20 replies to this topic

[Sentient Being]

Below I'm publishing an email I just fired off to a trading friend. He and I converse back and forth as I work through my trading journy. I'm in the middle of making a number of changes to my approach and it helps me to detail them in Emails to a friend, to sort of crystalize what I'm doing. ---------------------------------------------------------- I've re-read that paper on Position Sizing effects from the turtles site and it has quite a bit more meaning to me now. I may be over generalizing here but this is my impression of that paper. Basically the experiment suggests that position sizing is important in keeping the trader alive in the markets long enough to profit in an upwardly biased game. I gather the upward bias was to simulate using trading tools that gave you a statistical advantage. Traders who went bankrupt were risking on average about 22% while those who survived the first round risked (on average) 6.6%. Winning traders risked no more than 6%. 40% of those who DID NOT get a lecture on position sizing went broke. Only 6.3% who did hear the lecture went broke. The only influence they had over the game was position sizing. I don't think they used enough samples in the study quite frankly but it's still very interesting and may be valid. The percentages aside- the study appears to demonstrate that position sizing can be important to survival in the market. Those who assume too much risk on individual trades can run themselves out of the market and possibly lose it all. Logic can lead us to the same conclusions. Missing is any way to use money management to move beyond being defensive and to outperform the markets. The control group and the group who heard the position sizing lecture had the same mean returns. So how do traders outperform? I believe that the answer may lie outside of defensive position sizing but may still be in the realm of money management as opposed to superior TA skills. As you know, I'm not happy with my YTD results in that I have not really been outperforming the markets. I've been down when they are down and up when they are up and generally near average market returns based on the Wiltshire 5000 or the S&P. I am happy that I did not blow up in my first year of trading on my own but the results have not been worth the effort in my mind. One thing I may do as a result of reviewing this material, is reduce my position sizing from 10% to 6%. At +8% returns on the year at my present stops, I'm ahead of the S&P-but one years results doesn't mean I'm handling my position sizing well enough to avoid disaster. I think that reducing my position sizing here may add quite a bit of downside protection and I'm most likely going to do it. A drop from 10% in position sizing to 6% is a 40% reduction and should decrease the risk of my doing serious damage to myself and spouse! And I'm playing with enough dollars that I can do that without causing trading fees to be a major concern. I've mentioned to you that Gary Smiths comments to the Traders Talk board made quite an impression on me. Although he is a very active trader and trades much faster than I, his comments still apply. He indicated that it wasn't superior TA skills that allowed him to prosper so much over the years but the way he worked his winners. The way he dealt with trending positions. For all the reasons above (and others), this has led me to change my application of TA and combine it with a different money management plan. Basically I'm looking to load up on trenders where my initial position is in the black at my stops. I want to take additional buy signals and add on to my buys to better profit from sectors/stocks/countries that are trending. I'm also using a system to drop stops back at certain logical points to improve the odds of their hanging on in a long running trend but still leave some near tops to get what I can if the run is over. Each buy is it's own position and no additional buys will occur until the initial buy is in the black at the stops. So a 18% position in say Japan would consist of two prior positions that are now profitable at the stops and a new position at a logical (TA indicated) buying point. 3 positions does not mean I'm busting my 6% position sizing rule per trade because no new position is added until prior are profitable and I'll trade no small, illiquid stocks that may be more likely to present me with a disaster. I'll still have to limit total position on each stock in case of catastrophe. What I may do is limit myself to three buys on any trending stock which would be a total of 18%. So that a disaster that destroys stops by double digits percents does not also become a disaster for me. So I'm messing with my TA and messing with my money management in order to reduce my downside risk and also to improve the bottom line.

[traderpaul]

As you know, I'm not happy with my YTD results in that I have not really been outperforming the markets.  I've been down when they are down and up when they are up and generally near average market returns based on the Wiltshire 5000 or the S&P.  I am happy that I did not blow up in my first year of trading on my own but the results have not been worth the effort in my mind.

One thing I may do as a result of reviewing this material, is reduce my position sizing from 10% to 6%.

<{POST_SNAPBACK}>

You will not outperform the market if you increase your positions from 10 to 16......At best you will perform about the same as the market. If you want to outperform in the market you have to take risk........Have less positions and concentrate on the best.....

[ed rader]

>>TP: "If you want to outperform in the market you have to take risk........Have less positions and concentrate on the best".....<< very good. ed rader

[Sentient Being]

As you know, I'm not happy with my YTD results in that I have not really been outperforming the markets.  I've been down when they are down and up when they are up and generally near average market returns based on the Wiltshire 5000 or the S&P.  I am happy that I did not blow up in my first year of trading on my own but the results have not been worth the effort in my mind.

One thing I may do as a result of reviewing this material, is reduce my position sizing from 10% to 6%.

<{POST_SNAPBACK}>

You will not outperform the market if you increase your positions from 10 to 16......At best you will perform about the same as the market. If you want to outperform in the market you have to take risk........Have less positions and concentrate on the best.....

<{POST_SNAPBACK}>

Paul, I'm not sure you understand what I'm saying and I know I'm missing your point. I understand that trading is risk and for risk you seek reward. But there are ways of trading to reduce the very real risk of blowing up (going broke) before your statistical advantage plays out. A trader with a 90% Win to Loss system that bets it all on each individual trade could easily go broke before making any money. For instance, he puts it all into "X" and then there is an announcement that "x" has lied to the investors and is bust, they have no money. The stock opens at zero, the 90% system just went bust.

My risk is 100% of my trading pile. No matter how I trade position size, I will trade 100% of my trading pile. My goal in reducing position size is to reduce risk on any indiviual unit buy. I further define or reduce my risk through the use of stops. My goal in adding to buys in positions going my way is to have the money management funnel my money to postions that are rewarding me for the risk. Loading up where it is doing me the most good. Working my winners" is something I have not done in the past.

Moving from 10% maximium positions in any stock to a 16% maximum in a trending stock (in stages by individudal units) IS taking more risk on that individual stock.

Edited by Sentient Being, 10 December 2005 - 06:53 PM.

[Sentient Being]

Actually I'm considering 3-6% maximum positions in any stock. So that would be 18% maximum position in any sector or stock.

[flyers&divers]

SB, I do not know which Turtle study you were refering to above but the original turtes were trading uncorrelated (or not too correlated) futures. Since stocks more or less fall and rise with the market you should pay even more attention to diversifying. One can diversify across sectors but one also can diversify techniques: trend/countertrend, pairs, seasonals, etc. One needs every little edge. I admire your work and determination to succed and wish you the best. Flyers

Edited by flyers&divers, 10 December 2005 - 08:21 PM.

[Jnavin]

When I lived in Las Vegas, I played blackjack every day. I played basic strategy and counted the cards using Dr. Edward Thorpe's high-low count, the simplest, most effective count going. If I had a 100 bucks, that meant either 20 five-dollar bets or 50 two-dollar bets. You make the most money the quickest with the five dollar bets, but you can go bust quickly too. You make much less per hour with the two-dollar bets, but your risk of busting out is diminished. It depended on how I was feeling that night and it depended on how the conditions were: was the dealer going deep into the deck? Was I the only person at the table, thus getting more hands per hour? Could I "surrender" a 16 against an ace? The main thing is: have a money management plan before you sit down at the table and then stick to it. Don't show up and wing it. The best advice I ever got about money management was from a book on blackjack: Blackbelt In Blackjack by Arnold Snyder. I know it sounds crazy to bring it up in relation to trading the markets, but it's basically the same thing. In fact, it IS the same thing. There's no difference between bet size and "maximum position." My best regards, John

[Gary Smith]

SB, I too commend you on your perseverance but even more for your willingness to try new approaches when the old ways aren't working as well. I knew two of the turtles and one quite well. Back in the early 90s he always blew my mind when he said a prudent trader has to back up every S&P futures contract by $100,000 at a time when I was backing it up with $8,000. It dawned on me then that apparently it's a much different world in the managed money field where there are 100s of millions of dollars on the line versus what us small fry trade. With a smaller account, it is a lot easier to be a more concentrated trader. While some may disagree, I would contend you should trade a $10,000 account differently than a $100,000 account and a $100,000 account differently than a $1,000,000 account and so on as you go up in account size. I agree with you on the relevance of position sizing and believe it's the most crucial element in the money/risk management genre. Yet, as some have stated in this thread, I find it best to concentrate my money as much as possible in as few of issues as possible. When I traded mutual funds, if the market was running right, I would have all my trading capital in one fund. And with stocks, there have been times when I have had 25% to 30% of my total capital in one stock and as much as 100% in one stock in one of my retirement trading accounts. The key for me in position sizing is *volatility*. Unlike most traders, I absolutely hate volatility. That was the attraction of mutual funds, they were much less volatile than stocks and hence you could trade them more *aggressively* with larger amounts of capital by quickly adding to your winners. And that's why I like the tight rising channels so much in stocks - you can trade them more *aggressively* with more capital. And that is why I love junk bonds so much - you can really trade them *aggressively* and even add with leverage because of their trend persistency and lack of volatility. I guess what I am saying is position sizing and adding to winners should be a function of volatility. That's why I have had trouble trading lower priced stocks (which I find much more volatile than higher priced stocks) since I haven't figured out how to size my positions in them and even more so how to add to my winners there.

[Sentient Being]

Thanks everyone for your input. I'm going to take it all into account. Hopefully I'm advancing my understanding and my approach.

[sluzbenik1]

Risk-based stops are a great way to go in any case, but especially if you want to increase size in profitable positions. This is probably the only way to trade large-cap stocks - if you don't concentrate, with a small account, you will neve win. They are too efficient and you don't have the capital. On the other hand, concentration doesn't necessarily mean more risk if you are being careful about respecting all your stops for all your tranches. I am taking the opposite route now though, as I have a small account and am willing to take on more risk. I trade fairly volatile low-priced stocks, using risk-based stops and caps on equity percentage. It's sort of a hit and run style, so I don't really have time to add to positions, even if I wanted to. I have not actually done much backtesting with this regard though, I think I may do some today, but my observations and instinct say adding to these will increase risk-of-ruin, and at the very least make for some really killer drawdowns that would probably reduce profitability.