# Money management - relationship between profit and position size



## bassmann (5 May 2008)

I have a mechanical system I trade that has some money management built in. I am looking for some ideas on possible next steps to improve this where possible.

*My Money Management*
I currently use a fixed fractional method that has 5 equal size positions so a 100k account would have 5 * 20k positions when fully committed. I have a trailing stop that is also used as my Initial Stop at my Entry that is volatility based, and on average would be around 15%. This might sound extremely wide for some of you but I have found tightening it produces adverse system results. 

*RISK*
Based on these money management parameters I am risking 3% per trade and my aim is to reduce my exposure to 2% per trade and maintain system performance if possible. The obvious options to me are a) tighten my trailing stops (which I have not been able to do effectively) or b) increase number of positions in my portfolio (which I have found lowers the systems profitability somewhat).

*SIMULATION OBESERVATIONS*
I have compared results from 2 to 15 and found;
•	Win/Loss ratio does not change much until 5 or less positions where it begins to increase.
•	System profit is cut in half when increasing positions from 5 to 10.
•	Days for Winning Trades and Days for Losing Trades does not vary with number of positions
•	Profit factor increases considerably with less positions
•	Drawdown increases with less positions but is more dramatic for simulations of < than 5.

*QUESTIONS*
1)	What is the relationship between position size and profitability of my system? What should I look at next?
2)	Is it ‘always’ bad to risk more than 2% per trade in all cases? Are there exceptions where this would be feasible, if so when? Should I be concerned about 3% in my system or am I over-reacting?
3)	Does anyone have any suggestions on what I can look at to reduce my risk beyond what I have described above? i.e. Different technique etc.
4)	The above focuses on risk per trade. Am I correct in assuming that changing the number of positions does not alter the overall portfolio risk should the market tank. For e.g. 5 * 3% = 15% portfolio risk vs. 10 * 1.5% = 15%.
5)	What is the impact of risk per trade on a margined portfolio? For e.g. My account had a 50% LVR so my 100k account now has 200k available to trade. I trade 5, 40k positions with a 15% Stop. Is my risk per trade still 3% or has is doubled to 6% because of leverage? Why?
6)	Any other recommendations. Any suggested reading?

Thanks in advance

bassmann


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## Nick Radge (5 May 2008)

> I currently use a fixed fractional method that has 5 equal size positions so a 100k account would have 5 * 20k positions when fully committed.




You don't have fixed fractional sizing if you have 5 equal positions.


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## bassmann (5 May 2008)

Thanks Nick, just reading up on this now. 

Please ignore the "Fixed Fractional' bit. Rest of what I posed is accurate for my system.

bassmann


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## Trembling Hand (5 May 2008)

bassmann said:


> What is the impact of risk per trade on a margined portfolio? For e.g. My account had a 50% LVR so my 100k account now has 200k available to trade. I trade 5, 40k positions with a 15% Stop. Is my risk per trade still 3% or has is doubled to 6% because of leverage? Why?



Margin should not be used to increase the size of your positions as you will increase the risk per trade(3% to 6%) unless you tighten your stop by half. Which you have indicated that you don't want to.


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## nizar (5 May 2008)

Trembling Hand said:


> Margin should not be used to increase the size of your positions as you will increase the risk per trade(3% to 6%) unless you tighten your stop by half. Which you have indicated that you don't want to.




TH, would it be right to say that a correct use of margin would be to enable you to take on more positions?


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## Trembling Hand (5 May 2008)

nizar said:


> TH, would it be right to say that a correct use of margin would be to enable you to take on more positions?




Yeah. It doesnt matter if you are trading CFDs with 5% margin or Stocks fully purchased you are still risking the same amount per trade therefore you purchase the same amount of shares per trade. (or change your system to find trades with tighter stops)

So margin enables you to trade MORE position rather than more quantity(shares) of the same trade. (correlated risk aside )


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## MichaelD (5 May 2008)

Woohoo! An intelligent post.



bassmann said:


> 1)	What is the relationship between position size and profitability of my system? What should I look at next?



a. Go to fixed fractional position sizing.
b. Reduce position size to 1% or even 0.5%
c. Add to winning positions by pyramiding, taking the position size up to 2 - 2.5% when fully pyramided.

You will find that your results will change very significantly even with simply implementing point a.



bassmann said:


> 2)	Is it ‘always’ bad to risk more than 2% per trade in all cases? Are there exceptions where this would be feasible, if so when? Should I be concerned about 3% in my system or am I over-reacting?



Yes you should be concerned.

As position size increases, your risk of ruin becomes significant due to the sheer size of a given position. Once you get over 25% of your capital allocated to a single instrument, you become very vulnerable to black swan events.

You should set a maximum position size % to limit your exposure to one instrument - eg never expose more than 15% of your capital to one instrument.

Most books suggest 2% risk per trade and maximum 25% per instrument. I find these risk limits too high, and personally use 0.5% and 15%.

" Beginners will see 2% and think "so little!" and professionals will see 2% and think "so much!" "



bassmann said:


> 3)	Does anyone have any suggestions on what I can look at to reduce my risk beyond what I have described above? i.e. Different technique etc.



Explore pyramiding as mentioned above. It's much more challenging psychologically to trade as you get much longer runs of losers, but the losers are much smaller and the winners when they come are much bigger. The nett result is in favour of pyramiding.



bassmann said:


> 4)	The above focuses on risk per trade. Am I correct in assuming that changing the number of positions does not alter the overall portfolio risk should the market tank. For e.g. 5 * 3% = 15% portfolio risk vs. 10 * 1.5% = 15%.



Correct, but the market rarely tanks evenly, and a diversified portfolio suffers less drawdown than a concentrated portfolio.



bassmann said:


> 5)	What is the impact of risk per trade on a margined portfolio? For e.g. My account had a 50% LVR so my 100k account now has 200k available to trade. I trade 5, 40k positions with a 15% Stop. Is my risk per trade still 3% or has is doubled to 6% because of leverage? Why?



Your risk has doubled. The amount available to you with leverage is NOT the amount you use to calculate risk. You ALWAYS calculate risk on your base capital.

Your risk exposure is basically the maximum amount of YOUR capital that you are prepared to lose at any one time should all your stops get hit at the same time.

If you define your maximum risk exposure as 15%, and fully committing your capital exposes you to 10% risk, then you can use leverage to increase your risk exposure up to your predefined limit. That is the smart way to use leverage. You will note that using leverage this way never even comes close to the margin limits.

WARNING: A prudent trader is not likely to use leverage for at least 2-3 years. If you feel even the slightest twinge of regret at closing a position that has hit its stop loss then you are not ready for leverage. On the other hand, if it is simply illogical to you to not take a stop when it is hit, then you are probably ready to use leverage.



bassmann said:


> 6)	Any other recommendations. Any suggested reading?



Van Tharp - Trading Your Way To Financial Freedom

This introduces the concept of your risk per trade being defined as R, and your maximum risk exposure as an R-multiple. It is much more efficacious to consider risk in R-multiples than in % figures.

At a system level, ultimately, the maximum risk you are prepared to expose yourself to is directly related to the maximum drawdown that you are prepared to tolerate.


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## MRC & Co (6 May 2008)

Good post Michael in answering those questions.

On the maximum %s, I also find most books too risky for me, I prefer 0.5-1% and 15% as maximums, but this definately comes down to your own personality.


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## tech/a (6 May 2008)

> *SIMULATION OBESERVATIONS*
> I have compared results from 2 to 15 and found;
> • Win/Loss ratio does not change much until 5 or less positions where it begins to increase.
> • System profit is cut in half when increasing positions from 5 to 10.
> ...




*Strongly indicates* that your system is profitable due mainly to one or 2 trades which could be viewed as outlier moves.
Remove the top 3 best trades and the worst 3 trades then look at your result. Less than satisfactory??



> 4) The above focuses on risk per trade. Am I correct in assuming that changing the number of positions does not alter the overall portfolio risk should the market tank. For e.g. 5 * 3% = 15% portfolio risk vs. 10 * 1.5% = 15%.




Read up on Portfolio heat.

*I'm sure you'll find your system has serious problems with regard to consistent profit*. I would suggest your equity curve is less than smooth.
Have you run this through Montecarlo analysis to see the standard deviation of results? This is where you'll see clearly my suspicions.

How many trades were taken?

*Nizar*
Correct use of margin is highly correlated to correct calculation of Fixed Fractional Position sizing.


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## bassmann (6 May 2008)

Thanks to all that have replied so far. 

*MichaelD*
Lots of leads for me to investigate, all makes sense, next I will go off and do some testing / reading over the next few weeks which is bound to provoke further questions. 

I also thought of trading 2 non-correlated systems but in the same market (i.e. ASX), e.g. a long trending system (my current one) and say a mean reversion system to reduce my market risk. Only thing is the 2nd system is still in development.

*tech/a*
I have re-run my backtesting without the best 3 / worst 3 trades. This does reduce the profit but it is still very satisfactory (i.e. I will continue to trade it).

SIMULATIONS (excl outliers)
The simulation starts from 1/01/06 to present with 157 trades processed.
I've run my simulation with 'Equal Dollar Units' and 'Pyramid Profits'. The equity curve is quite linear and picks up 139 trades.

Also run with 'Equal Percent Dollar Units' and 'Pyramid Profits' and its EC is smooth expotentially and picks up 66 trades.

MONTE CARLO
Ran a MonteCarlo, and the Profit STDEV on Equal Dollar Units is 2% of mean profit and 4% on 'Equal Percent Dollar Units'. Is this reasonable over 10,000 permutations? What would be a sound target? The % winning only changes by 2% and drawdown is fairyly consistent as well.

MONTHLY PROFIT
How even should my monthly profit be? How would one quantify this? The monthly profit varies a bit however there are only 3 losing months from jan-06to present. The months with zero profit represent when the system has switched off (i.e. market gone bearish). This feels reasonable to me considering the level of volitility is recent times.

My own conclusion is the profits are fairly consistent, but maybe I'm not considering the right metrics. Any thoughts?

bassmann


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## tech/a (6 May 2008)

> • System profit is cut in half when increasing positions from 5 to 10.




Well I'm at a loss.
the only reason I can figure for a 50% decrease in profit with a 100% increase in number of positions is that the trades added were losers---big ones.
The 2% deviation in montecarlo sims doesnt compute taking the statement above into consideration.

Anyway if your happy with it keep on keeping on.


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## bassmann (6 May 2008)

As a next step I have run tabulated 4 simulations of my system (both sim and monte) as follows (see attached summary);

*Simulations*
1) Fixed Dollar, 5 equal positions
2) Fixed Dollar, 10 equal positions
3) Fixed Dollar Percent, 5 equal positions
4) Fixed Dollar Percent, 10 equal positions

The idea being 1 compares to 2 and 3 compares to 4. I have also removed the best 3 / worst 3 trades. 

*Observations*
1) The profit change is reduced without outliers but is still a factor of 1.46:1 moving from 5 to 10 positions. 
2) Scenario 3 (Fixed $ %, 5) has the lowest number of trades. Maybe my system does not have enough signals, so when I run 5 positions a greater % of my money is in the market and greater % of the time explaining increased profit.
3) Scenario 3 also has the greatest drawdown so my main focus needs to be managing my risk.

Running the above will be a good base for me to compare results when I try the suggestions you have all contributed.

Regards,

bassmann


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## tech/a (6 May 2008)

Why have you not included brokerage.
100 trades at $25 in and out = $5000 hows that effect your bottom line?


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## nizar (6 May 2008)

Bassmann and others.

I have attached an Excel file which may be of interest to you.
Looking at the relationship between Percent risk and Profit and also Percent risk and CAR/max.DD.


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## bassmann (6 May 2008)

hi tech/a - didn't include brokerage because I got halfway through and realised I had it switched off. I usually factor 0.12% of turnover this typcially is not a problem for 100 trades over 28 months on a medium account size.

hi Nizar, I assume this is off your system. 

1) The best return here of 41.8% is based on 2.5% fixed risk.
2) 0.5% Fixed Risk produces lowest drawdown
3) 1.5% fixed risk offers the best ratio of DD to CAR.

I think I know where you are going with this. Back to more testing.

Bassmann


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## howardbandy (9 May 2008)

Greetings all --

In my opinion, THE expert on money management is Ralph Vince.  He has published at least four books, the most recent of which is "The Handbook of Portfolio Mathematics."  Amazon carries it:
http://www.amazon.com/Handbook-Port...=sr_1_1?ie=UTF8&s=books&qid=1210284037&sr=1-1

He has three earlier books, all are excellent.

Thanks,
Howard


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## GreatPig (9 May 2008)

Hi Howard,



howardbandy said:


> THE expert on money management is Ralph Vince.



I just had a look at his books on Amazon. Is it possible for someone without a PhD in statistics to understand them? They look pretty high-powered.

Cheers,
GP


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## howardbandy (10 May 2008)

Hi GP --

There is some math, but nothing too scary.  Being reasonably comfortable with algebra is necessary.  Some background in probability and statistics will help.  There is very little calculus.  

Thanks,
Howard


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## bassmann (10 May 2008)

Hi there,

As part of my money management project, I also wish to revisit my stops.

Can anyone recommmend any books dedicated specificially to stops. Heavy reading is ok by me.

Bassmann


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## howardbandy (11 May 2008)

bassmann said:


> Hi there,
> 
> As part of my money management project, I also wish to revisit my stops.
> 
> ...




Hi Bassmann --

Based on my research, the best way to exit from a trade is through a signal.  That signal might be based on the same logic that caused entry to the trade with the same parameter set, but in the opposite direction.  Or by the same logic but with a different parameter set.  Or by a completely different signal.

The second best way to exit depends on whether the typical holding period is long -- a few weeks or longer -- or short.  If it is long, then consider a trailing exit (trailing stop) such as chandelier or parabolic that follows along below the trade and protects profit.  If it is short, then consider a profit target or timed holding period.  Neither timed holding periods nor profit targets work well with long holding periods; trailing exits do not work well with short holding periods. 

The final way to exit a trade, and the least desirable one with the poorest performance by far, is the maximum loss stop.

Whichever ways are used to exit, and a system may have more than one, be certain that each is tested independently, occurs often enough to be at least somewhat statistically significant, and passes reasonable tests of significance.  Be particularly careful to avoid selecting exits that are tuned to specific historical situations rather than general conditions.

Remember -- only out-of-sample results have value in estimating the future performance of a trading system. 

Thanks for listening,
Howard


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## Trembling Hand (11 May 2008)

howardbandy said:


> Based on my research, the best way to exit from a trade is through a signal.  That signal might be based on the same logic that caused entry to the trade with the same parameter set, but in the opposite direction.  Or by the same logic but with a different parameter set.  Or by a completely different signal.





howardbandy said:


> The final way to exit a trade, and the least desirable one with the poorest performance by far, is the maximum loss stop.




Howard I not with you on this one 

If you have a signal that is priced based then they can be the same? Both a signal and and a stop loss. Or are you saying that that is really just a signal?

And as a purely discretionary trader that has started to play around with system development I have come up with some ideas that are greatly improved by having a Max stop. Here is an example. Lets say I have a system that trades intraday based on the longer term trend/swing (10-20 day) so I enter at the open and exit at close OR maximum stop. The system with the stop has a 40% better profit than without over 300 days because it reduces the worst 50 losses.


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## nizar (11 May 2008)

Trembling Hand said:


> And as a purely discretionary trader that has started to play around with system development I have come up with some ideas that are greatly improved by having a Max stop. Here is an example. Lets say I have a system that trades intraday based on the longer term trend/swing (10-20 day) so I enter at the open and exit at close OR maximum stop. The system with the stop has a 40% better profit than without over 300 days because it reduces the worst 50 losses.




Interesting observation.

For me, i couldnt find an initial stop that improved my system in any way (profit, drawdown, equity curve, etc) and I tried several.

In the end, I just made initial stop = the trailing exit because I wanted to use fixed percent risk for position sizing.

I agree with Howard that stops hurt systems and are the worst kind of exit, but as he has said in the past, this doesnt mean you shouldnt have them.


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## MichaelD (11 May 2008)

nizar said:


> I agree with Howard that stops hurt systems and are the worst kind of exit, but as he has said in the past, this doesnt mean you shouldnt have them.




If you ask me, the worst kind of exit for a system is the "bottom drawer" exit (aka the "it's a good company" stop).


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## Frank D (11 May 2008)

Bassman,

3% stop loss!

So why haven’t you factored in your % profit?

Most system traders would find it hard to get a Risk: loss to 3:1

So if your stop is 3% are you happy with 7-10% profit per trade.

Why don’t you partial exit your trade into 2 lots to maximize reward?

 Initially take the first target (first portion), and let the 2nd part of the trade run


Developing a trend based system on CBA and BHP, why do you need stops?

On average the markets compound every year 10-12%, so why place a stop on a company like CBA or BHP.

Having those stocks in the bottom draw for 20 years will make you more than not having those stocks.

The argument needs to be taken into context with what is traded, how it’s traded, and timeframe of the trade: - leverage or not.  How large the position and how you manage winning trades and not just losing trades.

Are you trading leverage or not?

A trader with capital limitations because of their account size will need stops, especially trading leverage.

As an investor looking at the long term, and the fundamentals of the company they don’t need stops.

Take CBA for example; what stops should be used for CBA?

Maybe when they stop paying dividends.

You just can’t throw a blanket over the entire topic and say you need stops or you don’t need stops, unless trading leverage.


If you have a 50% LVR on your margins, you’ll get a margin call on a drop of about 30% of your portfolio. 

You could actually buy a put call over your stock holdings to hedge your positions.

Everything is pretty manageable.


Personally I don’t know why people spend their time trying to develop systems. I know people try and convince me that back-testing is the silver bullet, but it’s so misleading.

Build a trending system and markets become trend-less. Build a swing system and markets trend and frequency drops. Whatever system you develop it will work for some time, and it will stop working some time later.

Learn to chart read effectively and flick systems in the dustbin where they belong.


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## nizar (11 May 2008)

MichaelD said:


> If you ask me, the worst kind of exit for a system is the "bottom drawer" exit (aka the "it's a good company" stop).




LOL haha, yeh i cant argue with that.


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## nizar (11 May 2008)

Frank D said:


> Learn to chart read effectively and flick systems in the dustbin where they belong.




LOL what a funny guy


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## wayneL (11 May 2008)

nizar said:


> LOL what a funny guy



You can LOL when you're a better trader than Frank, but until then,laughing at Frank just makes you look a fool.


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## Frank D (11 May 2008)

Nizar

Honest question...

Do you know how to chart read the market?


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## tech/a (11 May 2008)

> 3% stop loss!
> 
> So why haven’t you factored in your % profit?
> 
> ...




Frank that's not it!
That's capital risked /Trade not R/R.
8-12:1 (Average) we all have outliers-- for long term trading systems isn't un common.
33% win rate isn't un common either.

There is a place for everything.
Designing systems will teach you a heap about what will work in discretionary trading and whats likely not to.
You'll learn a lot about mechanisation and you'll be frustrated by the in flexibility that Systems trading by design hands you..
*BUT* you'll play the tortoise and most likely survive where most un trained discretionary traders will perish.

You'll learn trade management and the importance of each aspect of a trade from entry to management to exit. You'll dissect more trading ideas and plans then most discretionary traders will even dream up. You'll know to dismiss more than you accept and that which you accept wont be because its a good hypothesis.

But after many years of trading systems and designing them I finally bow to those who are competent discretionary traders who in times of uncertainty and lack of sustained trends (years) have demonstrated through both practical application and now through my own experience---that this is (Discretionary Trading) a truly profitable and viable trading style.


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## nizar (11 May 2008)

wayneL said:


> You can LOL when you're a better trader than Frank, but until then,laughing at Frank just makes you look a fool.




I didnt say I was a better trader than Frank.
But you shouldnt dismiss other methods when you dont understand them.
There is more than 1 way to make money in the market.
You should know this Mr. Moderator. So should Frank.


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## nizar (11 May 2008)

Frank D said:


> Nizar
> 
> Honest question...
> 
> Do you know how to chart read the market?




Regardless of whether or not I can chart read the market, it would be incorrect for me to say that charts belong in the dustbin, they way you said about systems.

There are many people who read charts and trade discretionary and clean up and there are others who trade using systems and clean up.

*It is foolish to dismiss another idea just because its not your way of trading.*


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## vciscato (11 May 2008)

bassmann said:


> Hi there,
> 
> As part of my money management project, I also wish to revisit my stops.
> 
> ...




Hi,
One of the best books on money management which includes stops is : The Aggressive Investor by Colin Nicholson. 

From your earlier quote on % of capital per trade, I do think you are taking on too much risk from the levels you quoted. I use 6% of allocated capital as the maximum for each trade. Some trades I only allocate 3%, but never go past 6%. I find from experience that managing about 20 stocks when fully invested is about right. To do the maths 6% of capital will allow purchase of 17 stocks. 

The risk per share or trade is 1% of allocated capital as maximum. I normally try and keep this down to 0.5% it depends on what you are comfortable with. I have found this has worked for me.
cheers,vic


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## Frank D (11 May 2008)

Nizar,

Don’t get your knickers in a not…

The fact is most don’t know who to chart read effectively so they have to rely heavily on the indicators that they use to trade with. There is no right or wrong answer to the question. Whether you can or you can't isn't important.

Personally I can chart read effectively so I don’t need a system to tell me when to enter trade. But I do need to know how to manage the trade.

As long as I know my money management, trade management and my 'end result'.

When building systems why not instead put the end result first?(monetary reward) and then try and build the system around that.

I  have $20,000, and I would like to make %5 per month.  Or I have $20K and I would like to make 5% per week.

Just those two scenarios will need two different systems, and completely different 'trade' management techniques.

If I want to make 50% on my account, do I have to trade 100 times a year or  can I only 4 times a year?

The trader might actually realize that he or she might only need to trade 8 times per year to achieve the monetary reward on the account, than trying to build a system that triggers 100 times per year.

That was the point in asking how much are you happy with if risking %3 per trade?  Do you want 7-10% or much more as an end result.

For many, systems usually start with price based indicators, which then try and achieve the greatest expectancy and profit ratio. A tweak here and a tweak there can increase the results favorably. After they build the system they then optimize it with money management techniques.  Often what looks great in backtesting, often doesn't work in live trading.


You know I built the world's best price-indicator based systems when trading Index futures, and two weeks later they were the world's worse......


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## WaySolid (11 May 2008)

howardbandy said:


> The final way to exit a trade, and the least desirable one with the poorest performance by far, is the maximum loss stop.



I found this comment interesting as well, are you able to expand on it Howard?

I view them as terrible things but am yet to find a better alternative to having them in place and exiting a decent (far too large sadly) % of my trades using them. 

If you are exiting a losing position with anything other than a predetermined exit then I would ask why that exit isn't a potential SAR as well.


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## howardbandy (11 May 2008)

WaySolid said:


> I found this comment interesting as well, are you able to expand on it Howard?
> 
> I view them as terrible things but am yet to find a better alternative to having them in place and exiting a decent (far too large sadly) % of my trades using them.
> 
> If you are exiting a losing position with anything other than a predetermined exit then I would ask why that exit isn't a potential SAR as well.




Hi WaySolid --

There are more flames and heat in this thread than I am comfortable with.

My comment comes as a result of testing systems.  

Given that a trading system has a method for entering a long position, each of the exit techniques can be evaluated independently.  

See if the logic that gave the signal to enter a position also gives information about when to exit the position.  For example, if the trade is entered on a moving average crossover, see if there is an equivalent exit.  If the system entered because the entry date is a certain time of the month, see if there is a time of the month that you do not want to be long.

If the system is intended to hold just a few days, try using a timed exit or a profit target.  The system might buy on an extreme oversold condition.  Try selling after one day or two days.  Or selling when the trade has a 1% profit or 2% profit.

If the system looks for trends that last for several weeks, it is difficult to set profit targets of timed exits without picking values that fit specific events that occurred in the history.  You might get better results by using a trailing exit -- the chandelier exit that moves the exit point up as the price rises is a good one.

If the trade goes against your position without ever becoming profitable, there must be some way to exit the trade.  If the system has no other method, then the maximum loss stop is the last resort.

My point is that it is better to design intelligent ways to exit rather than allow the maximum loss stop to be hit regularly.

Should an exit from a long position be an entry to a short position as in SAR (Stop And Reverse)?  Maybe, but it depends very much on what that trading system does.  A system that looks for extreme overbought or oversold conditions and holds only a few bars would not be a good candidate to be SAR.  A long term breakout system might be.

Thanks for listening,
Howard


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## It's Snake Pliskin (12 May 2008)

howardbandy said:


> Hi WaySolid --
> 
> There are more flames and heat in this thread than I am comfortable with.
> 
> ...




Thanks for the perspective Howard.


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## It's Snake Pliskin (12 May 2008)

Frank D said:


> Nizar,
> 
> Don’t get your knickers in a not…
> 
> ...




Thanks for your input and perspective Frank.


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## It's Snake Pliskin (12 May 2008)

nizar said:


> *It is foolish to dismiss another idea just because its not your way of trading.*




In part this could be wrong, but worthy of a bigger discussion.


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## wayneL (12 May 2008)

nizar said:


> I didnt say I was a better trader than Frank.
> But you shouldnt dismiss other methods when you dont understand them.
> There is more than 1 way to make money in the market.
> You should know this Mr. Moderator. So should Frank.



You're shifting the goalposts dude. That was never the point.

You LOLing at Frank is like a Clydesdale LOLing at Secretariat.

The truth is that a proficient chart reader will outperform a mechanical system. It may be rarer, but that doesn't alter the truth.

One need look no further than your mechanical results as posted on your blog. A decent chart reader makes money while your system is suffering a calamitous drawdown. You may become profitable someday, but meanwhile, it's business as usual for the likes of Frank, Nick et al.

"But you shouldnt dismiss other methods when you dont understand them."

By this comment you have been hoist by your own petard... think about that Nizar.


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## MRC & Co (12 May 2008)

Some fantastic stuff here fellas.  

One question, have any of you tried over any decent length of time, exiting a position if the trade does not go in your favour within a couple of days?  (was it Jesse Livermore who used to do this?).

I personally found my most successful period came when doing this, I initiatied only 20 trades over a 3 month period and made a profit of just over 30%.  Wish I could compound that over a year or two 

Since, I have been using a traditional initial stop based on chart patterns (below a double bottom, support etc) and do not exit until either the stop is hit or the position moves in my favour before I adjust that stop, however I find this far less profitable (maybe simply due to volatility and now being a time where very short, high frequency trades are going to make you the $$ IMO).  However, over the past week I have moved back to my initial exit strategy.

Any thoughts?


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## It's Snake Pliskin (12 May 2008)

MRC & Co said:


> Some fantastic stuff here fellas.
> 
> One question, have any of you tried over any decent length of time, exiting a position if the trade does not go in your favour within a couple of days?  (was it Jesse Livermore who used to do this?).
> 
> ...




Momentum and lack of momentum = apples and apples

Momentum and time = apples and oranges


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## sleepy (12 May 2008)

howardbandy said:


> My point is that it is better to design intelligent ways to exit *rather than allow the maximum loss stop to be hit regularly*.




This approach is advocated by Curtis Arnold and Nick Radge and again highlights the importance of *Managing the Trade*.

For example, in Nicks Power SetUps very few of the stocks that are closed out hit his original stop loss (i.e, maximum loss).



MRC & Co said:


> One question, have any of you tried over any decent length of time, exiting a position if the trade does not go in your favour *within a couple of days*?  (was it Jesse Livermore who used to do this?).




Again both Curtis and Nick recommend *defending an open position* (i.e, moving the original stop if possible) if it doesnt move in a positive fashion (i.e., higher closes) in the first *4 days*.


sleepy


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## MRC & Co (12 May 2008)

Yeh, I see Nick does it, which is pleasing.  

Wanted to know how many others apply the same logic as I have read many who say leave your initial stop in place to give it time to move, but this appears to be counting on more luck and you being right, as opposed to getting on momentum (or a change thereof) or a breakout/breakdown, which is what chart reading is all about afterall. 

I definately know which one I have found more successful.

Just another example is last week I initiated 7 trades, 3 did not move my way and I got out with practically no loss on 2 and was stopped out on 1, 4 did move my way and are up by an average of about 5% each in just 4 days.  Not much and definately far from done yet, but it is a far more positive position to be in than with dogs lingering around my initial stop offsetting those running away.

Cheers


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## Timmy (12 May 2008)

MRC & Co said:


> Some fantastic stuff here fellas.
> 
> One question, have any of you tried over any decent length of time, exiting a position if the trade does not go in your favour within a couple of days?  (was it Jesse Livermore who used to do this?).....
> 
> ...




MRC - I do have some thoughts on this approach, not original, but thoughts I have found useful so I will spout them here if OK.

Basically the philosophy is that, having entered into a position, the price must move to prove the position right in order for the position to be held.  The idea is that the market must behave (price move in my favour) to show the position is 'right'.

This is a different approach to setting a stop and letting the price action either take it out or go into profit.  In this approach the market (price) is allowed to move to show that the position is 'wrong'.

I am not sure if I have explained it well but the first approach comes from an assumption that I must see confirmation from the market to allow me to hold the position.

The second approach I am assuming the position is right and then allowing the market to prove the position is wrong.  The difference between the two approaches is subtle but very important (at least to me).  I hope I have made sense.

In summary - I think your approach of not giving the position time, but requiring that it perform and thereby confirm your position is the correct approach and one I use too.


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## MichaelD (12 May 2008)

Frank D said:


> Developing a trend based system on CBA and BHP, why do you need stops?




'Cause CBA was $62 6 months ago whilst in a long term uptrend with no end in sight and then got down as low as $37.


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## nomore4s (12 May 2008)

Timmy said:


> MRC - I do have some thoughts on this approach, not original, but thoughts I have found useful so I will spout them here if OK.
> 
> Basically the philosophy is that, having entered into a position, the price must move to prove the position right in order for the position to be held.  The idea is that the market must behave (price move in my favour) to show the position is 'right'.
> 
> ...




I understand what you're saying Timmy, I think lol:

To me it depends on the type of signal & timeframe you're using to trade with.

If you're using some form of breakout set up like Nicks power set ups, you want the position to move in your favour straight away, especially if using shorter time frames.

But if I'm using (for example) a Wyckoff set up over a longer time frame (different magnitude of move) I'm willing to let the stock prove me wrong. E.g - Buying off a No.3 spring or at a last point of support, as the stock may take a bit longer to move but when it does I want to capture a larger portion of that move - I don't want to be shaken or scared out too early :


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## Timmy (12 May 2008)

nomore4s said:


> I understand what you're saying Timmy,




That's a relief ... now if you could just explain what I said to me ... LOL


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## MRC & Co (12 May 2008)

Yes, refer to my post above Timmy.    I was basically stating what nomore4s said, if reading the charts and looking for a breakout, the position should move practically instantly, further, especially this is particularly relevant for shorter timeframes, of which I see as critical in this type of environment, as stated earlier also.

Seems logical to me and is what I have used with the most success, that's why it was good to see someone both successful and more experienced back up my sentiments (as stated in Adaptive Analysis which is what I guess you are referring too Timmy).  Wondering how many other seasoned campaigners, Frank, Wayne etc use the same technique......


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## Timmy (12 May 2008)

MRC & Co said:


> Seems logical to me and is what I have used with the most success, that's why it was good to see someone both successful and more experienced back up my sentiments (as stated in Adaptive Analysis which is what I guess you are referring too Timmy).




Actually, I first read about the idea from the Phantom of the Pits (PDF doc attached).


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## MRC & Co (12 May 2008)

I have heard of the Phantom.  Thanks for that PDF mate.


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## Frank D (12 May 2008)

Michael,

who the F sake is going to BUY CBA around $62....

don't take to comment out of context....it was about investing over 20years 

run stops if you are trading leverage on CBA and take profits on leverage around channel highs each year...

Long term investing:- accumlate CBA around higher timeframe levels every year on pullbacks.


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## WaySolid (12 May 2008)

Howard, I will need to think about this a bit more. I understand the logic of the idea that the maximum stop is the worst way to exit a trade; though I have never personally found a better way to exit with my trades that are in loss making position. 

The following is all concerning trades in loss (<0 R)

Take a system with profits set at 3R, I'm loathe to close these trades between 0 and -1R except MOC (day trading) as the upside is much larger than the downside at these points, I would be much more inclined to choke a trade when it's up 2R than down 0.5R, confirming the addage that you should chop your winners and let your losers run. If you have some value adding skill closing a loser <0R and have edge tested your exits then I'm thinking that's a stop and reverse trade, otherwise let them run.

Some interesting things my numbers tell me, that you don't tend to read about that much.

1) On short term systems (No positions held O/N) profit targets can work very well.
2) I'm yet to find a trailing stop idea that adds value.


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## howardbandy (12 May 2008)

Hi WaySolid --

For your positions that hold a fairly long time, look at the Chandelier Stop.  

For a Long position -- 
Use either the highest high or highest close as the anchor point.
Decide on some measure to determine how far from the anchor point you want your trailing exit to be.  2 * ATR(14), for example.
On the entry bar, set the exit point.
On every subsequent bar, raise the exit point if it is higher than the previous value, otherwise leave it alone.
Exit intra-bar when the Low is lower than or equal to the exit price.

Here is the code for the AmiBroker development platform, taken from my book:


//	ChandelierStop.afl
//
//	The Chandelier Stop is a trailing stop that rises
//	as the price rises, with the distance between the
//	price and the stop determined by the volatility
//	of the price.  
//	Volatility is measured by Average True Range.
//	The chandelier is "hung" below either the highest
//	high or the highest close.
//
SetTradeDelays(0,0,0,0);
BuyPrice = C;
SellPrice = C;


//	Use a moving average crossover to generate the Buy signals.
MA1 = MA(C,5);
MA2 = MA(C,25);
Buy = Cross(MA1,MA2);

//	ATRRange is the number of bars used in the 
//		calculation of the ATR.
ATRRange = 10; //Optimize("ATRRange",5,1,30,1);

//	ATRMult is the number of ATRRanges below 
//		the highest value to place the stop.
ATRMult = 3.0; //Optimize("ATRMult",2,0.5,5,0.25);

//	Trail the exit from the highest High 
//		-- it could be the highest Close.
TrailPrice = H;

//	Compute this bar’s Chandelier Exit Price.
ThisBarsExitPrice = TrailPrice - ATRMult*ATR(ATRRange);

//	The trade’s exit price is the highest 
//		of the bar’s exit prices.
TradeExitPrice = HighestSince(Buy,ThisBarsExitPrice,1);

//	Sell when the price drops to the CurrentChandExit.
//	If there is a Stop Order in place during the day, 
//		use L as the triggering price.
//	If there is not an intraday stop, 
//		use C as the triggering price.
TriggerPrice = L;
Sell = TriggerPrice <= TradeExitPrice;

Buy = ExRem(Buy,Sell);
Sell = ExRem(Sell,Buy);


shape = Buy * shapeUpArrow + Sell * shapeDownArrow;
Plot( Close, "Price", colorBlack, styleCandle );
Plot(TradeExitPrice,"Chand",colorRed,styleLine);
PlotShapes( shape, IIf( Buy, colorGreen, colorRed ), 
		0, IIf( Buy, Low, High ) );
GraphXSpace = 5;
//Figure 7.12 Chandelier Stop

Thanks,
Howard


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## WaySolid (13 May 2008)

Howard thanks for sharing, I used an ATR exit when I was trading ASX stocks (av hold time 14 days for me), here I think I was like all classical trend followers (no time stops) always letting the market take me out of a trade and never trying to pick a top. It was very important to catch my fat tails when I wasn't turning over my capital that quickly, now I have discovered faster time frame trading a whole new universe has opened up for me.


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## bassmann (24 May 2008)

Hi all,

I’ve been researching & testing everyone’s recommendations the last few weeks as I think it’s only fair I do so before coming back and asking for further advice.
Just thought I would give an update of where I am at, remember my aim here is too reduce my systems risk whilst maintaining (or near to) its profit characteristics.


*Reading *
MichaelD - currently reading Van Tharp as you suggested and about 2/3rd of the way though. Finding the reading is at the right level for me and is confirming things I already do whilst highlighting things I am not in a structured manner. Much for me to cover off here in the coming months and I would recommend for others.
•	The first area to look at is to measure my system as Tharp prescribes in the earlier chapters. 
•	The second being to look at the components of my system that are ‘Setups’ vs.’Entires’ since I have not thought of it this way before. I haven’t completed the section on Entries yet, but at this point my takeout is my own system has a good setup and lacks an Entry since my setup is my Entry. If I can refine this I can potentially Enter closer to my stops and reduce Entry Risk.

HowardBrandy - Ralph Vince is on the reading list as well.



*Risk*
We’ve had previous discussions around Risk per Trade, Portfolio Risk and touched on how to use margin with Risk. I’m working on a model to work out ‘What Ifs’ based on this idea. 
One question I have is, do people use Portfolio Risk theory just for position sizing and let there exits manage the trade, or do the Risk rules hold true for open trades as well? If so, does it apply to losing, winning trades and/or both? My gut feeling is it should apply Risk to cover your initial risk and protect profit. 

But this brings about the following issue. 
What if there is a big move on one stock in the portfolio, say 50% in a day.. If you work on a principle of 2% risk this may increase substantially and would suggest an exit. This goes against the principle of cutting losses short and letting profits run.

Alternatively, do a different set of rules apply to manage Risk on open trades?
Interested to hear others thoughts on rules for managing risk once in the market.



*Stops*
The stop in my system is volatility stop based of my own making. It has smoothing built into both the Stop and the Trigger (i.e. 10 day smoothing of the Close) and does not allow intraday exits, so a Close below the Stop may will not cause and exit. It’s also based on High for X days. I am using this as the initial stop and profit stop. I’m sure many of you think may be thinking smoothing and the accompanied lag are ultimately increasing my risk (and they probably are), but no matter what I try I cannot get better results with more commonly available methods. 

I did try adding a % based initial stop to act as an absolute floor for a worst case scenario that would trigger intraday. This did not provide any value to the system so I have dropped this tact for now.

I noticed that quite often my Stop tightens a few days into the trade (lag inevitable caused by smoothing), especially if the breakout was substantial. This means the high risk I have on entry is short term and may cause Fixed Fractional sizing to calculate incorrectly.


Position sizing
I have done further position size testing on Fixed Position sizing and Fixed Fractional sizing. In each case I have factored brokerage and excluded outliers (best 3/worst 3 trades) and I have simulated at different risk levels.

The results on my system show that Fixed Position sizing gives better results than Fixed Fractional sizing. 
Additionally, to my earlier point, 5 fixed positions vs. 10 fixed positions give far superior results again. Month by month profits are evenly distributed and DD acceptable. 
Both conclusions are based on the system CAGR, DD and PF.
Despite this my system theoretically carries much higher risk than what my reading and you guys recommend as managed.

The whole theory around Fixed Fractional makes sense to me as so I need to unravel why its not for my system. I have narrowed this down to 3 issues.

1)	Time in the Market - My system has an on/off status which over the long-term is on about 66% of the time (this would be less in the last 12 months given the environment). Of this 66% the actual days in the market is much less given time between signals and so forth. It you think about how this may impact 5 vs.10 positions in a Fixed Position size model it takes longer to generate 10 signals so I commit my capital to the market faster and increase inventory turns with fewer positions. This rationale seems to hold true if you are not in the market all the time. The net result is the effects on my CAGR.

2)	Fixed Fractional - Fixed Fractional is not working because to achieve my desired risk level, its creating too many positions and suffering from the ‘time in market’ issue in the point above but probably in a more managed way than say a portfolio of 10 positions.

3)	Stops – my method of calculating my stop may not be suitable for Fixed Fractional Sizing due to its lag effect from the smoothing. At the time position sizes are calculated the lag means short-term risk is large only to contract a few days later.


In my mind I am making significant progress here. The most important point being I now have a picture of what I am aiming for.
Any comments/feedback much appreciated.

Regards,

Bassmann


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## peter2 (24 May 2008)

Your research will give you a good understanding of what to expect using your system and it seems that this is important to you. All the research that you do will not prepare you adequately for what can happen when you actually trade. Strange things will happen when you start trading. 

Adequate preparation will allow you to trade your system correctly. Over analysis will make you doubt the effectiveness of your system and you won't trade it correctly. I think you are in danger of over analysing your system parameters. You can only minimise risk not eliminate it. In fact, you have to embrace risk to trade well. 



> do people use Portfolio Risk theory just for position sizing




IMO no, pos. sizing is determined by the individual trade risk (entry - SL). Portfolio heat determines the maximum number of open positions that are exposing your trading capital to risk. I do not include open profits in my calculation of P heat. 




> The results on my system show that Fixed Position sizing gives better results than Fixed Fractional sizing.




More risk gives you more rewards. If fixed pos. sizes gives you bigger profits then you are risking more using this model.


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## nizar (24 May 2008)

bassmann said:


> What if there is a big move on one stock in the portfolio, say 50% in a day.. If you work on a principle of 2% risk this may increase substantially and would suggest an exit. This goes against the principle of cutting losses short and letting profits run.




This doesnt make sense at all.
How does risk increase substantially if the stock skyrockets??

The 2% rule is the MAXIMUM loss of 1R that you are willing to tolerate on any trade (Of course due to slippage and/or opening gaps, you could (and will) potentially lose more than 1R). So its the worst case scenario.

If the stock significantly appreciates past your entry price (for example, up by 50% in one day), then your should have exited the trade OR your exit should have moved up. Actually there are possibilities as to what you can do here but this depends on your exit and your timeframe.

For me, I use a trailing exit, which follows the price upwards BUT then flatlines when the price declines, so I am protecting my equity as the trade moves in my favour. 

Contrary to what I have quoted from you above, A trailing exit is actually exactly how you cut losses short and let winners run.

An example of how my trailing exit works is shown on my blog on the first page.


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## PolarBear (25 May 2008)

Hi, 



> Howard:--  trailing exits do not work well with short holding periods




Howard, could you explain why you think this is - I'm particularly interested in whether this is the case (and why) for strategies based on scalping indexes.

thanks
Daniel


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## Trembling Hand (25 May 2008)

PolarBear said:


> Howard, could you explain why you think this is - I'm particularly interested in whether this is the case (and why) for strategies based on scalping indexes.




Daniel I suspect Howard is talking about a longer time frame than scalping with an indicator based system. Using the signal from the indicator to tell you to get out. (could you define your idea of scalping for us)

I have asked the same question because in testing have found systems based on price patterns that have been greatly improved buy stops but didn't get a response from Howard.


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## tech/a (25 May 2008)

I'm of T/H's thinking here.

Indicator trailing stops would logically be poor in my mind.

However Price/Range and or Volume based work well for myself.

But I havent tested this other than my own trading.
I suspect target exit are the best performing as there is no "give back"-----only in some cases lost "Potential" Profit.

Would be interested in Howards comments.


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## MRC & Co (25 May 2008)

tech/a said:


> I suspect target exit are the best performing as there is no "give back"-----only in some cases lost "Potential" Profit.




Exactly.  Has to be what Howard means.  

In short timeframes, you would not want to be giving back a few % of your winnings.  It would be very costly to your system.


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## bassmann (25 May 2008)

*Nizar* – I may not have been clear in my example on increased Risk following a large move so I’ll have another go. 
Using the same example I have a position that moves 50% in one day. I have a trailing stop to manage the position that moves up following the move. Now I’ll re-illustrate my example.

Account size is 100k and 20k goes into the position with a 10% stop, so at entry the RISK is 2%. 
The position moves 50% and is now worth 30k and account value increases to 110k. Let’s assume that the stop is still 10%, therefore new risk is (30*0.1)/110=2.7%, hence an increase of 0.7%.

I was wondering if there would be any special treatment given in the case since as if demonstrates the potential to be overexposed in a single position.
Peter 2 has indicated that Portfolio Heat is more important to his trading style than Risk per Trade and does not include open profits in the PH calc. On that basis no action would be necessary in this example.
*
Peter2 *– Can you clarify why you don’t include open profits in the Portfolio Heat calc. Don’t you wish to protect open profits as well as initial capital in the trade?

Interested to the view from others.

Since I did not state this previously, I thought I might add that I am currently trading this system.


Regards,

Bassmann


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## nizar (25 May 2008)

bassmann said:


> *Nizar* – I may not have been clear in my example on increased Risk following a large move so I’ll have another go.
> Using the same example I have a position that moves 50% in one day. I have a trailing stop to manage the position that moves up following the move. Now I’ll re-illustrate my example.
> 
> Account size is 100k and 20k goes into the position with a 10% stop, so at entry the RISK is 2%.
> The position moves 50% and is now worth 30k and account value increases to 110k. Let’s assume that the stop is still 10%, therefore new risk is (30*0.1)/110=2.7%, hence an increase of 0.7%.




Bassman.

The way I see it if your system is a short term one, the stop should NOT be static when the stock moves 50% in your favour.

If the system is longer term, then your backtesting would have allowed for this increased risk.

The fixed percent risk for position sizing is based on closed equity (at least in TradeSim it is) so in this sense you are still risking 2% on the trade.

But there are aggressive position sizing methods that are based on open equity.

What's important is that you trade as closely as possible to the backtesting program that you used to design the system.

Nizar.


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## tech/a (25 May 2008)

bassmann said:


> *Nizar* – I may not have been clear in my example on increased Risk following a large move so I’ll have another go.
> Using the same example I have a position that moves 50% in one day. I have a trailing stop to manage the position that moves up following the move. Now I’ll re-illustrate my example.
> 
> Account size is 100k and 20k goes into the position with a 10% stop, so at entry the RISK is 2%.
> The position moves 50% and is now worth 30k and account value increases to 110k. Let’s assume that the stop is still 10%, therefore new risk is (30*0.1)/110=2.7%, hence an increase of 0.7%.




No you only calculate risk to realised capital not open profit.Peak to valley (High of the portfolio total equity to the low of the total equity within a trading period) is known as Peak to valley drawdown.
Regardless of how much open profit you have if all positions crashed to your stop your total portfolio risk still remains at x%  if you liquidate then the calculations are based upon the NEW closed equity.



> I was wondering if there would be any special treatment given in the case since as if demonstrates the potential to be overexposed in a single position.
> Peter 2 has indicated that Portfolio Heat is more important to his trading style than Risk per Trade and does not include open profits in the PH calc. On that basis no action would be necessary in this example.




No action is correct.


> *
> Peter2 *– Can you clarify why you don’t include open profits in the Portfolio Heat calc. Don’t you wish to protect open profits as well as initial capital in the trade?
> 
> Interested to the view from others.
> ...




This is a totally seperate issue and one which you'll find a masterful balancing act. Giving positions enough room to correct whilst not giving back to much of open profit if the correction turns into a reversal.
For Discretionary traders this is part of their analysis skill set. For systems traders this is the setting of trailing stops to find an optimum---which will never be perfect but will encompass enough trades to strike a profitable balance. The discretionary trader will generally (if proficient) suffer less slippage of profit.

This is one of the reasons Howard Bandy suggests trailing stops arent helpful in short term systems. Price targets being the "Ideal".


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## MichaelD (25 May 2008)

bassmann said:


> What if there is a big move on one stock in the portfolio, say 50% in a day.. If you work on a principle of 2% risk this may increase substantially and would suggest an exit. This goes against the principle of cutting losses short and letting profits run.




The total % risk for your portfolio varies on a day-to-day basis. The 2% rule applies only at trade entry - this is the maximum amount of your initial capital you are prepared to lose with one given trade. If the trade takes off, great - you will have more than 2% of your capital between the current trade price and the stop loss, but this does not mean exit, this means move your stop up according to your pre-tested rules - a trailing stop will automatically do this.



bassmann said:


> I have done further position size testing on Fixed Position sizing and Fixed Fractional sizing. In each case I have factored brokerage and excluded outliers (best 3/worst 3 trades) and I have simulated at different risk levels.
> 
> The results on my system show that Fixed Position sizing gives better results than Fixed Fractional sizing.




These results are intriguing and contrary to all the work I have done/have read about in this area. I feel you need to figure out why this is so.

A suggestion;

 - Compare systems by normalizing the drawdowns so that the drawdowns are the same across all systems - then look at the other system parameters such as profit and number of trades.

If fixed sizing is giving you twice the profits with three times the drawdown compared to fixed fractional, then in fact it is a poorer performing system despite the extra profit.


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## peter2 (25 May 2008)

Bassmann: Protecting open profits is an individual trade management issue. As the trailing stop is above breakeven there is no risk to your starting capital with this trade. [I agree with Tech/a and MichaelD]

Just to clarify, I manage the risk in each trade primarily. Portfolio heat prevents me starting too many trades at the same time. If you start 5 trades at 2% then you will lose 10% of your capital if all trades are stopped out. What is the probability of you having 5 losing trades in a row? How are you going to handle this?

MichaelD, I agree. The only way fixed pos. sizing gets bigger profits than fixed fractional sizing is because the dollars at risk is greater (or the sample size is small).


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## howardbandy (26 May 2008)

PolarBear said:


> Hi,
> 
> 
> 
> ...




Hi Bear --

If you are using end of day data, and holding a few days, there is much less opportunity for the trailing stop level to catch up to the price, so the exit remains at the level it was set when the trade was entered.  Compare this with a holding time of a few weeks, where the exit price moves up as the trade gains profit.

For short term, particularly mean reversion, trades, try testing an exit that has three components:
1.  A signal.  If you bought oversold conditions, and the prices rises quickly enough to give an overbought condition, use that as an exit signal.
2.  A profit target.  Look at the historical results to see what the distribution of the maximum favorable excursion has been following the entry signal.  Set a profit target based on that.  Look for a profit target that gets hit about half the time, then vary that percentage as one of the optimizable parameters.
3.  A timed exit.  Look at the historical results to see the distribution of profit versus holding period following your signal.  Set an exit based on holding a fixed number of days based on that.

Exit the position when any of the three conditions is met.

As a second phase, you can combine all three and adjust the exits as the trade progresses.  But, with EOD data and holding of just a few days, there will not be much opportunity for adjustment or improvement.

If you are using intra-day data and holding a few days, then you might try parabolic or chandelier exits based on intra-day bars.

As always -- do your testing on whatever in-sample data you wish, but only results from out-of-sample data have value when estimating likely future performance.

Thanks,
Howard


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## WaySolid (26 May 2008)

PolarBear said:


> Hi,
> 
> 
> 
> ...



My own limited testing says that the the tail you seek in no way compensates you for the give back from letting the market always take you out.

If you introduce an automatic time stop, which by definition all day traders have then targets can work particularly well. 

I can't imagine how you could possibly use a trailing stop for anything related to very short time frame trading.

Just measure everything, as much time should be spent edge testing exits if not more in my opinion compared to entries.


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## nizar (26 May 2008)

WaySolid said:


> Just measure everything,




Well said, I agree wholly.

Instead of going with popular opinion, or with what you have read, just test everything.
Its the best way.


----------

