Position sizing across multiple different markets

Discussion in 'Risk Management' started by Newc2, Dec 2, 2018.

  1. Newc2



    Say I have half my cash in forex and half in equities, what do people think the best way to consider position sizing? I can't seem to figure out whether there is an advantage to either of the following options?

    Based on total portfolio value across both instruments?

    Or to treat each individually as separate entities and then position size based on the value of each?

  2. tomorton


    The conventional answer would be to cap risk per position but then limit or avoid additional positions that are highly correlating with what is already open.

    So you might set a stop-loss such that if hit, the max loss on the trade would be 1% of your account capital.

    If the position is a long on the USD, you might then avoid additional longs on the dollar - any adverse USD news might trigger all the 1% stops and cut a major chunk of your account.

    So far so simple. But the equity markets are also a useful risk tolerance belweather, and often, if cash takes flight out of stocks, its also pulled in a hurry from the forex market. See the volatility that hit many forex pairs in Jan/Feb this year. So an additional rule to account for "invisible" correlation might also be a useful insurance.
    Newc2 likes this.
  3. Newc2


    Thanks Tomorton.

    That makes sense.

    But say in a hypothetical world you have $90000 to invest
    of which $30000 is in Market A and $60000 in Market B

    Using a 10% stop loss and 1% risk per trade, in Market A would your single position risk be $300 or $900? (and same for a single Market B position - $600 risk or $900 risk)?

    I think in your answer you consider total account capital. But I can't figure out whether this is disadvantageous
  4. tomorton


    The 1% risk is calculated from 100% of your account capital, so as that's $90k, it is $900 per trade, doesn't matter how you parcel them up or allocate capital to which markets.

    People say risking just 1% makes it very hard to make serious money, but the other side of the rule is that you should therefore always risk the full 1% of the entire account per each and every trade.
    Newc2 likes this.
  5. Newc2


    I now risk only 0.25% per trade! It reduces account volatility. Yes I would need lots of positions for an effective use of capital but I figure that if equity markets have good trading conditions then they will give me multiple setups and if conditions aren't good then I'll only be offered few setups and therefore automatically have less total portfolio heat at risk.

    In a way this is letting the market guide me on how much to bet. Kind of works the same way in the adding positions method you've put up previously
    tomorton likes this.
  6. comagnum


    I find it beneficial to segment my risk/trade mgmt by the instrument types: futures, forex, & stocks. This adds an extra layer of protection, transparency, and keeps me better grounded.
    Newc2 likes this.
  7. ironchef


    Perhaps you should calculate the Kelly on each and size them according to their respective Kelly.
    Newc2 likes this.