Fixed percent risk position sizing?

[N1Spec]

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.

 

[skyQuake]

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

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.

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

 

[Mr J]

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.

 

[tech/a]

I know what fixed percent risk position sizing is

Well so far the replies arent my understanding.

 

[N1Spec]

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........

 

[Naked shorts]

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

 

[tech/a]

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

 

[beerwm]

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',

 

[N1Spec]

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??

 

[beerwm]

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??

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

 

[Kryzz]

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

 

[Mr J]

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.

 

[AMSH]

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.

 

[Wysiwyg]

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.

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).

 

[kam75]

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.

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.

 

[Mr J]

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?

 

[skc]

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).

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.

 

[howardbandy]

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

 

[tech/a]

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.

 

[Mr J]

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.