Increasing Your Position Size Over Time

[Dinerotrader 10]

I was wondering if any would be willing to share how they went through the process of increasing their regularly traded position size. I realize it can depend on numerous factors so there isn't really a right way to do it so I thought hearing from other's experiences would help me develop a method.

 

I'd like to incease my size as quickly as possible without letting my risk get out of control. It is very easy to look at your past results and just start multiplying by x number of contracts thinking you could have made x amount more with larger lots but this doesn't take into account all that goes into it.

 

I threw this chart together to give me something to think through.

 

[BlowFish 10]

TradersCALM - risk of ruin menu All you need is here. One of the reason that even successful traders blow up is assuming too much risk. Personally I would consider reducing RoR over time. You might want to google monte carlo simulation & risk in financial markets (or similar( if you really want maximum bang for your buck. I would try to be as quantitative as possible and personally (again) I would focus on risk. Simple version, the more you cane it the greater your risk of blowing up.

[bootstrap 47]

i do not advocate the numbers directly, but the scale. or maybe the process is a better term. it is something that i found early on and is given to me by a bond futures trader. its % of capital based on a risk

 

$5k to $7500 = 10% or $500

$7500 to $12500 = 7.5% or $600

$12500 to $20k = 5% or $625

$20k to $32500 = 3% or $600

$32500 to $50k = 2% or $650

$50K + = 1% or

[DugDug 10]

Theoretically - your risk reward should not change for each trade regardless if it 1, 10 or 100 contracts.

The process of actually increasing contracts is different.....

While ideally this can be documented and ordered - eg; allocate a certain number of contracts to varying equity levels of the account, trade to be consistently profitable and then increase size after 4 weeks, reduce/increase size when certain equity levels are reached.

 

Personally when I first started trading it was based on comfort levels, starting at 1-5 option contracts, raised to 20-50, it still remember doing the first 100, then the first 1000, and finally in lots of 1000. There was no process, just when I felt comfortable.... but primarily once I was consistently profitable.

I would say that its important that once you step up, or down a level, stay there for a period, otherwise you risk the possibility of having some losses while trading larger, scaling back becoming profitable again, and then scaling up and loosing again. This can affect the absolute dollar amounts massively. Think through how to cope with this possibility, as you dont want to step up a level and then be spooked into suddenly being profitable only with smaller amounts.

Currently in retraining myself (in more intense intraday trading), I will stick to 1 contract until I am consistently profitable with a proper basis, then it will be a matter of upping contracts based on equity actually committed and comfort.

[Guest Tresor]

I used to use this simple formulae to increase / decrease your position:

 

Percentage of Winners X Average Win / Average Loss

 

Regards

[rs1 10]

One tried and trusted way of doing this is to simply bet a constant percentage of your closed account equity on each trade. As your account increases, your bet size increases (in terms of absolute amount at risk, but not in terms of percentage of account risked). And as your account goes through a drawdown, your bet size decreases accordingly.

 

This probably works better for a larger account as you can finesse the position sizing a bit more, but the principle is sound and removes a fair amount of emotion from the equation. Of course, you have to choose a percentage of account to risk that you are comfortable with. And that may be the most important factor.

[macdfx 10]

Your position size should be proportional to your risk and your account size. This means that your trade size should also be able to meet and cover any margin requirements if you are caught in a limit move as well.

 

One thing is that most traders are quick to increase position size without considering the potential consequences of doing so. I'd rather learn to trade a given setup and product successfully with say, only 3 cars, than expose myself to undue risk with a larger position.

 

For example, it takes only a 35 cent move on CL to earn $1000 with 3 cars (and that should cover commission as well). I think with a little study and prep you can learn to find and trade a setup that can get you that kind of move day-in and day-out.

 

Rinse and repeat. And sleep well at night too. (And be sure to use stops every time you trade).

[brownsfan019 17]

Your position size should be proportional to your risk and your account size. This means that your trade size should also be able to meet and cover any margin requirements if you are caught in a limit move as well.

 

One thing is that most traders are quick to increase position size without considering the potential consequences of doing so. I'd rather learn to trade a given setup and product successfully with say, only 3 cars, than expose myself to undue risk with a larger position.

 

For example, it takes only a 35 cent move on CL to earn $1000 with 3 cars (and that should cover commission as well). I think with a little study and prep you can learn to find and trade a setup that can get you that kind of move day-in and day-out.

 

Rinse and repeat. And sleep well at night too. (And be sure to use stops every time you trade).

 

Sounds so easy, doesn't it?

 

Just trade 3 contracts and go for 35 ticks and off you go!

 

Better yet - trade 50 and only need to go for 5 or 10 ticks.

[The Pip Thief 10]

Hello,

 

It is not me saying this but it is proven by all the top traders of the world that the % Risk Model of Position Size Theory is the best. You should be risking a percent of your balance.

 

Example - Balance 100,000 and you risk 1% then you risk $1000 per trade. Then this naturally allows you to risk more as you win and risk less as you lose. How? Well if you lose $10,000 then you now have $90,000 and 1% of that is $900.

 

I use PositionSizer to do all this for me and get the order off to the broker in seconds. I could not do these calculation without PositionSizer, actually I could but it would take 60 seconds to get the order sized and to my broker versus 4 seconds with PS.

 

Check out the pics that show how % Risk Position Size Model works.

 

The Pip Thief

[macdfx 10]

Sounds so easy, doesn't it?

 

Just trade 3 contracts and go for 35 ticks and off you go!

 

Better yet - trade 50 and only need to go for 5 or 10 ticks.

 

And that's the rub. It's the discipline in your setups and your position size that matters.

 

If it were that easy then why not trade the 50 lot? Notwithstanding margin/account size issues, the reality is that you'll blow out your account really quick.

 

You probably know this already, but chose to throw in a snarky reply as a way of showing us your "market knowledge". :doh:

 

My point? Keep the position size small, manage the setup, trade and exits, and honor your stops.

[brownsfan019 17]

And that's the rub. It's the discipline in your setups and your position size that matters.

 

If it were that easy then why not trade the 50 lot? Notwithstanding margin/account size issues, the reality is that you'll blow out your account really quick.

 

You probably know this already, but chose to throw in a snarky reply as a way of showing us your "market knowledge". :doh:

 

My point? Keep the position size small, manage the setup, trade and exits, and honor your stops.

 

My point was that if it was that simple, everyone here would be multi-millionaires. You'll find out soon enough that it's not.

 

Is that 'market knowledge'? I do not know what you define as market knowledge, I am speaking from real experiences.

 

The numbers look great when you make assumptions but as dinero could explain, it's not quite that simple when trading live w/ real money. Simulation is a different story (and useless).

[macdfx 10]

Quite useless, indeed.

 

Be well.

[sevensa 10]

Hello,

 

It is not me saying this but it is proven by all the top traders of the world that the % Risk Model of Position Size Theory is the best. You should be risking a percent of your balance.

 

Mind to expand who these top traders are and where and how they have proven this to be the best?

[BlowFish 10]

Despite what many think the majority of the quants in the business are not busy working on high frequency trading systems or even methods to get in and out of the market. Most are busy valuing stuff and modelling risk.

 

One method that does not require boffin level maths is using Monte Carlo simulation.

 

Worth repeating Risk of Ruin is probably going to be your key risk metric.

[The Pip Thief 10]

Mind to expand who these top traders are and where and how they have proven this to be the best?

 

Hello Sevensa,

 

No worries! I would be glad too do that for you.

 

Ed Seykota-

He is best known for making over 250,000% in less than 20 years not counting withdrawals. Those are absolutely staggering numbers by any stand point. Quote was taken from “Definitive Guide to Position Sizing” by Dr. Van Tharp.

 

"First, I'd like to acknowledge Ed Seykota who first taught me the importance of position sizing, saying that success was 60% psychology, 30% position sizing, and 10% systems. Ed was also the person who taught me the value of using the market's money." – Dr. Van Tharp

 

Now Dr. Van Tharp has studied the profile of over 5,000 successful traders and has come to the conclusion that the # 1 determining factor in ones trading success is how they implement % Risk Position Size Models into their trading plan.

 

What it comes down to is that this system is not nearly as important as people think when they come into the trading business. It’s all about how you are sized and control your risk per trade.

 

By the way, Van Tharp invented the word "Position Sizing" after studying all these top traders.

 

 

Larry Williams-

He is an all-time great trader and educator. The statement below says it all.

 

"I'm probably best known for winning the Robbins World Cup Trading Championship, turning $10,000 into $1,100,000.00 in 12 months. That was real money, real trades, and real time performance. For years people have asked for my trades to figure out how I did it. I gladly oblige them, they will learn little there - what created the gargantuan gain was not great trading ability nearly as much as the very aggressive form of money management I used. The approach was to buy more contracts when I had more equity in my account, cut back when I had less. That's what made the cool million smackers - not some great trading skill." - Larry Williams

 

Anyone that makes turns 10 grand into 1.1 in a year has specialized knowledge that most traders do not know. He leads to the definition but does not give the exact diagram. After more study of this great trader he admits he uses % Risk Position Size Model. His secret is the money management and not the system, these top traders set themselves apart through this approach.

Michael Marcus-

Over a ten year period he multiplied his company account by an incredible 2,500%

Michael turned $30,000 into 80 million in less than 10 years.

 

All of these traders and others if you want me to quote some more give credit to % Risk Model of Position Sizing to be the number on factor in their success.

 

I mean you have to ask yourself. Pretty much every trader out there has access to the same buy and sell systems. How the hell are a couple of these traders turning 30,000 into 80 million in less than 10 years or 10,000 into a over a 1.1 million in a year. This is what I wanted to know and I found it. It is the % Risk Model of Position Sizing. I mean there are times when I have taken a trade of 1% risk and then made 10% in an hour. Then I started to understand.

 

The % Risk Model is the best! It lets you scale in or out and also lets you play with the markets money. What do you do when you are day trading and make 10% in an hour. Me, I risk 3% on the next trade and if I lose I quit for the day. If I win, and normally I would have won 3% when risking 1%, by risking 3% I now won 9%. This is what I have learned from these guys who multiply their money at these alarming rates.

 

Hope this helps. Check out the pic if you think you cannot with 10% in an hour by only risking 1%.

 

The Pip Thief

Edited April 15, 2010 by The Pip Thief

[Kiwi 16]

This is one of those funny arguments.

 

Both sides are right.

 

But

 

 

The problem with trading is that it isn't just one problem. And the ones that come from within after one has a working strategy are much harder to deal with than the one of finding a working strategy.

 

So, yes, in theory risk 1% per day on one trade with an expectancy of 35% and you're on you just scale up ... so easy ... but so so hard.

[macdfx 10]

This is one of those funny arguments.

 

Both sides are right.

 

But

 

 

The problem with trading is that it isn't just one problem. And the ones that come from within after one has a working strategy are much harder to deal with than the one of finding a working strategy.

 

So, yes, in theory risk 1% per day on one trade with an expectancy of 35% and you're on you just scale up ... so easy ... but so so hard.

 

My argument would be"why scale up" in the first place?

[Dinerotrader 10]

My argument would be"why scale up" in the first place?

 

IMO,

 

Because the goal is always to make as much money as possible with the least amount of work. Scaling up requires no more work but makes you significantly more money if done correctly.

[sevensa 10]

Hello Sevensa,

 

No worries! I would be glad too do that for you.

 

Ed Seykota-

He is best known for making over 250,000% in less than 20 years not counting withdrawals. Those are absolutely staggering numbers by any stand point. Quote was taken from “Definitive Guide to Position Sizing” by Dr. Van Tharp.

 

"First, I'd like to acknowledge Ed Seykota who first taught me the importance of position sizing, saying that success was 60% psychology, 30% position sizing, and 10% systems. Ed was also the person who taught me the value of using the market's money." – Dr. Van Tharp

 

Now Dr. Van Tharp has studied the profile of over 5,000 successful traders and has come to the conclusion that the # 1 determining factor in ones trading success is how they implement % Risk Position Size Models into their trading plan.

 

What it comes down to is that this system is not nearly as important as people think when they come into the trading business. It’s all about how you are sized and control your risk per trade.

 

By the way, Van Tharp invented the word "Position Sizing" after studying all these top traders.

 

 

Larry Williams-

He is an all-time great trader and educator. The statement below says it all.

 

"I'm probably best known for winning the Robbins World Cup Trading Championship, turning $10,000 into $1,100,000.00 in 12 months. That was real money, real trades, and real time performance. For years people have asked for my trades to figure out how I did it. I gladly oblige them, they will learn little there - what created the gargantuan gain was not great trading ability nearly as much as the very aggressive form of money management I used. The approach was to buy more contracts when I had more equity in my account, cut back when I had less. That's what made the cool million smackers - not some great trading skill." - Larry Williams

 

Anyone that makes turns 10 grand into 1.1 in a year has specialized knowledge that most traders do not know. He leads to the definition but does not give the exact diagram. After more study of this great trader he admits he uses % Risk Position Size Model. His secret is the money management and not the system, these top traders set themselves apart through this approach.

Michael Marcus-

Over a ten year period he multiplied his company account by an incredible 2,500%

Michael turned $30,000 into 80 million in less than 10 years.

 

All of these traders and others if you want me to quote some more give credit to % Risk Model of Position Sizing to be the number on factor in their success.

 

I mean you have to ask yourself. Pretty much every trader out there has access to the same buy and sell systems. How the hell are a couple of these traders turning 30,000 into 80 million in less than 10 years or 10,000 into a over a 1.1 million in a year. This is what I wanted to know and I found it. It is the % Risk Model of Position Sizing. I mean there are times when I have taken a trade of 1% risk and then made 10% in an hour. Then I started to understand.

 

The % Risk Model is the best! It lets you scale in or out and also lets you play with the markets money. What do you do when you are day trading and make 10% in an hour. Me, I risk 3% on the next trade and if I lose I quit for the day. If I win, and normally I would have won 3% when risking 1%, by risking 3% I now won 9%. This is what I have learned from these guys who multiply their money at these alarming rates.

 

Hope this helps. Check out the pic if you think you cannot with 10% in an hour by only risking 1%.

 

The Pip Thief

 

While I fully agree that position sizing is important, your references above just mentioned that the traders attribute position sizing to their success. Not specifically % Risk Model of Position Sizing and what you present is hardly proof.

 

Ryan Jones claims in his book that fixed ratio is the best. I'm sure some successful traders use his model. Does this prove that his is the best?

 

As I said, I agree position sizing is important, but I don't think you can claim one method is proven to be the best without actual proof. Maybe it is and I would love to see prove for that. A couple of random traders saying it is so, however is not prove.

 

I can show you 100's of pictures that vendors use to show how great their systems are. Posting a picture in hindsight to support your arguement, unfortunately is not prove either.

[macdfx 10]

IMO,

 

Because the goal is always to make as much money as possible with the least amount of work. Scaling up requires no more work but makes you significantly more money if done correctly.

 

 

True, but it requires much more "emotional" capital, IMHO. And that's what keeps most of us from trading at the next level successfully.

 

Hence the push to automate our edge and remove the subjective human component if possible. Easy to say, but much, much harder to do.

[The Pip Thief 10]

My argument would be"why scale up" in the first place?

 

To clarify. My definition of scaling up is adding to a trade that you are already in. I guess I was not clear. Although I have done this it scares me too much even if I am using proper or sound rules. Just my personality. I should have said that PositionSizer makes it very easy to do by not breaking some of the cardinal rules of scaling, even so I get too scared. And yes. WHY? 10% in a short time is great!

 

What I do much much more is play with the markets money. That is what I find to be really beneficial. The definition of this to win a big trade and then risk a little more on the second. Like if you win 10% ( which rarely happens I might add) then I risk 3% on my next trade. If I hit for 6% then I risk 2 on the next trade. This is what I call Playing with the Markets Money and % Risk Models make this easy.

 

One last clarification, I do not only risk 1% per day but per trade. And I would not consider this an argument but a discussion and there are no rights or wrongs!

 

The Pip Thief

[BlowFish 10]

Ed Sekoyta on Risk worth a read.

 

Pip Thief, Interesting you mention Williams and the Robbins World Cup. Didn't he have a close to 70% draw down in the competition? An abject lesson in how not to manage risk. To win competitions you need to throw risk management (and caution) to the wind. Maximum leverage in the most volatile instrument you can find is the position sizing rule for competitions.

Edited April 15, 2010 by BlowFish

[The Pip Thief 10]

Ed Sekoyta on Risk Risk worth a read.

 

Pip Thief, Interesting you mention Williams and the Robbins World Cup. Didn't he have a close to 70% draw down in the competition? An abject lesson in how not to manage risk. To win competitions you need to throw risk management (and caution) to the wind. Maximum leverage in the most volatile instrument you can find is the position sizing rule for competitions.

 

You have to know what you want to do. That is my whole point. % Risk Model allow you to go into competitions or trade conservatively, use scaling or not, play with the markets money or be conservative. Reduce risk or increase risk.

 

Larry Williams was already a very huge investor when he threw 10 grand into the account to try and win this competition. Fixed Ratio is very complex but that is just my tiny little brain that has a hard time applying it.

 

The Pip Thief

[The Pip Thief 10]

While I fully agree that position sizing is important, your references above just mentioned that the traders attribute position sizing to their success. Not specifically % Risk Model of Position Sizing and what you present is hardly proof.

 

Ryan Jones claims in his book that fixed ratio is the best. I'm sure some successful traders use his model. Does this prove that his is the best?

 

As I said, I agree position sizing is important, but I don't think you can claim one method is proven to be the best without actual proof. Maybe it is and I would love to see prove for that. A couple of random traders saying it is so, however is not prove.

 

I can show you 100's of pictures that vendors use to show how great their systems are. Posting a picture in hindsight to support your arguement, unfortunately is not prove either.

 

I do not know? Van Tharp is the Grand Father of PositionSizing through inheritance of Seykota. He profiled over 5000 and then proved the MATH in his book "Definitive Guide to Position Sizing" that % Risk Model is the most statistically viable via the samples he puts forth in the book. We could argue this for hours but I guess I choose % risk because it is way easier as well.

 

As to hindsite. That is kind of funny because we are not looking for points of entry in time but how to size market moves. They are completely not correlated in this sense. Take that same move with a one lot position or with a stop of 30 pips. What does that give you for a ROI in this trade?

 

You are missing the point! Again there are no rights or wrongs here so I am just giving you my standpoint as to what I think is best for a simple mine like mine.

 

The Pip Thief

[Dinerotrader 10]

Thanks for all the discussion and responses. Hopefully, they continue. I am working to develop a trade strategy that lends itself to increasing my lot size as my account grows. Begin with the end in mind, as Stephen Covey would say. I'd like to end up a 50 lot trader but that will only happen if I have a strategy that can hold up to the various issues that arise with larger lot trading. I'd be interested to hear what trading method attributes you think are important to be successful at increasing your lot size over time.