then up-volume and down-volume only depending on whether you go long or short. Total volume is a meaningless measure especially when dealing with not so liquid markets since it can only represent transactions between various MMs.
  9. Mike,

    Thanks for your thoughts.
    3-5% sounds reasonable.
    Obviously, less is better.
  10. Maybe at some point you will have more experience.

    At that time you will begin to consider how a day unfolds. We verified this with 400,000 runs to shape the curve.

    Markets have different capacities as the day proceeds. If you are significant in the market, then you have to consider this. You may be small so this is not important.

    At some point anyone can become significant. That is the theme of your question.

    When that happens for any instrument, you are in the world of partial fills as a way to meet a goal.

    About three considerations come into the picture: the block sizes, the capacity of the market, and cummulative volume relative to your intrusion.

    Its probably a good idea to not deal with things that affect people's decision making negatively.

    Occasionally, I review the info that hits the financial planners desks and which they forward to those for whom they plan. Both parties are fairly ignorant so things roll along as usual.

    Getting out of trouble is hazardous as most charts in statements indicate. It is kind of humorous what people profer as knowledgeable information.

    Good luck, you may be up against some difficult cures if you follow the suggestions so far.
    #10     Dec 14, 2009