Trading large position size (percentage of equity)

Discussion in 'Risk Management' started by Newc2, Nov 17, 2017.

  1. GhostOf144


    Portfolio backtests only show you what might work based upon what has happened. A lot like use VAR for bank stress testing, and of course, that worked so well in 2007-2008.

    To the OP, go look up the Survivorship Bias. When you finally get taken out on your 50% idea, it will be for multiples of your account size and earnings up to that point. Course if it's odd-lots or 100 shares in a cash account, maybe no big deal...
    #11     Nov 18, 2017
  2. d08


    @GhostOf144 true. Backtests only show some of the risk. One should also consider the theoretical maximum loss. As far as I know bank stress testing was incredibly relaxed before 2008, ridiculously optimistic and making a lot of assumptions. Not at all what it is today.
    #12     Nov 18, 2017
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  3. tomorton


    Picking winners from trades opened is a non-starter for me, I just can't differentiate at the initiating stage.

    So all trades are opened with the same capital risk and a pyramid trade order triggers each time a trade makes break-even. Capital at risk is never increased but return on capital risked grows exponentially as trades are layered one on top of each other.
    #13     Nov 18, 2017
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  4. ironchef


    I think we all missed the fine points of OP's comments. OP said he/she took numerous gains out of his/her trading, so in reality his/her trading size is not 50% of asset but 50% of trading capital. That is a huge difference after a few 50% wins and since OP claimed he/she made consistent winning trades, the 50% trade size is likely only a very very small percentage of the assets, perhaps 1-2%.
    #14     Nov 18, 2017
  5. comagnum


    Getting a large ROR trading stocks above that big wall of 25% does require a different approach. Market wizard Mark Minervini is on of the highest ROR producing pure stock traders - here is his take on this.

    While it’s true that the more concentrated your portfolio, the bigger gains you can make in a shorter time, it depends on whether things go your way.

    The first rule is to never put your entire account into just one stock; that would be taking too much risk. If you have hopes of making a short-term killing by risking it all, you’re liable to be the one killed! If there’s even a 1 percent chance of ruin, it’s an unacceptable risk. Remember, you’re not going to make just one trade.

    Even if there’s a 1-in-100 chance of a catastrophe, that misfortune becomes a certainty, because you’re going to make at least 100 trades, and probably thousands of trades, during your lifetime. Each time you risk it all, you are essentially tempting fate.

    On the other hand, if you want to achieve super performance, diversifying your portfolio too much is counterproductive. Diversification also provides some psychological benefits to single instrument trading since some of the short-term variation in one instrument may cancel out that from another instrument, resulting in an overall smoothing of short-term portfolio volatility.

    Your goal should be optimal position sizing. The size of your position should be determined by how much equity you stand to lose if a trade goes against you. Let’s say you have a $100,000 portfolio and you put 50 percent ($50,000) into one position. With a 10 percent stop, you cap your loss at $5,000. But that’s 5 percent of the total equity of your account—and that’s too much risk. If you were to suffer a string of such losses, you would put yourself at risk of ruin.

    Instead of arbitrarily picking a number, your maximum risk should be no more than 1.25 to 2.5 percent of your equity on any one trade. The less experienced you are, the less risk you should take on because you are at or near the bottom of the learning curve and more prone to mistakes and losses.

    To understand more about how position size affects your risk, let’s say you have a $100,000 portfolio and commit $25,000 (25 percent of your account) to one stock. With a 10 percent stop, you’re putting $2,500 of equity at risk if you lose on that trade—or 2.5 percent of total equity. That’s at the high end of the range for ideal exposure.

    If you want to lower your exposure you could tighten your stop to 5 percent, putting only $1,250 or 1.25 percent of equity at risk. If you wanted to keep your 10 percent stop, your only other choice to reduce equity risk would be to cut down the position size to $12,500 (12.5 percent of your account), thus reaching $1,250 or 1.25 percent of equity at risk.

    Either your stop moves or your position size moves. One or the other must be adjusted to dial in the correct amount of risk. For argument’s sake, if you wanted to be very aggressive and put 50 percent of your account into one position, you would need to use a 5 percent stop to contain your risk as a percentage of equity to 2.50 percent. But the tighter your stop, the more likely you are to get stopped out.

    The key is to find a balance between an acceptable position size and a stop that allows the stock’s price to fluctuate normally without choking off the trade. This is known as backing into risk.
    Last edited: Nov 18, 2017
    #15     Nov 18, 2017
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  6. 15% with a 10% stop loss is 1.5% equity at risk. That 15% is a max value in high probability moves. I am more worried about risk of ruin than potential profits.
    #16     Nov 18, 2017
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  7. CALLumbus


    I understand, that sounds much better.
    #17     Nov 18, 2017
  8. rvince99


    Wow. I think you're missing the obvious, and most of us do

    The first question to be answered is that of your criterion; WTF are you doing in this game? What do you want to accomplish?

    And for individuals,this can be difficult. "I want to make a good return on my money," or some other, nebulous nonsense. Yet, take an institution - a pension fund, for example, with a prescribed liability for year X, etc. Their criterion is very clearly defined.

    And I have found through the decades that the probability of success is directly correlated to the specificity which someone articulates their criterion in trading. And it's not easy. And most can;t do it and most will lose. As I always say the road narrows and those who fall off, in most cases, never took the time to satisfy this first and primary rule of money management - "Wtf do you want?"

    IT;s even HARDER to define because it also involves a time frame - unless you are going to live forever, but if that is the case, you will go bust at some point no matter what you do. And again, to quote myself, "If you live long enough, you will get to experience everything - twice." And I thank God I won't live long enough to experience a lot of sick things.

    So whatever answer is the correct answer to the question you pose here, is a function of your (deadline-based) criterion. Maybe trading in a large percentage for a short period of time fits your criterion. What f I offered you a game that had a one-in-ten chance of losing $100, and a 9 in ten chance of making $1? Do you play?

    For how long?

    And how much do you then risk? (to satisfy your criterion)

    Don't hide behind the "Mathematical Expectation" fallacy that this game should not be played by you. And don't rely on "Kelly" either, which I guarantee you no one here understands (nor did Seykota nor the MIT blackjack team, nor Claude Shannon nor even Kelly himself).

    There ARE answers here, but first you have to answer the existential on - WTF are you doing here? We are like teenage boys who want to go out and learn how to ride a motorcycle. Well, "Exactly why?" Some of us may have a good reason, and we should. Most of us just "I don't know, I think it would be fun."

    So take your time, figure out exactly what you want to accomplish and by when, Only then are you in a position to seek answers to this question.
    #18     Dec 29, 2017
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  9. Newc2


    thanks for your and other replies.

    you mean reverse engineer a financial target (requirement) eg $5m by age 60? and then take that into designing and trading a system accordingly including factors such as position size and expectancy?

    from my understanding the inevitable losing streaks are the killer for most and the only way to avoid this ruin is to risk a low percentage.

    but my results tell me that i cannot trade this way and that i trade best when trading larger and taking quick profits.

    I know this is a big no no in books but I finally found a Market Wizard who suggested something similar (no risk mentioned but 30:27s mentions taking quick profits).

    #19     Dec 31, 2017
  10. rvince99


    <<you mean reverse engineer a financial target (requirement) eg $5m by age 60? and then take that into designing and trading a system accordingly including factors such as position size and expectancy? >>

    That's one way to do it I suppose. Again, it depends entirely on what you are trying to do - and there are as many "criteria" as there are people I suppose, and a criterion can have one (e.g. "Make as much money as possible in 2018, all else be damned!") or many facets ("Make 10% in 2018, without exceeding a 20% drawdown, without paying more than 6% to create such a hedge, and keeping within a Sharpe ratio of X, with no more than 10% exposure to any one sector...andd yah balh blah ybbidt blibbidy").

    It ALL depends on what you are trying to accomplish, and that includes not having an open-ended time frame.

    And once someone defines their criteria specifically, like this, that is what dictates not only their money management, but their trading as well.

    I know it sounds dry, plain, boring, pedestrian, as sexy as sweat sock and not worth anyone's time to do. The rejection of doing this, at the outset, however, is indicative of how serious someone really is about tradin OR if they are like the guy at the casino with his life savings who thinks he is there to make money, but, actually, is there for just expensive entertainment.

    And having a criteria, and the degree to which is is specified, I have found to be the biggest determinant to success or failure at any of this.
    #20     Dec 31, 2017
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