Jump to content


Money Management Risk Management

  • Please log in to reply
20 replies to this topic

#11 Cirrus



  • TT Patron+
  • 5,735 posts

Posted 11 December 2005 - 03:02 PM

If you're position trading--which I consider holding things for a half dozen to a dozen and a half weeks--you may want to consider something I call a reflex stop. Frequently, when you get taken out at your stop in something you have good gains in you'll find you give back quite a bit of profits from the most profitable point of the position. If you use a reflex stop, you basically wait for you're reflex sell stop to be hit and then put in a sell limit at an arbitraty retrace level back towards the high. To protect yourself, set a final stop point in case of a waterfall like decline. I've seen so often when posiiton trading that a nasty correction takes people out at undesirable points when momentum type stocks typically tend to retest highs on most time frames. This method is not for everyone because it requires LOTS of discipline and a solid working knowledge of the general market environment. It also adds a little complication to trading--but not much. What it does is keep you from selling at the ST/IT weakest points on a chart. Those points are weak because so many stops are being hit. Just some thoughts here as I'm currently continuing to develop and refine this methodology and further integrate it into my own position trading.

#12 mss



  • TT Sponsor
  • 6,182 posts

Posted 11 December 2005 - 06:24 PM

SB, You have no idea how much your willingness to post this will mean to a lot of the lurkers here. Some of us "old timers" are going to benefit due to reading and saying, maybe I need to review my own risk management. Risk or money management is the most important aspect of trading. I am honored that you would share with us, me, your thoughts and concerns. Best to you and THANKS. mss

#13 Rogerdodger



  • TT Member*
  • 26,896 posts

Posted 11 December 2005 - 07:19 PM

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."

I couldn't agree more with the anology between gambling & trading.
Both must have money management and a system.

Both gambling and trading tend to chop you up most of the time but on those rare times you get a trend going, MAN is it fun.

I love to play casino craps.
As with trading I've noticed that different systems work at different times.

I believe one reason that traders are always looking to "tweak" their system
is that no system works all the time because the market conditions change.
Sometimes it is in a trading range, then it changes into a trend, then chaos.

My favorite strategy is to take partial profits off the table and let the winners run on the house's money.

#14 hitoya



  • Traders-Talk User
  • 494 posts

Posted 11 December 2005 - 07:42 PM

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 enjoyed reading your comments above. I cannot agree with you more.

Very best,

#15 arbman



  • Traders-Talk User
  • 19,504 posts

Posted 11 December 2005 - 08:01 PM

I would recommend to anyone learning the basic principles of probability and statistics in the analysis of the time series --this is what basically TA is all about. If one knows the probability of a given situation statistically in terms of the deviation from the mean at a certain statistical correlation level, then one can evaluate basically much better how likely the trade will end up in their favor.

I evaluate the momentum patterns statistically on the historical data since the 1960s and adjust the size of my positions based on the probability of the trade and the profit potential. The larger the standard deviation among all of the correlating cases, the less money I would commit to the position. Basically, I can commit 100% of my money in one stock if the odds are above 90% with little standard deviation (among all of the similar cases) and the profit potential is above 10% with some hedging, no problem...

The general guidelines in the ARIMA and spectrum analysis should be enough for any trader to get a good understanding about the odds. However, one also needs to be well equipped with the computers for this purpose. Personally, I came up with several momentum and cyclical analysis tools, but they would not be useful, if I didn't do the analysis on these tools to calibrate on the historical data. Anyone can come up with a signal tool, but without the proper calibration to teach to the trader about how and where to use the tool, the trend analysis and the trades can be hardly successful.

Essentially, the definition of the momentum is nothing but the statistical correlation of the trend of a mean with its standard deviation; the faster the standard deviation increases with the moving average, the more likely that there is a strong trend. On the other hand, the seasonal or cyclical patterns are to be extracted using a spectrum analysis; this is what Jim Hurst pioneered first.

Both of these analysis are necessary for the proper analysis of the trends. I don't favor one over the other, it would be an incomplete analysis. If one is very strong, it tends to override the other too. For example, you should not expect to see a major dip right after a high momentum break out (compared to the historical data) just because you have a minor cyclical low coming, the simple trendlines can be very misleading in these situations. Similarly, the larger cyclical signatures, say over 20 weeks in the Hurst model, will be usually seen within the momentum patterns.

As a side note, the EWP actually tries to recover the commonly encountered or known momentum patterns out of the price patterns. Hence, even though it can be considered as an art, the trained eyes can spot many of these patterns quickly, but it is very hard to take the bias out of the human perception because the word "common" means statistically more frequent than the others, BUT, not having less influence just because they are not well known or it can be a combination of several patterns. So, you would need an unbiased momentum and cyclical system to guide you through...

- kisa

Edit: tried to clarify a bit more...

Edited by kisacik, 11 December 2005 - 08:10 PM.

#16 jabba



  • Traders-Talk User
  • 62 posts

Posted 11 December 2005 - 08:40 PM

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%.


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.....


I agree, thats the only way I know also.

#17 sluzbenik1



  • Traders-Talk User
  • 753 posts

Posted 12 December 2005 - 06:30 AM

It helps even my system...surprisingly.

Here is what I did -

1) enter initial position with risk-based stop, risking no more than 1% of capital, additional 15% equity cap just in case
2) once position profit is half of the original risk-based stop add an additional tranche with same formula for the risk-based stop, then cut the second position in half to ensure that no additional risk is being taken, though we are increasing the percentage of equity beyond 15% in some cases.

I could then go on and add another tranche but if I really liked but it will take some time to balance any few bits of profit I could pick up versus transaction costs once you start adding smaller and smaller sizes.

My system doesn't use price targets so that's the best I can do. Note Sharpe ratio, profit factor and Wealth-Lab score drop because of added exposure.

System 2 - adding additional position.
Long + Short Long Only Short Only Buy & Hold
Starting Capital $100,000.00 $100,000.00 $100,000.00 $100,000.00
Ending Capital $823,701.38 $823,701.38 $100,000.00 $317,780.53
Net Profit $723,701.38 $723,701.38 $0.00 $217,780.53
Net Profit % 723.70% 723.70% 0.00% 217.78%
Annualized Gain % 69.66% 69.66% 0.00% 33.62%
Exposure 72.62% 72.62% 0.00% 99.83%

Number of Trades 1,635 1,635 0 743
Avg Profit/Loss $442.63 $442.63 $0.00 $293.11
Avg Profit/Loss % 3.54% 3.54% 0.00% 221.92%
Avg Bars Held 10.61 10.61 0.00 1,004.00

Winning Trades 950 950 0 512
Winning % 58.10% 58.10% N/A 68.91%
Gross Profit $1,376,904.91 $1,376,904.91 $0.00 $228,984.93
Avg Profit $1,449.37 $1,449.37 $0.00 $447.24
Avg Profit % 12.97% 12.97% 0.00% 340.03%
Avg Bars Held 10.29 10.29 0.00 1,004.00
Max Consecutive 16 16 0 N/A

Losing Trades 685 685 0 231
Losing % 41.90% 41.90% N/A 31.09%
Gross Loss $-653,203.53 $-653,203.53 $0.00 $-11,204.39
Avg Loss $-953.58 $-953.58 $0.00 $-48.50
Avg Loss % -9.52% -9.52% 0.00% -39.85%
Avg Bars Held 11.06 11.06 0.00 1,004.00
Max Consecutive 12 12 0 N/A

Max Drawdown $-78,209.94 $-78,209.94 $0.00 $-47,613.58
Max Drawdown % -28.55% -28.55% 0.00% -37.65%
Max Drawdown Date 10/6/2005 10/6/2005 N/A 8/13/2004

Wealth-Lab Score 68.54 68.54 0.00 21.00
Profit Factor 2.11 2.11 0.00 20.44
Recovery Factor 9.25 9.25 N/A 4.57
Payoff Ratio 1.36 1.36 0.00 8.53
Sharpe Ratio 2.00 2.00 0.00 1.32
Ulcer Index 6.38 6.38 0.00 11.87
Wealth-Lab Error Term 11.52 11.52 0.00 11.37
Wealth-Lab Reward Ratio 6.05 6.05 N/A 2.96
Luck Coefficient 13.90 13.90 0.00 31.09
Pessimistic Rate of Return 1.76 1.76 0.00 16.96
Equity Drop Ratio 0.07 0.07 0.00 0.16

System 1

Long + Short Long Only Short Only Buy & Hold
Starting Capital $100,000.00 $100,000.00 $100,000.00 $100,000.00
Ending Capital $686,187.44 $686,187.44 $100,000.00 $317,780.53
Net Profit $586,187.44 $586,187.44 $0.00 $217,780.53
Net Profit % 586.19% 586.19% 0.00% 217.78%
Annualized Gain % 62.06% 62.06% 0.00% 33.62%
Exposure 64.20% 64.20% 0.00% 99.83%

Number of Trades 1,492 1,492 0 743
Avg Profit/Loss $392.89 $392.89 $0.00 $293.11
Avg Profit/Loss % 3.41% 3.41% 0.00% 221.92%
Avg Bars Held 10.27 10.27 0.00 1,004.00

Winning Trades 878 878 0 512
Winning % 58.85% 58.85% N/A 68.91%
Gross Profit $1,108,761.09 $1,108,761.09 $0.00 $228,984.93
Avg Profit $1,262.83 $1,262.83 $0.00 $447.24
Avg Profit % 12.41% 12.41% 0.00% 340.03%
Avg Bars Held 9.55 9.55 0.00 1,004.00
Max Consecutive 17 17 0 N/A

Losing Trades 614 614 0 231
Losing % 41.15% 41.15% N/A 31.09%
Gross Loss $-522,573.59 $-522,573.59 $0.00 $-11,204.39
Avg Loss $-851.10 $-851.10 $0.00 $-48.50
Avg Loss % -9.47% -9.47% 0.00% -39.85%
Avg Bars Held 11.30 11.30 0.00 1,004.00
Max Consecutive 15 15 0 N/A

Max Drawdown $-52,381.19 $-52,381.19 $0.00 $-47,613.58
Max Drawdown % -26.11% -26.11% 0.00% -37.65%
Max Drawdown Date 7/26/2004 7/26/2004 N/A 8/13/2004

Wealth-Lab Score 71.43 71.43 0.00 21.00
Profit Factor 2.12 2.12 0.00 20.44
Recovery Factor 11.19 11.19 N/A 4.57
Payoff Ratio 1.31 1.31 0.00 8.53
Sharpe Ratio 2.09 2.09 0.00 1.32
Ulcer Index 5.95 5.95 0.00 11.87
Wealth-Lab Error Term 10.11 10.11 0.00 11.37
Wealth-Lab Reward Ratio 6.14 6.14 N/A 2.96
Luck Coefficient 14.52 14.52 0.00 31.09
Pessimistic Rate of Return 1.74 1.74 0.00 16.96
Equity Drop Ratio 0.08 0.08 0.00 0.16

Edited by sluzbenik1, 12 December 2005 - 06:33 AM.

#18 Jnavin



  • TT Member*
  • 2,126 posts

Posted 12 December 2005 - 07:15 AM

Roger: it's probably a topic for another time, but card-counting at blackjack is not gambling. If you do it correctly, you have an edge over the house. That's not true of the game of craps, which IS gambling. Anyway, I just mentioned it to make a few points about money management...

#19 Rogerdodger



  • TT Member*
  • 26,896 posts

Posted 12 December 2005 - 11:19 AM

Roger: it's probably a topic for another time, but card-counting at blackjack is not gambling. If you do it correctly, you have an edge over the house. That's not true of the game of craps, which IS gambling.

You are correct.
It's for that reason that casinos do not welcome card counters and use a shoe full of multiple decks and use shuffle master machines (and serve free drinks ;) ) to thwart the efforts of "evil" counters.
My point is about money management AND the way that various systems work for a while but then fail at other times. The similarities to trading are many including the emotional/psychological effects of winning or losing.

#20 EagleTrader



  • TT Member
  • 2,399 posts

Posted 13 December 2005 - 07:49 AM

SB, Excellent Post..

I wanted to add something for futures traders.

The standard method obviously is "fixed fractions" ie a certain number of contracts per account size (depending on how far you put your stops)

But all of us know, that our system works better in certain market conditions and you have many more winners than losers. It is the opposite in other conditions..

Linking to something I read sometime ago, which may help some to optimise their methods.

Fixed Ratio

Edited by EagleTrader, 13 December 2005 - 07:50 AM.