# Fixed percent risk position sizing?



## N1Spec (15 July 2009)

Hi All,

I know what fixed percent risk position sizing is... but what im unclear about is do you always fix it against your "ORIGINAL" capital base? or do you change it as your capital base/equity changes.

Example. Lets say i start with $20k, and i want to risk 2%, thats $400. after 2 months my capital has dropped to $15k, so in this instance do i still go with 2% of $20k or $15k??

In the event that my equity goes up i would most probably pyramid  my profit with the same fixed 2% risk, but when it goes down.... what should i do? that is my main concern.


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## skyQuake (15 July 2009)

*Re: Fixed percent risk position sizing.....?*



N1Spec said:


> Hi All,
> 
> I know what fixed percent risk position sizing is... but what im unclear about is do you always fix it against your "ORIGINAL" capital base? or do you change it as your capital base/equity changes.
> 
> ...




Obviously reduce your risk to $300 as per the 2% rule


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## Mr J (15 July 2009)

*Re: Fixed percent risk position sizing.....?*

You keep the 2%, so if you rise to $25k you would bet $500, and if you drop to $15k you bet $300.


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## tech/a (15 July 2009)

> I know what fixed percent risk position sizing is




Well so far the replies arent my understanding.


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## N1Spec (15 July 2009)

tech/a said:


> Well so far the replies arent my understanding.




how would you do it tech/a

would you keep it at 2% of the original amount even when the capital base has reduced?? because this was my original understanding........


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## Naked shorts (15 July 2009)

N1Spec said:


> would you keep it at 2% of the original amount even when the capital base has reduced?? because this was my original understanding........




Yes you would, you need to take your stop loss size into account as well when trying to figure out your position sizing. Doing things this way is an "anti-martigale" system...the opposite of the gamblers fallacy.

http://www.investopedia.com/terms/a/antimartingale.asp


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## tech/a (15 July 2009)

N1Spec said:


> how would you do it tech/a
> 
> would you keep it at 2% of the original amount even when the capital base has reduced?? because this was my original understanding........




Fixed % of *initial purchase *price which Say---was 10% so if a $10 stock then a $1 stop.
Which of course equates to a 1% risk on $100K
2% on a $50K account.

There are endless variants


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## beerwm (15 July 2009)

tech/a said:


> Fixed % of *initial purchase *price which Say---was 10% so if a $10 stock then a $1 stop.
> Which of course equates to a 1% risk on $100K
> 2% on a $50K account.
> 
> There are endless variants




so this approach is like a contigency plan? right?

if a certain 'stock' becomes valueless or to prevent the effect slippage might have on 'the total capital base'.

so the risk is refering to - total outlayed - as opposed to 'a stop loss risk',


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## N1Spec (15 July 2009)

this is my understanding of the percent risk model....

the following excerpt copied from Dr Van K Tharps book "trade your way to financial freedom".

Percent risk model: According to this model positions were sized such that the initial risk exposure was 1% of the account equity. So with $1,000,000 equity the initial risk would be $10,000. So if the initial stop on a trade was $1 the system would trade 10,000 shares. For an initial stop of 50 cents the system would trade 20,000 shares, etc. 

======================================================

I totally understand this, what im asking and im getting different answers for is when my account equity goes down, so would my "risk" amount in $$ value??


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## beerwm (15 July 2009)

N1Spec said:


> this is my understanding of the percent risk model....
> 
> the following excerpt copied from Dr Van K Tharps book "trade your way to financial freedom".
> 
> ...




the name "Fixed percent risk position sizing" is abit misleading,

risk = Total equity * Fixed Rate

eg,
$10,000
using 2% risk.

risk = $10,000 * 0.02
risk = $200

equity drops to $8000

risk = $8000 * 0.02
risk = $160

so:. equity drop = risk $$$ drop


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## Kryzz (15 July 2009)

https://www.aussiestockforums.com/forums/showthread.php?t=14201&highlight=fractional


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## Mr J (16 July 2009)

Can be interpreted both ways, since it isn't defined what is fixed (i.e. the percentage or the position size). In my experience it generally refers to a fixed percentage, as that allows for compound growth.


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## AMSH (16 August 2009)

The risk has to be calculated on the current equity at the time the trade is taken (taking into account the equity contributed to open positions). Otherwise the risk level becomes meaningless as the *effective * amount of risk on a trade will change depending on whether your capital base is larger or smaller than your initial capital base.

An easy way to think about it is like this. If your system works best at 2% risk, and you grow your capital base from $10,000 initial capital to $1,000,000, you're still only risking $200 if you use the initial capital base to calculate. This is an *effective* risk of .02% instead of 2%. The opposite is true if your capital base has decreased. 

The actual risk will change depending on the difference between current and initial capital - essentially, the percentage risk value becomes meaningless and you may as well use any arbitrary risk figure.

Hence, you use the altered capital base to calculate - you only have a *fixed* level of risk if you use the current capital base, and that's the whole point; using a fixed level of risk that best fits your system.

This is my understanding of it anyway - any other interpretation would make the whole thing pointless in the first place.


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## Wysiwyg (30 September 2009)

N1Spec said:


> Hi All,
> 
> I know what fixed percent risk position sizing is... but what im unclear about is do you always fix it against your "ORIGINAL" capital base? or do you change it as your capital base/equity changes.
> 
> ...




AMSH sums it up okay too.

Hi there N1Spec, I have ventured deeper into the art of trading and this subject came up and was presented to me like below ...

---------------------

1) Total Core Equity (TCE)

Total core equity represents the total amount of funds available for trading, i.e. the total of all account balances.

2) Total Equity (TE)

Total equity represents the total core equity plus the value of all open positions valued at the current price.

3) Total Reduced Equity (TRE)

Total reduced equity represents the total core equity plus the value of all open positions valued at their stop loss prices.

----------------------
Number 3) being my choice because in worst case scenario (all open positions hit stop loss) the remaining equity would be what I have to trade with. So 2% of total reduced equity if adding another trade. This way as I raise stop losses with winning positions the funds available for trading also rise yet a loss scenario is locked in (fixed).


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## kam75 (30 September 2009)

N1Spec said:


> Hi All,
> 
> I know what fixed percent risk position sizing is... but what im unclear about is do you always fix it against your "ORIGINAL" capital base? or do you change it as your capital base/equity changes.
> 
> ...




I size my positions based on available equity.  When it increases, I bet more, when it decreases, bet less.  There's a great chapter to read in Larry Willams book "Long Term Secrets to Short Term Trading".  The 2% Rule is good for larger accounts but for something like 20K, you'd probably want to go a bit more like 3 or 4%, depending on your risk tolerance of course.


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## Mr J (30 September 2009)

4% will for most result in intolerable fluctuations in capital. I wouldn't suggest it to anyone. I suggest try 1%, then 2% etc. The last thing a trader needs is to have confidence ruined by trading an uncomfortable size. Why not work up to it?


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## skc (1 October 2009)

Wysiwyg said:


> AMSH sums it up okay too.
> 
> Hi there N1Spec, I have ventured deeper into the art of trading and this subject came up and was presented to me like below ...
> 
> ...




I size based on closed equity... bit easier than calculating reduced equity all the time. Plus the word reduced equity is a bit mis-leading. It could actually be that my trailing stop is at 2R positive so it isn't really reduced per se.

I do like the concept, however.

Also agree with Mr J about working up the size slowly. One advantage of starting small is that initial losses don't hurt, and your mindset is better tuned to accept losses / being wrong etc.


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## howardbandy (1 October 2009)

Greetings All --

There are so many variations to position sizing -- 122,435 at my last count.  

The 2% risk can be considered 2% of the initial equity, then 2% of whatever equity remains as trades are taken.

Or the 2% risk can be considered as 2% of the initial equity, remaining 2% until some other criteria are met.

It is whatever you want it to be.  

Define your own and make it 112,436.

The general question you are trying to answer is: Assuming that the future will be similar to the past, what are the characteristics of the equity over several years when this particular system is traded with this particular position sizing method.  One specific question might be: if I am willing to accept a 40% drawdown before considering the system bankrupt, what position sizing method maximizes my final equity while holding the probability of bankruptcy to less than 10%?  (Every system traded has some probability of going bankrupt if traded long enough.  The only way to assure that probability is 0% is to not trade at all.)

The best way to evaluate position sizing is to start with a list of closed trades that are the result of either actual trades taken or out-of-sample test runs.  Depending on how often your system trades, you will need at least one year's worth of trades that trigger every day and hold a short period, or one hundred or more trades if the trading is less frequent or the holding period is longer.  (Do not use in-sample results -- you will so seriously overestimate the potential profitability of the system that you will likely go bankrupt very quickly if you try to trade it.  Do not use idealized statistical distributions based on assumptions of the characteristics of the trades -- trades do not follow any of the standard distributions.)  Then, using a simulator that allows you to define exactly how you want the position sizing computed, make several hundred thousand Monte Carlo runs.  Of course, you can make fewer runs or make the runs with smaller data sets, but the accuracy will be better with more runs and more data.

Thanks,
Howard


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## tech/a (1 October 2009)

My view is its not so much the 2% but rather the position of the initial stop which causes a trigger of that stop.

If its a very tight stop then the stop is likely to be triggered far more often.
On the + side the R/R will likely increase.
A wider stop will mean getting "stopped" is less likely but you'll  sacrifice R/R.

The concern of a string of losses eroding a your 2% is heightened with tight stops.

If you can develop a method which has a low stop out rate with a tight stop you'll likely have a high R/R and Nirvana!
Id say that more frequent stop outs could be seen as an in ability to get on board momentum.Often seen attempting to trade against the predominant trend.

Again we get back to WHY a method will/could profit.

I think its something I have found suits me best.
Cutting initial risk to 1 or .5% and taking tighter stops with the expectation of high R/R.
10:1 is not un common.


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## Mr J (1 October 2009)

> If you can develop a method which has a low stop out rate with a tight stop you'll likely have a high R/R and Nirvana!




I believe tight stops are far more efficient. The general advice is to place the stop just beyond the recent pivot or S&R, so if those levels are taken out, we're taken out. Logically it's sound, as we're being taken out when it seems the trade won't go to plan.

However, I've found that the majority of my successful trades do not use most of my stop, and if a trade uses up most of my stop, it will very likely use up all of it. Something to note is that I do wait for some market confirmation (as I'm sure many do). This gives me a higher probability trade, but I also do it with the aim of entering into movement.

This does place more emphasis on a good entry and we would need to pay attention to faster timeframes (if we enter just before a mini-retracement, we're wasting much of our stop). I would guess that most people could get away with a stop of 1/2 to 2/3 of what they use now, and possbily less. This is only based on my own trading though, and perhaps it suits me more than others. Possibly something for people to think about though.


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## howardbandy (2 October 2009)

Greetings all --

About tight stops.

I strongly encourage everyone to test the effect stops have on their favorite trading system.  The system has logic to enter the trade and logic to exit the trade.  No matter what time frame is being used and no matter what trading system is being used, there will be adverse price movements between the time of entry and the time of exit.  A system that has a tight stop will be stopped out by normal price fluctuations.  No matter how those trades would have turned out, they will not have an opportunity to become profitable.  The tighter the stop, the more often the stop will cause an exit and the trade will be a loss.  If I increase losing trades due to stops being hit, I reduce the proportion of winning trades to losing trades, and I increase the number of consecutive losing trades that will occur.  In order to have an overall profitable system, my winning trades will have to be much more profitable, which is much more difficult to achieve.  

One of the methods of determining whether a system is broken or not is based on observation of the number of consecutive losing trades.  If I have a system that wins 70% of its trades, a string of 4 consecutive losing trades will be rare, and will cause me to watch the system very closely, or even take it off line.  If I have a system that wins 30% of its trades, it will have strings of 10 or more losing trades, still be within its parameters, and I will not have reason to take it off line.  

When we do the mathematics to evaluate the characteristics of safe, profitable trading systems that generate high rates of return with low risk, several things appear.  

Have a positive expectancy.
Trade frequently.
Hold a short period of time.
Have a high percentage of winning trades.
Limit losses on losing trades.

Simply based on the normal, random fluctuations in financial prices, adverse price movement increases in proportion to the square root of the time the position is held.  Which means that the probability of a stop being hit due to normal price fluctuations increases in proportion to the square root of the time the position is held.

There is a formula that will give you a statistic measuring the likelihood that a system will trade profitably:

t = (mean / standard deviation) * squareroot of (number of trades).

where mean and standard deviation are the percentage return of each closed trade, taken from either actual trades or out-of-sample validation runs.  Do not use in-sample results -- you will certainly go bankrupt.

When t is greater than about 2, the probability of going bankrupt is small.  

Please, do not accept the traditional wisdom regarding placement of stops without testing it on your own systems.  Tight stops hurt the performance of every trading system I have ever tested them on.  

Thanks for listening,
Howard


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## weird (2 October 2009)

Howard, if I have a negative year trading, does that mean my system is broken ?

Show a history of trades to a mod, to validate your trading, try not to edit it, then I won't be a naysayer so much.

Notice you missed position sizing from your course, really how hard is it too code ? Btw everything else you are covering ... gee ... I guess u r working with the ...


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## howardbandy (2 October 2009)

Hi Weird --

Are you asking if we will be discussing position sizing in the workshops?  Yes, we will.

And your last sentence.  Who am I working with?  Myself -- no one else and no other organization.  Or is there something I don't understand.

Thanks,
Howard


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## weird (2 October 2009)

howardbandy said:


> Hi Weird --
> 
> Are you asking if we will be discussing position sizing in the workshops?  Yes, we will.
> 
> ...




Howard, I trade, I don't teach, do you mind sending your 10 yrs, 5 yrs, or even 1 yr account to a mod or even Joe ?

Btw, AB is simple, how expensive can it be to teach the basics, which includes loops and pyramiding ... I don't mind some one in there prime getting a ride but don't do it on others ... we are abit smarter here in Oz.


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## wayneL (2 October 2009)

weird said:


> Howard, I trade, I don't teach, do you mind sending your 10 yrs, 5 yrs, or even 1 yr account to a mod or even Joe ?




Weird,

As far as I can see, Howard is showing people how to build their own system using Amibroker. Again, as far as I can see, he hasn't made any specific performance claims.

Unless I've missed something, I don't understand why he should supply brokers statements. He's not selling "a system".


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## Wysiwyg (2 October 2009)

weird said:


> Btw, AB is simple, how expensive can it be to teach the basics




The $850 introductory course would suit me because at the moment all I can do is run pre-programmed explorations which I might add exposed instant profitable trades. 
My next goal is to create a "fully" mechanical system which can be automated to trade. Not this exploration/scan stuff. Right now the coding obstacle is giving me a headache.  I will have to pay.

I read about people that have back/forward tested their trading strategy but you know they speak le crapola. I reckon most people haven`t got any idea how to "fully" code a trading system but they come on and say yeah, yeah I backtested and it is profitable. Yeah yeah sure mate.


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## Wysiwyg (2 October 2009)

Wysiwyg said:


> My next goal is to create a "fully" mechanical system which can be automated to trade. Not this exploration/scan stuff. Right now the coding obstacle is giving me a headache. * I will have to pay.*




Problem with forking out for computer programmer to code a strategy is that if it doesn`t work then it is wasted money, though in a sense not wasted because you learn what doesn`t work. Funny that really.


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## howardbandy (2 October 2009)

weird said:


> Howard, I trade, I don't teach, do you mind sending your 10 yrs, 5 yrs, or even 1 yr account to a mod or even Joe ?
> 
> Btw, AB is simple, how expensive can it be to teach the basics, which includes loops and pyramiding ... I don't mind some one in there prime getting a ride but don't do it on others ... we are abit smarter here in Oz.




Hi Weird --

I do trade.  I am doing fine with my own trading.  But I am not touting a trading system or an advisory service, so my trading results are not the issue.  If and when (probably never, but just for discussion) I begin to offer specific advice or trading systems, there will be adequate and convincing documentation.  

I do teach.  My books, lectures, speeches, workshops, and consulting are to teach people sound modeling and simulation techniques.  I do provide details of my academic credentials and professional experience, and refer to other quality materials that support the statements and suggestions I make.  Implicit or explicit in every comment I make is the following:

If you have a method that you have confidence in and that works for you, do not change a thing.  But if you are uncertain about the probability that your trading system will be profitable in the future, then here are the accepted professional simulation methods and statistical analysis methods that might help show what your system might do in the future.  There are no guarantees -- the best we can hope for is knowledge of the probabilities.  

So -- If your methods work for you, great -- don't change a thing.  As I meet groups of traders, there are people who are completely confident in their systems.  But the great majority have had varying degrees of trading success and are uncertain about how to develop sound systems, how to measure the robustness of their systems, how to estimate the future performance of their systems.  I am not selling snake oil.  Quite the opposite, I am explaining techniques for identifying snake oil.  Notice how often the statement "try it" or "test it for yourself" is part of my posting.  That never appears in snake oil commercials.  

The reason I mention AmiBroker so regularly is that, in my opinion, it is the very best trading system development platform available to retail-level traders.  (And it is superior to some platforms I have used at companies that manage quite a lot of other people's money.)  I have no ties to the AmiBroker organization.  I get no compensation from them.  I do not act as their agent in any way.  I pay full retail price for my AmiBroker license.  If I knew of a better development platform, I would consider switching.  

There is so many statements of conventional wisdom and so many rules of thumb about trading systems that are worse than wrong, and so very little high quality information about designing, testing, and validating trading systems, that I think my contributions are positive.  Some others think so as well and have said that they benefit from my materials.  I have not heard from anyone who understood what I was saying and told me that my ideas were detrimental.  If you do not like me, then ignore me.  If you have different views than mine regarding modeling, simulation, experimental design, and statistical analysis as applied to trading systems, then we can have a meaningful discussion.

Best wishes,
thanks for listening,
Howard


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## Sean K (2 October 2009)

Howard, thank you for your patience and time in responding to these questions. Those concerned would be much appreciative. Cheers, kennas


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## Wysiwyg (4 October 2009)

Wysiwyg said:


> This way as I raise stop losses with winning positions the funds available for trading also rise yet a loss scenario is locked in (fixed).




Best correct my error here. Funds available for trading is wrong and should be "total reduced equity". Obviously the funds would only be available for trading when the position(s) are closed.

After reassessing my risk tolerance I would be more comfortable with .5% to 1%. A string of 10 losses would not be comfortable at 2% of TRE.

*Question* : What is more "successful" ... example $50k account

A) Using total equity to calculate % risk in dollars (50k)
or
B) Using the trade equity to calculate % risk in dollars. (i.e. only10k)

Obviously 1% of total equity is more than 1% of amount invested per trade so I can only see position size reduction as a matter of consequence in B.

I think I`m confusing myself here a bit.


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## weird (4 October 2009)

howardbandy said:


> Hi Weird --
> 
> I do trade.  I am doing fine with my own trading.  But I am not touting a trading system or an advisory service, so my trading results are not the issue.  If and when (probably never, but just for discussion) I begin to offer specific advice or trading systems, there will be adequate and convincing documentation.
> 
> ...




HB, do believe you have plenty to offer.

But 100 bucks an hour for a basic course, not sure, but I guess the marketing folk and you have agreed that this is what folk maybe be willing to pay ?

I still don't understand your description of Monte Carlo, I come from a school which more follows this,

http://www.compuvision.com.au/

Believe you can download for 30 days trial free, and examples on the Amibroker yahoo site on how to integrate.

Also worth reading the free manual.

Also not sure why you use, the close, in most system examples.

Anyway HB, don't wish to be a prude, I know you have plenty to offer, so not raising any flag in any direction personally towards you ... just have some questions.


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## howardbandy (4 October 2009)

Hi Dave --

About the price of the workshops -- 

The workshops I am presenting are priced in line with those of Ernie Chan, Van Tharp, John Bollinger, generic TradeStation workshops and so forth.  I have presented them before.  Most people find them good value.  I rarely get complaints at the end of the workshop -- just sticker shock before.  I do not tout or teach trading systems, but rather trading system development.  Unless I am very surprised, people who attend the workshops in Melbourne in October will be very satisfied.  Number three will include a lot of unique material that translates directly into actionable trading system development with very high rates of return at very low risk.  

I think one of the problems is that Tomasz has AmiBroker priced too low.  I have spoken with him several times about pricing and recommend to him that he at very least add a zero to the end of his price.  The price is now US$279.  AmiBroker is clearly a peer of MetaStock, TradeStation, and others in that category and should be priced accordingly.  US$3599 sounds about right.  If AmiBroker was priced near $3000, fewer people would think there was a disconnect between the price of the software and the price of the workshops.  And Tomasz' market share might actually rise -- many people equate price with value.

About Monte Carlo Simulators -- 

I have visited the CompuVision / TradeSim site and I have read the manual and the other materials on the site.  There is a lot of good information there.  I have exchanged emails with their support staff, who were very helpful.  I have no doubt that TradeSim is an excellent product for performing the simulations of the tasks described in its documentation.  But as it implemented now, it solves a problem that is different than the one I need solved.

In developing trading systems, there are many ways Monte Carlo Simulation can be helpful.  That is, there are a lot of different problems that need to be solved.  I have looked at many Monte Carlo Simulators, and have not found one that does what I want done.  I have one that I am using that I wrote in Excel VBA.  I'll keep looking, and perhaps find one I can use in demonstrations, use myself, and recommend to clients.  Or perhaps I will develop the one I wrote into a product that can be distributed.  When I get some spare time.

About using the close --

Are you referring to why the examples I use generate signals at the close of bar and then take the trade at that same time?  If so, it is because, using daily data, if my signal is correct, the change in price that takes place overnight on the first night is often the biggest part of the move.  If that wasn't what you meant, please explain.

Thanks,
Howard


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## weird (4 October 2009)

Howard, thanks for the in depth reply. Cheers.


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