Increasing Your Position Size Over Time

[Kiwi 16]

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.

 

 

1. Ryan's way is not best ... but see 2 for a hint on where to find long discussions of the reasons why.

2. There have been lots of discussions on boards devoted to system trading on this area in depth. Its years since I was involved in one but the original chuck lebeau board and curtis's board both had big discussions. The nett was that you risked a fixed percentage of equity (after costs) for best growth with the statistical distributions of wins and losses to be expected from trading the markets. Some liked the "risk a higher percentage of the markets money" styles but the statistical proofs all came back to risk x% of equity on each trade - the only variation being if you had 2 different trades with different distributions and in that case X changed. The strategy was best - but you need to determine x which is based on the win rate and the nature of the distribution (a higher win rate gives a lower probability of strings of losses all else about the distribution being equal).

3. No one will prove it to you unless you do a lot of work on the maths - and you'll have to find the old discussions and prove it for yourself.

[The Pip Thief 10]

Below I have listed the streak odds for 50% win rate up to 15 straight losses. The gambler’s fallacy is that the longer your losing streak the better your odds of winning on the next trade. Of course this is not true because each trade is statistically independent. So here are the odds without emotion or error.

 

2 Losses in a row = 1/(2*2)=1 out of 4 or 25% or 250 times in 1000

3 Losses in a row = 1/(4*2)=1 out of 8 or 12.5% or 125 times in 1000

4 Losses in a row = 1/(8*2)=1 out of 16 or 6.25% or 62.5 times in 1000

5 Losses in a row = 1/(16*2)=1 out of 32 or 3.125% or 31.25 times in 1000

6 Losses in a row = 1/(32*2)=1 out of 64 or 1.5625% or 15.625 times in 1000

7 Losses in a row = 1/(64*2)=1 out of 128 or .78125% or 7.8125 times in 1000

8 Losses in a row = 1/(128*2)=1out of 256 or .390625% or 3.90625 times in 1000

9 Losses in a row = 1/(256*2)=1 out of 512 or .1953125% or 1.953125 times in 1000

10 Losses in a row = 1/(512*2)=1 out of 1024 or .09765625% or .9765625 times in 1000

11 Losses in a row = 1/(1024*2)=1 out of 2048 or .048828125% or .48828125 times in 1000

12 Losses in a row = 1/(2048*2)=1 out of 4096 or .0244140625% or .244140625 times in 1000

13 Losses in a row = 1/(4096*2)=1 out of 8192 or .01220703125% or .1220703125 times in 1000

14 Losses in a row = 1/(8192*2)=1 out of 16384 or .006103515625% or .06103515625 times in 1000

15 Losses in a row = 1/(16384*2)=1 out of 32768 or .0030517578125% or .030517578125 times in 1000

 

My win rate is in the high 40's and this is why I bet 1% per trade. You are exactly right KIWI. You have done your homework. 1000 trades a year and you will normally have a streak of at least 10 losses in a row which is something most traders could not handle and when you risk to much you are dust in the wind.

 

The Pip Thief

[The Pip Thief 10]

Actually, so I can learn something here as well. Can some one please size up the position that I have posted above and have attached here as well.

 

This is a short trade.

The entry price is 1.6239'5

The stop price is 1.6249'5

 

Tell me how large your position would be with a $70,000 account. How would you size your position? I am asking this to learn because I really do not understand this fixed ratio position size model.

Now after you are sized and you exit at 1.6136'9 how much did you make?

 

I would appreciate if anyone could give me a serious answer.

 

Thanks

 

The Pip Thief

[sevensa 10]

3. No one will prove it to you unless you do a lot of work on the maths - and you'll have to find the old discussions and prove it for yourself.

 

Easy to make statements about something being proven and when asked where that prove is to say to go and prove it yourself.

[sevensa 10]

Actually, so I can learn something here as well. Can some one please size up the position that I have posted above and have attached here as well.

 

This is a short trade.

The entry price is 1.6239'5

The stop price is 1.6249'5

 

Tell me how large your position would be with a $70,000 account. How would you size your position? I am asking this to learn because I really do not understand this fixed ratio position size model.

Now after you are sized and you exit at 1.6136'9 how much did you make?

 

I would appreciate if anyone could give me a serious answer.

 

Thanks

 

The Pip Thief

 

This can really not be answered based on the information provided. This depends on your starting capital and the delta being used. Read this article for a fairly painless explanation and you should have a better idea how it works: Fixed Ratio

[The Pip Thief 10]

This can really not be answered based on the information provided. This depends on your starting capital and the delta being used. Read this article for a fairly painless explanation and you should have a better idea how it works: Fixed Ratio

 

So I am understanding that this starts off trading 1 contract. Even if you balance can handle more? This does not make sense. What if I have a million and and a Delta of $10,000 then I start trading one contract and when I have 1,010,000 then I would start trading 2 contracts?

 

Am I understanding this correctly?

 

"Because the number of contracts always starts at one, the fixed ratio method usually produces better results for smaller accounts. For larger accounts, it may take an unreasonable amount of time to increase the number of contracts to a level that takes full advantage of the available equity."

 

This is not a strategy that is interesting at all for larger traders. I must point out that the flexibility is proven better with % Risk Model. If you take any field actually, not trading, including census studies, disease control, migration or crime stats. All of these are put into percentages because it is naturally easy to compare fields of data that may not have the same sample size and allow us to make comparisons. To say that that 30,000 people have x problems means nothing really when you break it down.

 

Is that 30,000 out of 300,000,000 or out or 35,000 which are completely different statistics.

 

The % Risk Model allows you to risk 1% of your capital in Stocks, Futures, and FOREX and be able to compare the losses with a quantifiable way. One next to another. You may also say I average winning 3 percent for every one risked in Stocks but 5 percent for every one percent risked in FOREX so I am going to put more of my equity into FOREX because I have a better return.

 

I have read that article and you can keep you method and I will keep mine.

 

We will agree to disagree:crap:

 

The Pip Thief

[Kiwi 16]

Given your unwillingness to do the work sevensa you will always fall for the easy answer - even when it is wrong. You'd be better following my research suggestions.

 

I don't expect you to do that - and I'm relaxed about it.

 

Unlike the last poster I feel know pain in our disagreement. Think of trading as evolution in action and you'll know why.

[DugDug 10]

While I am fully of the belief that the % risk is generally accepted as the best model, the fixed ratio has a valid idea for increasing a SMALL traders position size.

It gives them an easy measure to do it, makes intuitive sense and achieves much the same result. If given most small day traders are generally under capitalized I can see the merit in it.

At the same time if someone is being consistently profitable and growing their account one would imagine that they are looking to work out more sustainable and scalable system - which is the % risk.

[Kiwi 16]

While I am fully of the belief that the % risk is generally accepted as the best model, the fixed ratio has a valid idea for increasing a SMALL traders position size.

It gives them an easy measure to do it, makes intuitive sense and achieves much the same result. If given most small day traders are generally under capitalized I can see the merit in it.

At the same time if someone is being consistently profitable and growing their account one would imagine that they are looking to work out more sustainable and scalable system - which is the % risk.

 

It is an attractive idea but consider the following:

 

- the small under-capitalized trader is also most likely to trade poorly so increasing bet size reduces their time to learn before the next blow out

 

- steenbarger, shull, etc etc all note at one point or another that we experience involuntary learning from our stressful experiences and the greater the stress the more impactful that learning on the amygdala (read emotionally linked memory and patterns and resulting bad habits). so take the small newbie trader and bet big relative to account size thus increasing their faulty learning experiences.

 

On the other hand. It does make them more likely to be donors to those who ignored Ryan so ... evolution in action and thanks for the money.

[BlowFish 10]

Van Tharp might have coined the phrase 'position sizing' (though I am sceptical....seems like a far too obvious expression not to have been used before ) anyway the concepts where covered just as comprehensively in The Futures Game: Who Wins, Who Loses, & Why by Tewles & Jones. Can't remember when the first edition was published (my copy is elsewhere) Early 80's (maybe late 70's) I think. (Pretty decent reference on lots of aspects of trading futures). I'm pretty sure Gann wrote about it in his original trading course (in the 20's or 30's?). Anyway my point is that the principles where well known before Tharp & Sekoyta. Not disputing Tharps contribution in popularising this stuff just saying he didn't really contribute anything 'new'.

 

As for Williams maybe you mis my point? You have to completely ignore risk and use maximum possible leverage to produce that sort of growth and win competitions. Another looser (or maybe 2) and he would have wiped. That's the irony of trading competitions.

 

Anyway I don't want to appear contrary as I agree with your core point its just the anecdotal stuff that I have a bit of trouble with :D.

[BlowFish 10]

 

- the small under-capitalized trader is also most likely to trade poorly so increasing bet size reduces their time to learn before the next blow out

 

 

Conversely if you don't have a 'edge' but want to 'bet' on the market (bet rather than trade) you are better off making one large bet rather than lots of small ones.

[The Pip Thief 10]

This can really not be answered based on the information provided. This depends on your starting capital and the delta being used. Read this article for a fairly painless explanation and you should have a better idea how it works: Fixed Ratio

 

Sorry but you are not answering a question that could be answered. After much reading and research of your strategy, I just wanted to tell you that from the information I gave you you can answer my question with hypothetical responses.

 

1. You could say that if this was your starting balance then you would trade one contract and calculate your delta and then increase by on contract every time your balance adds a delta. Like if 4000 was the delta then I would trade 2 contracts at $74,000.

 

2. If my starting balance was 50,000 and I had the same $4000 delta then I would be trading 5 contracts at the $70,000 mark.

 

Wow that was easy! I know more about your strategy than you already.

 

Plus it is funny how you gave me a link trying to prove you were right and it proved you wrong:rofl:

 

Fixed Ratio Position Sizing

 

After 24 trades on the link you gave me we are only up $55,268 in equity and trading 2 contracts with a starting capital of $50,000.

 

Now on that page there is a link to my method with the results. MATH Results that you had to see or you would not believe. I put the link in below. This is the # Risk Model crushing your results. These were the same sample of trades by the way.

 

Fixed Fractional Position Sizing Another Name for % Risk Model

 

Now our equity with the same trades is at $91,887 after 24 trades and we are trading 13 contracts with the same $50,000 starting capital.

 

So your model made 10% and % Risk Model made 90% after 24 trades. WTF!!! If it was a difference of 10% then yes I would still say maybe there is a chance your model is better than % Risk. But the numbers are lopsided. There are your numbers my friend, ironically found on the site you turned me on too. Now if you come back and argue now it is just a case of ignorance.

 

The Pip Thief

Edited April 16, 2010 by The Pip Thief

[DugDug 10]

It is an attractive idea but consider the following:

 

- the small under-capitalized trader is also most likely to trade poorly so increasing bet size reduces their time to learn before the next blow out

 

- steenbarger, shull, etc etc all note at one point or another that we experience involuntary learning from our stressful experiences and the greater the stress the more impactful that learning on the amygdala (read emotionally linked memory and patterns and resulting bad habits). so take the small newbie trader and bet big relative to account size thus increasing their faulty learning experiences.

 

On the other hand. It does make them more likely to be donors to those who ignored Ryan so ... evolution in action and thanks for the money.

 

Given both of these points then shouldn't most new traders use the fixed ratio method - as it grows the number of contracts they trade more slowly?

Hence they are are aiming to be more consistently profitable rather than just trying to trade larger size more quickly.

given the example quoted on the link, then if after only 24 trades, a new trader is trading 13 contracts, then the stress of any big loss could be devastating.....most new traders are still thinking in absolute dollar terms not percentages

 

This assumes that they have enough capital to actually trade most products (if you have only enough to cover the margins then you are undercapitalised) , and that you already have a strategy that works.

Not to argue as I do agree the % method is the best....just that for a new trader looking to increase the position size - the fixed ratio is a slower method of doing it hence somewhat more conservative. Easier to understand and implement.

Of course if going for scale scale scale with absolute returns combined with capital preservation, then % rules the roost.

[The Pip Thief 10]

Given both of these points then shouldn't most new traders use the fixed ratio method - as it grows the number of contracts they trade more slowly?

Hence they are are aiming to be more consistently profitable rather than just trying to trade larger size more quickly.

given the example quoted on the link, then if after only 24 trades, a new trader is trading 13 contracts, then the stress of any big loss could be devastating.....most new traders are still thinking in absolute dollar terms not percentages

 

This assumes that they have enough capital to actually trade most products (if you have only enough to cover the margins then you are undercapitalised) , and that you already have a strategy that works.

Not to argue as I do agree the % method is the best....just that for a new trader looking to increase the position size - the fixed ratio is a slower method of doing it hence somewhat more conservative. Easier to understand and implement.

Of course if going for scale scale scale with absolute returns combined with capital preservation, then % rules the roost.

 

This is going over you head I think because it does not matter the number of contracts you trade. You are missing the point of % Risk Modeling. They are risking 1 % . How can it be stressful risking 1% I ask you, You need lose 20 straight to be down 20% I will take those odds any day.

 

What I am finding is Fixed Ration dwells on contracts and this is not good versus % Risk dwells on the % you risk and not the # of contracts.

 

Plus being up 90% after only 24 trades would give me enough confidence to trade this system.

 

The Pip Thief

[DugDug 10]

pip thief - please read my notes - I agree with you. I know the % method is better, I have been trading for many years using a portfolio - position sizing is very important to me. Its not over my head.....on the other hand your fervor misses my possibly badly worded input.

 

For NEW traders looking to actually mange something to help them ACTUALLY increase their position size I maintain my point is a valid one. Not everyone is abe to do it in real life...not like a theoretical model.

I have seen many, many traders over time - not everyone is the same, not everyone is a machine. Many people get concerned with the $ amounts.... they think...look at me I am a genius I have made $40,000.... the first thought they get is I had better protect this. This is the value of a car, a holiday, part of my mortgage. they don't think in terms of %. Very few people are able to switch off, and just think in percentages, risk and return.

 

What happens to many new traders after a rash of success, is that they have vastly increased their trading size too quickly... the first run of losses - their plan goes out the window, they loose their mind, discipline and usually their account. (I am sure there are many cases of experienced traders that this can happen to as well) The example shown to go from 7 contract to 13 in 24 trades..... at that rate, it wont take long for them to have problems of scale with only a $50,000 account. This does not seem a problem for most people here. I would suggest that for a NEW trader with $50,000 trading 7 contracts from the start will not have $50,000 for long.

Now do you see my point? There are alternatives, they may not be the most mathematically perfect, or best, but they may work for some.

Edited April 16, 2010 by DugDug

[The Pip Thief 10]

DUGDUG,

 

I see what you mean. Your are 100% Right about the psychology side side. All to often traders lose in not on the losing side but on the winning side. Had a friend do this actually. These ups in trading can be deadly.

 

Sorry, you wording did throw me off and I guess I was quick to shoot without proper examination of your remarks as I was just thinking of the math and not the psychology of the equation. If you head is not right then none of these strategies work. That is for sure so I am right on with you there. Thanks for the clarification. I guess I am the one who was letting something fly over my head, which happens quite often if I am honest.

 

The Pip Thief

Edited April 16, 2010 by The Pip Thief
Grammer

[DugDug 10]

also the original writer of the quoted link can be found..... I think he has a very good website/blog providing some good info. Particularly in this case the info about the sequence of trade wins v losses and how it can relate to position sizing.

 

Breakout Bulletin - July 2003

[The Pip Thief 10]

also the original writer of the quoted link can be found..... I think he has a very good website/blog providing some good info. Particularly in this case the info about the sequence of trade wins v losses and how it can relate to position sizing.

 

Breakout Bulletin - July 2003

 

Very Interesting indeed. Did you see how when you change the trade sequence that Fixed Ratio is better in first example and then in the second example Fixed Fractional is much better? In reality the best strategy would be to start a small account with Fixed Ratio and then go to Fixed Fractional as it grows. Again this does depend on distribution and the only way to find out how to trade your system best is to do 10,000 simulations of 100 or 1000 trades and to see what would have been best.

 

I must admit that I am too addicted to % risk and prefer my model for the stage that I am presently. Good article though and just goes to show you how Numbers can play games on results depending on all the variables. I would not say I am a believer but I definitely give merit to the Fixed Ratio at this point which is something I would not have done previously.

 

So thank you to all who reasoned me through this mental process.

 

The Pip Thief

[Kiwi 16]

Dugdug,

 

I didn't and wouldn't advocate excessive risk for newbies who don't want to blow out quickly (on the other hand ...)

 

My personal recommendation is that you change X based on both the expected return pattern of the trading system and also experience.

 

So the typical recommendation for a long term trending system is <=2%.

 

In which case a new player should start at 1% or less and work their way up to the full X based on success and the lack of unexpected surprises.

 

Similarly though, given that a long term trending system has a win rate around 40% to 50%, if you had a win rate of 70% to 80% the probability of risk of ruin declines considerably. In this case the base X might be 3% rather than 2% (but again, adjusted for user and system newness).

 

I may be overly cautious but when I start a new strategy I trade it light simply because I'm a newbie to the strategy.

 

FWIW.

[HighStakes 10]

Earn the right to increase your position size.

 

Personally, I will allocate $4000 for every contract (ES). Thus, if my account increases by $4000, I add one contract. Conversely, if my account decreases by $4000, I reduce my size with one contract.

 

I will keep risk at a constant maximum of 2% per trade, ideally less.

 

It is not that hard to make basic Monte Carlo simulations in Excel. It can be very useful to do when learning to think about these concepts. Experiment with different input and observe the results of the simulations.

 

What kind of win%, average winner, average loser and number of trades do I need in order to meet my objectives? What will happen if I allocate less capital per contract or more? How much drawdown can I expect?

 

If you have an idea about your trading statistics or just want to experiment, you can simulate a week, month, year or more of trading, 10 000 times or whatever you like, to see what can be expected from that trading profile.

[leobust 10]

Every trading day is different, (market does a series of daily contraction and expansion), so only I allocate the no. of contracts according to the type of setup triggered and signal strength. My trade risk limit is from 1% to 5% of my account.

When I exceed my maximum risk limit, I stop trading and take a rest. I go back to my notes and review my setups.

[SIUYA 11]

LeoBust - I agree with you - while fully systemised strategies and very disciplined traders generally push for the idea that every trade is kept the same risk percentage. Over the years, I find that not every trade is the same..... particularly in terms of time frame. This is largely as I am not really much of a day trader so possibly the divergence in ideas.

A good example maybe whereby shorts are taken as a larger percentage in a clear downtrend, while longs are limited in size.

However, this might also mean that too many setups and trades are being taken out of context? Just food for thought.

[Ed Goldstein 10]

I've found that % risk per time period has made a difference for me and as the account grows I add to the contracts traded and the % of equity I risk.

 

because...

 

Early on I sat through many losing trades waiting for the % stop to get hit as I ostensibly "let the trade work."

 

It didn't help that in 2002, I didn't have a real methodology and only a vague understanding of supply and demand in the micro time frame, but I bought hook line and sinker into Van Tharp's psychology coaching and position sizing concept and ended up "paper-cut" bleeding my account 1% at a time.

 

Having a market view and understanding how to gauge supply and demand allowed me to then gauge my risk dynamically per day so I wasn't married to the hard stop on each trade...I would find that I was often correct in my understanding of turns in the market but needed flexibility in entering the trade so I scaled into with a max of three levels with a %per day risk.

 

'Scaling in' is also known as "working the trade" and it's not a magic bullet for bad trading. It can also be known as losing your a$$ or blowing out an account by adding to a loser.

 

However this approach reined in by a % per day forced me to watch my criteria as opposed to hyper-focusing on nailing the perfect setup and slapping on a two point stop or % per trade stop and then feeling a false sense of security as though I were following good practices.

 

When I had a useful marketview (like worldview) based on data driven supply and demand (i.e. a positive expectancy) that led next to tweaking on how to best risk in the market and then those together greatly reduced my anxiety and discomfort around trading thus buoying my psychology.

 

Psychology and position sizing without a real methodology is akin hyping yourself up at an Amway rally. All the NLP, hypnosis, law of attraction rah rah psychology leads to grief with no payout for time and money spent.

 

BTW It's not a slam of Van Tharp. I own his course and position sizing videos and it's not that position sizing and Pyschology aren't important. It's that they're useful in supporting a solid methodology.

[SIUYA 11]

thanks Ed - interesting that you started the first method, and transitioned. Its a question I have always asked myself. I started from the opposite spectrum and just had an intuitive sense of what seemed like a low risk trade without any maths involved. Then I discovered all the theory.

 

Which is better? Is there a difference? is it more a physc issue? Is it a matter of focus and intensity? a matter of trying to get the timing just right on a trade?

 

Is it better to risk 1 contract for $500 per trade, where you might get it wrong 3x or risk $1500 for that one contract and really wait for the right (or better) setup?

 

Whilst you can backtest some ideas intensely in order to try and answer this using statistical models, no one has yet satisfied my answers about context as yet. With all the debates about robots, EAs etc not working, I also wonder how accurate the backtests are.

Ideally you can actually track your actual trades for a long period of time to get actual stats. But then there is the assumption that you will act in exactly the same way going forward and that context again will not change.

 

This debate gets away from the thread of increasing position size over time, but it is still related in that there are questions raised on when to scale in, scale out, how long to run something for etc; etc;

But for me not all setups are equal and therefore should not be treated the same. Particularly in the short term trading arena where there are ample opportunities every day, and hence you can afford to wait for only the best ones.

[natedredd10 10]

Is it better to risk 1 contract for $500 per trade, where you might get it wrong 3x or risk $1500 for that one contract and really wait for the right (or better) setup?

 

I think this is ultimately the million dollar question, literally, once you have systems that have positive expectation. Of course if we knew with 100% certainty that a trade had positive expectation, even only making 1 penny after transaction cost there is no rational argument that can be made for not taking every positive EV bet that comes your way.

That of course would be foolish in the real world as 1 penny would obviously not compensate for our uncertainty of the model/system's expectation.

This to me is the heart of speculation and a good place to come at this stuff. How much do I need to get paid to bet on the certainty of the expectation of this model/system?

Something else to think about is that obviously over leveraging is a death blow to any system but on the other hand the farther you slide away from geometric growth from winning trades, the more you increase you risk of ruin by making the draw down padding less from large winning trades.