Fixed fractional position sizing in algo trading?

[Nameless_]

Hello,

I have a question I'm hoping to understand. With discretionary trading, you can use fixed fractional position size by calculating the risk because you already know where to put your stop loss based on previous support lines.

E.g. Calculate so you put your positions to risk 1% of your capital etc. You know where you are going to exit if the trade goes against you, hence can calculate how much to allocate.

With algotrading using Amibroker, how are we meant to position size? Essentially you don't sell until the system tells you to sell, but that also means that the stop loss changes per trade and you can't be sure you are allocating the right amount of money per trade?

Allocating based on fixed dollar doesn't seem as efficient to manage your trades though - not sure if there's another solution for algo trading?

 

[tech/a]

Just allocate a fixed % or $ value
Eg 1% or $200

 

[Nameless_]

Thanks tech/a! I guess it's discretionary trading really is about minimising risk and systematic trading is about sticking to the system!

 

[Trav.]

how are we meant to position size? Essentially you don't sell until the system tells you to sell

You can use whatever method you want in AmiBroker and the backtest feature helps you understand how this would have worked over the test period. I tend to stick with fixed position size for backtesting as it is easy to compare results with other systems, but you can select whatever style you want to try in the setpositionsize function

E.g. Calculate so you put your positions to risk 1% of your capital etc. You know where you are going to exit if the trade goes against you, hence can calculate how much to allocate.

So you can test your system with a Trail Stop in the market which will allow you to exit quickly (intraday) if you want, by setting sell delay to 0 and using the inbuilt applystop function

 

[Lone Wolf]

Fixed fractional position sizing works well for discretionary traders who decide on a good place for a stop loss and profit target based on the price structure. Then they decide if the risk/reward is good enough to be worth taking.

I think it's very hard in Amibroker to have the software accurately pick out your ideal stop level and profit target on any given chart based purely on the price structure. You could still use fixed fractional if you know your initial risk, such as a 20% trail stop, or 3xATR. It won't work for "when these two indicators cross over", because you have no idea what price level that might happen at. Even with something like 2xATR, on some charts that might result in a very wide initial stop, making the required profit level for good risk/reward too far away to be worth taking. It's far easier to just use a certain % of your portfolio per position.

You could use Amibroker to find suitable stocks that meet your criteria, then use your discretion to apply the stops. But that's not system trading.

Thanks tech/a! I guess it's discretionary trading really is about minimising risk and systematic trading is about sticking to the system!

I think I know what you mean to say. But you should still look to minimise risk while designing your system too.

 

[peter2]

Fixed Fractional position sizing is used more often in leveraged markets like futures, forex and CFDs.