Position Sizing

Discussion in 'Strategy Development' started by Bo_D_, Mar 25, 2008.

  1. Bo_D_


    Hi everyone,

    I have been trying to make my systems more robust and have come to the conclusion that i need to have volatility based position sizing.

    I use leverage and trade a short term (3days average) counter-trend system that trades the aussie market only... long and short.

    Market volatility really influences my drawdown (obviously) so im looking at ways of cutting that down if possible.

    I was wondering what general rules systems traders on ET use? Im not asking for peoples secrets, just a little push in the right direction.

    Would really appreciate any help.
  2. One answer is to trade the trend instead of counter-trend. This would cut down on those extended moves that take you out of your comfort zone.

    A second answer would be to spread trade weak/strong pairs of whatever indice you're trading.

    A third would be to trade trend and counter-trend, Long and Short, the same market.
  3. Bo_D_


    hi mandel,

    i prefer mean reversion systems over trend systems. profitability and drawdown im happy with, until the market gets volatile.

    thats why i want more robust position sizing methods.

    i do have market gates to effectively combat the market going down which has reduced historical DD alot... but its not enough.

  4. So why not volatility-normalize your results?

    Make your stops tied to volatility, instead of fixed values. For example, 50% of ATR(20). Then you would risk a fixed amount per stop, for example, 0.5% of the capital, no matter what 50% of ATR(20) value is. If you want more sensitivity to the recent volatility changes, use smaller ATR lookback periods, like ATR(5).
  5. If you're looking for volatility-based exits, try using Average True Range to determine your stop size (in points) and then determine your contract size on a percentage of the account basis.

    For example, ATR = 25 points per bar.

    You determine that a 2 ATR stop is best for your system.

    Risk Per Trade = 2 ATRs or 50 points.

    If the market you trade is $5 per point, you're risking $250 per contract you trade. If your account value is $50,000, that's 0.5% per contract traded. So you could trade 2 contracts to risk 1% of the account on each trade.

    On the other hand, if the volatility drops and ATR = 10 points per bar, your 2 ATR stop is now equal to 20 points x $5 per point = $100 per contract. Thus you could trade 5 contracts and still be risking 1% per trade. Make sense?

    This is a crude version of how many professionals determine their position size.
  6. OK, I understand.

    Do a search on ProfitTakgFool, he's the mean reversion king around these parts, and reading his posts might give you some insight into his methodology for trading and/or how he position sizes. Wouldn't hurt to send him a PM, but first do some reading, he even started threads about this very same topic.


    There's also a thread called "The Holy Grail" something or other, about a guy who trades in a similar style. Now, this being ET, it was a total flame-war and the guy was disagreeded with left and right, but a lot of interesting information was posted, none-the-less, I'll look around to see if I can find it.

    Ultimately your position sizing should probably be something like X amount of dollars per Y amount that price goes against you ... tell you what, I'll look for the thread, that stuff is right up your alley.

  7. OK, here's the thread I was looking for:

    Averaging Down the Real Holy Grail

    The other source, like I said, is PTF ... between these sources, you should at least get some ideas, if not a solution to your problem.

  8. Bo_D_


    basically all my buy and sell parameters are volatility based...

    im looking for position sizing methods not volatility stops.

    thanks for that link mate, your a champion.
  9. oh sorry.

    it's hard for us to get into your headspace, because no one that I know of here trades like this with consistent success.

    probably over 80% of us are directional intra-day scalpers (even though we do it across a number of different instruments and around the clock).

    i would think you would need do a study looking at the maximum/minimum adverse excursion that a position will move against your entry before turning around and giving you a profit ... and then what the amount of that profit is.

    once you have those numbers you can determine what your position sizing "might be" based on the amount of capital you're willing to allocate to each trade ... I'll have to look into it further.

  10. Bo_D_


    hi mandel,

    the first bit of my post was for the other 2 posters.

    MAE and MFE arent that important in what i want to do.

    its basically to stop me going 'all in' when the markets swinging 3% a day. which would see my account swing wildly.
    #10     Mar 26, 2008