I've found that putting on big trades is easy, because I am always optimistic at trade inception. And taking profits on big trades is fun and easy. But watching big trades go sour is much more painful than watching small trades go sour. And especially so when it is other peoples money. I'd rather lose my own money than lose the Schindler Fund's money. When I lose my own money in my own account I move on the the next trade and that's that. When I lose the Schindler Fund's money, that loss is going to haunt our performance numbers forever and ever and at the end of the month I'm going to have to report to each of my investors how poorly their investment did. Yuck. With larger trades not only are you leveraging up your wins and losses, but you are likewise leveraging up your joy and nausea.
it is a puzzle which I have been pondering almost constantly. The way I figured it, it is best to just scalp at full margin and hope for the best. The math gets very tricky when you start working out how it goes when you have to start reducing size due to drawdown. Another one of those trading problems that all comes down to the elusive expectency factor. The way I look at it, I wouldn't be doing it if I didn't have positive expectency. Now, just what number that is, and how it is going to help me pull myself out of a hole on fewer contracts than I fell into the hole with is I'm sure some very boring formula. (But I would feel a lot better if I could prove it.)
Aaron! Thanks for the post. It would be interesting to hear what method you or other traders that traded for their own account used when they started trading for a funds account. I assume that this can be done with the proper method, e.g. increasing the number of contracts traded by 10 each day. Or did some of you have the stomach to switch to 100 or 500 overnight? Thanks, gizo.
I have always used fixed fractional position sizing. No matter whether it is my money or Schindler Fund money. Trade size = Porfolio value x fraction of the portfolio I've got assigned to this strategy x fraction of the portfolio I've got assigned to this contract / desired equity per contract. The desired equity per contract is usually derived from Monte Carlo simulation and a desired max drawdown or risk of ruin. So if the Schindler Fund doubles in size tomorrow, all trades will immediately double in size.
Fixed sizing worked fine, until I started scalping. Then my average loss was so small, if I only allowed twice the margin per contract, I didn't have enough risk riding on each trade to make it worthwhile in the long run. $5,000 per es contract works fine when you are using 2 pt stops. But if you tighten your stops to 1 pt or less, then even 4k is too conservative. 2k per contract is theoretically the best, but my bills are not paid with theoretical money. So I compromised and started thinking of the whole day as one big trade.
I've found the fixed ratio algorithm that Ryan Jones pioneered to make the most sense and be the best for me - superior to the more traditional fixed fractional approach.
Gordon, Thanks for the reference. Yes, I am familiar with some of the arguments against this MM method, but, in my experience, I have found many more arguments and evaluations FOR it. Plus, Ryan's math makes perfect sense to me. Not to mention that I have used this same, or very similar methods for a couple years, and I find it more conservative than the fixed fractional approach - and guiding the buildup of a smother equity curve. To each his own, I guess. if you are interested, read Ryan's book. it's a good one, imo.
right gordon, I agree. The move from one to two contracts is huge. The move from 19 to 20 isn't so much. I'm trying to build an upside down pyramid something like 4k 1 contract 8k 2 11k3 14k 4 15k 5 etc but in real life I just trade 1 per 5k and forget about it. But I need to start optimizing something. Maybe I'll just widen my stops. This comm is killing me anyway. 3 pt stops, 1 pt profit. What's worked in the past usually doesn't work in the future, what I give up in r&R I gain in hit rate and save on comm. People read books and then try to tell you how to trade. Some of this stuff works a lot better in the book, and some of this stuff which doesn't work on paper works very fine with real dollaroismo, thank you. (and that's why I get to take the rest of the day off and go cut the grass one more time.) hey, I needed a point and I was willing to risk 3 to get it. So shoot me, get away with it enough times on Mon and you can take the whole week off, which I may just do, because who the heck knows what will work tommorrow?