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Position sizing-why not go low


u0362565

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Hi all, just wondering what you should be thinking when sizing a position. Say you have a relatively large account relative to your position size choice  e.g. if you had £100k and you said you'd only risk 1% per trade then 1% is £1000. If you chose a position size of 50p, 1000/0.5 =2000 then that's a stop potentially at -2000 points from your entry level. This is assuming there's is no logical place to put the stop, you're just risking 1%. Now I haven't done this but I would suspect at least on stock markets you'd require a pretty serious price drop for this to be hit, e.g. FTSE would need to fall about 30%. I know it happens but it is a fairly rare event. Over thing that wouldn't make sense is where to put your profit target as to achieve 1R+ would be tough or would take a long time for the market to move 2000 points so you'd have to be satisfied with much less than 1R winners I suspect. Then it would come down to taking profit each time at much less than 1R. Does any of this makes any sense. Would depend how many less than 1R winners you had Vs how often there stop would be hit. I guess you could look historically at how often to see that kind of drop. I know last year was one for most markets.

 

 

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It's a bad trade setup. I thought of it myself; I could but in small limits and huge stop losses, to try "survive" a fall. But if it can happen, it will happen (Murphy's Law) so if you were to loose -2000 points you had to win 10 if your take profit was 200 points... So you have to be right 10 in a row to cover a loss of -2000 points. 10:1 is just one extreme example, but I think every ratio that is based on that kind of theory will be mentally hard to deal with. It's better to form a strategy that has a ratio that is in your favor. The only way I see that this would work is to have a stop loss lower then any low ever before, it will probably take years to hit the stop loss, but if it were to dip it would also take forever to hit the take profit target and you will rack up fees.

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Thanks for your opinion. It was funny because I posted that message and then got to a paragraph in Van k tharps book last night where he discusses this very scenario. Or at least what he says is a naive notion of just risking 1% of an account as a money management tool and not to confuse this with position sizing.

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The funny thing is though that this could be a sensible risk, stop distance depending on the market and your time frame of trading. Certainly if you were trading over weeks then a stop in the several hundreds to a thousand doesn't seem ridiculous if you use a multiple of the ATR or a long term MA. But for every trade.. The psychology would be hard to deal with I think.

 

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  • 2 weeks later...

Hi Boppers, thanks for that, yeah I understand the conventional way of doing it. They say position sizing is super important and I don't disagree but it assumes you know a sensible place to put your stop in the first place in order to make this calculation. If you don't know what's sensible then that's why I was just thinking put it 1000 points away at £0.5 but I couldn't handle this getting hit as it would wipe out a lot of prior profit and also it's not that practical as for the market to move in your favour by this amount e.g. at least 1R is a big ask when it's 1000 points!

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The 1% rule is often parroted around but the people who propagate it rarely understand risk.  If someone is telling you "only risk 1% per trade", I would follow up by asking why 1% and not 1.2% and not 0.7% -- their answer will demonstrate how clueless they are.

 

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2 minutes ago, CaptainSamurai said:

The 1% rule is often parroted around but the people who propagate it rarely understand risk.  If someone is telling you "only risk 1% per trade", I would follow up by asking why 1% and not 1.2% and not 0.7% -- their answer will demonstrate how clueless they are.

 

The number is back calculated to minimise the risk of going bankrupt. It should ideally be calibrated to the win/loss ratio of your strategy.

Risking 5%, would allow you 20 losses in a row, before wiping you out. But after 10 losses you would barely be surviving, remember once you have lost half your capital, you need a 100% return, just to break even.

Basically, you want to risk a lot less than you think you should. Once you have a track record, increase it.

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You should consider instead thinking in account size and risk level instead of "per trade risk".

I can take 100 positions and lose 100% in one of those positions, that's completely fine, I still lose 1%.

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One problem I have is that low risk to me just means tight stop with very low position size as this way each trade doesn't dent your account much. I have no insight into the market other than this. However, repeated attempts to get into a position with a tight stops ends up like just going in once with a large stop and defeats the purpose somewhat. And at the end of the day, over a period of time is whether you want a very slow drain on your account Vs a faster drain potentially if you go with higher position size. Obviously I want neither of these things but in the end the result I assume would be account balance zero. I'd need to test a lot before I got a real sense of the overall result.

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When I say no insight, that's not strictly true. I just know from what I've read that the thing that comes up again and again is is keeping your R multiple losses low Vs your R profits. But thats just an obvious statement. 

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19 minutes ago, u0362565 said:

One problem I have is that low risk to me just means tight stop with very low position size as this way each trade doesn't dent your account much. I have no insight into the market other than this. However, repeated attempts to get into a position with a tight stops ends up like just going in once with a large stop and defeats the purpose somewhat. And at the end of the day, over a period of time is whether you want a very slow drain on your account Vs a faster drain potentially if you go with higher position size. Obviously I want neither of these things but in the end the result I assume would be account balance zero. I'd need to test a lot before I got a real sense of the overall result.

your stop has to go where it has to go, the obvious position on the chart where everyone else's stop is. That's the only likely place that might get protection by other traders big enough to actually move the market.

You then use the size of the stop to calculate your position size as per your max risk amount for your account size. If the stop is big then the position size will have to be small.

You are always totally reliant on/at the mercy of - big traders pushing their own trade on or protecting their own stop.

Edited by Caseynotes
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But those stop points obviously vary depending on your time frame. I have often thought that putting the stop where everyone else is, is half the problem in that it's obvious and those on the other side want to get you stopped out. I've often had my stop at the swing low as it's turning and it gets stopped. If you wait for the move to establish and you still want your stop at the swing low you've got a larger point distance in risk to deal with therefore your profit target also has to go up.

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15 minutes ago, u0362565 said:

But those stop points obviously vary depending on your time frame. I have often thought that putting the stop where everyone else is, is half the problem in that it's obvious and those on the other side want to get you stopped out. I've often had my stop at the swing low as it's turning and it gets stopped. If you wait for the move to establish and you still want your stop at the swing low you've got a larger point distance in risk to deal with therefore your profit target also has to go up.

You have to put your stop in a position where it has a chance of being protected by large traders if attacked. Everyone's stop is below the last swing low, so yes that is a target for large traders taking the other side. Your entry rules are determined by testing (what works), early or late, if late such as a breakout up past the last swing high then your stop will be large. The profit target is also determined by testing and will normally be based on chart structure such as an obvious support and resistance level rather than an arbitrary ratio based on the stop size.

Taken all together (stop > entry > target) then comes the decision whether to go ahead with the trade or not.

Edited by Caseynotes
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The R value statement stems from people just randomly buying and selling with no strict money management - people with no set methodology will have small wins, big wins and most likely big losses too - the R value focuses your mind on having a % and a £ value to it hence risk 2% of my account of £10k per trade = £200 or 2% easy peasy you can then set position size, stops etc on this - you would be surprised at how many people do not do this and wonder why they win £50's and then take a £500 loss

The method you trade should determine where the stop is placed, some use a moving average others like me swing lows - you need to work out when a SL will not be violated and what conditions violate them

A genuine up trend will NOT violate a SL - I think I covered this somewhere in my How to Win thread - again this borders on a bit of advanced knowledge as, as a trend changes degree it can wipe out a SL and continue, but it will also give you the opportunity of rejoining the trade too

DAILY NASDAQ100 = Trending upwards - the ticks - only 2 - represent the only times when a prev SL was violated - the 1 vertical line shows a time when a prior SL was violated, but you would NOT have had a stop at that SL if you are using SL/SH's correctly

The 2 pullback corrections changed the degree of the previous rally = end of rally

the correction was short-lived and thereafter continued to present - again since then NO SL has been violated - it will be when the degree of the market alters/changes again though

Obviously the chart below is virtually perfect for trend following - it doesn't always happen like below BUT this is the daily chart of the nas to date so this HAS happened in real-life and the lesson is that no professionals can be seen gunning for stops at SL's

If SL's are being run, then it ain't an uptrend per se, it's a corrective market

463.thumb.JPG.66330b19307f1aa2598e040e95c92742.JPG

FTSE100 Daily chart:

Corrective market = SL's and SH's are "run"

It requires a different approach to the above

How do you know which market will happen? You don't, it is impossible to know in advance with adds to all the fun and games 

464.thumb.JPG.2574e3365bbf577ba942aba484aef95f.JPG

 

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Hi all, thanks for the comments. Yes I see that SL should be based on strategy. I haven't yet found a strategy that fits me or that really works but I pick them up and drop them too quickly, partly the problem comes from manual testing which takes patience. It's not a game but somehow it feels like I'm playing one because you want to be right in your beliefs about what the market is going to do and I know trying to be right all the time is not the correct mentality for most. No one wants to lose but I really don't so I wonder if my mind just isnt cut out for short term trading. Should have kept my passive index tracker open but that's another story.

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On 22/02/2021 at 08:16, Bopperz said:

The number is back calculated to minimise the risk of going bankrupt. It should ideally be calibrated to the win/loss ratio of your strategy.

Risking 5%, would allow you 20 losses in a row, before wiping you out. But after 10 losses you would barely be surviving, remember once you have lost half your capital, you need a 100% return, just to break even.

Basically, you want to risk a lot less than you think you should. Once you have a track record, increase it.

This is wrong.

In theory, even if you risk 10% of your balance on each of a series of trades, you will never go bankrupt.

"a lot less" is not a mathematically accurate measure.

This is exactly what I was talking about, people throw around percent numbers and it's fine if it's a rule of thumb but you have to understand that it's just a rule of thumb -- there is nothing scientific or mathematical about it.

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3 hours ago, CaptainSamurai said:

This is wrong.

In theory, even if you risk 10% of your balance on each of a series of trades, you will never go bankrupt.

"a lot less" is not a mathematically accurate measure.

This is exactly what I was talking about, people throw around percent numbers and it's fine if it's a rule of thumb but you have to understand that it's just a rule of thumb -- there is nothing scientific or mathematical about it.

Sorry captainsamurai, are you actually saying that you won't go bankrupt? In my case no I'd stop trading before that happened but I could sure make a nice dent in my savings first.

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3 hours ago, CaptainSamurai said:

Respectfully, I've been in this game for many years and I can tell you that if you're absolutely terrified of losing you shouldn't play at all -- you will just make bad choices.

It's not being terrified of losing. I get that you need to lose sometimes to win but in the end of the day your account/expectancy needs to be positive, so I guess it's the fear of repeated losses or the one big loss that you then need to recover from, 2 steps forward 3 steps back. That's of course if you're willing to put yourself in a big loss situation i.e. too big a position size.

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7 hours ago, u0362565 said:

Sorry captainsamurai, are you actually saying that you won't go bankrupt? In my case no I'd stop trading before that happened but I could sure make a nice dent in my savings first.

In theory, if you take a potato and repeatedly cut it in half, each time throwing away one piece, you never run out of potato...

The point is that you need to adjust your percentage to however much money you have left.

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Yeah I see what you're saying but it's not really a position you want to be in in the first place. Perhaps I don't understand how much people's accounts fluctuate even if they are are profitable. In an ideal world your account for the most part goes up with the odd dip back here and there but I don't know maybe the swings can be massive but that's not how i'd want to trade. The problem with working a standard job is you get used to a steady paycheck every month so your balance as it were steadily goes up. Very hard to replicate that through trading I assume.

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