Fixed Fractional Positioning

[BentRod]

didn't expect that much though.

You weren't long were you Bog??

 

[tech/a]

The 3 bars previous to the large gap down show volume in selling.
But there is no way VSA or any other analysis could have seen a gap down like that.

However you would have been out of the trade and on the right side of the price action---meaning that if long you wouldnt have been exposed.

 

[sleepy]

For what its worth ... there were several signs of weakness (upthrust, upthrust, no demand, supply coming in) preceding its swan dive ... on the 15 min bars/chart.

sleepy

 

[Boggo]

You weren't long were you Bog??

I was actually since the 9th Jan but I really did a Houdini on this, I had a tight stop at 2.59 and was stopped out on Monday.
The low of the 22nd at 2.63 was my stop signal, I actually set it at 2.59 to allow it to move around at the 2.60 to 2.63 area but I thought if it broke 2.60 it could go lower.
I had it at 2.49 but I moved it up after the dodgy action on 29th

Had I left it where it was I would have been in more trouble than the first settlers, more ass than class really

 

[BentRod]

I was actually since the 9th Jan but I really did a Houdini

Glad to hear it Bog, nice escape from that one.

 

[Kryzz]

Having trouble understanding on what 'figure' you base your risk percentage on.
If i were to have a $20,000 trading a/c and i risk 1% thats 200 bucks obviously, what if $10,000 is already invested, do i still risk $200 per trade?? Or is it 1% risk of available capital??

Cheers,

Shaun.

 

[MS+Tradesim]

Shaun,

Probably the two most common ways to calculate it are:
1) cash + purchase price of open positions
2) cash + current value of open positions

To use your example, say your open positions are now worth 12,000 and your purchase value was 10,000. So....

1) 10k cash + 10K purchase value = 20k -> 1% risk = $200
2) 10k cash + 12K open value = 22k -> 1% risk = $220

For myself, I use a quick sale value. Just say I had to dump my stock to exit quickly and sell down through several price levels, what would my lowest exit price be? Thus for me, cash + quick sale value = equity.

The reality is, any of these methods are elastic as obviously prices are moving, unless you are calculating everything on EOD. Just use a method that you're comfortable with as it's never going to be perfect.

 

[Kryzz]

Thanks for the reply MS, cleared it up for me.

 

[pavilion103]

I'd be interested to hear how some other calculate their Fixed Fractional Position Size.
- At the end of each day?
- At the end of each trade?
etc....

 

[tech/a]

Position sizing is calculated at the BEGINNING of a trade.

 

[pavilion103]

Position sizing is calculated at the BEGINNING of a trade.

I know. But I mean based on what capital? For example if it is 1% risk of account size per trade is the account size based on cash reserves + value of open positions? Or another method?

 

[Boggo]

I know. But I mean based on what capital? For example if it is 1% risk of account size per trade is the account size based on cash reserves + value of open positions? Or another method?

It is based on your account size, ie, how much (%) of your account size are you prepared to put at risk on each trade and this in turn determines how much you are going to allocate to a trade.

In the example below (assume no slippage or brokerage for the exercise) you know where your entry point is, you know where your stop point and you know what your risk is.
So, 4 cents is the difference between entry and exit, $400 is what you are willing to lose if you are wrong, therefore we can only buy ($4.00/$0.04) 10000 shares in this stock.
Your total outlay is only $6850 and this is determined by the $400 risk.

Most people would say "but I have $20000 and I want to put half of it on this winner", that is the common thought process but is the reverse of the money management approach.
Plan around your risk, assume you are going to win but plan as if you are going to lose.

Anyway, that's my

(click to expand)

 

[skc]

I know. But I mean based on what capital? For example if it is 1% risk of account size per trade is the account size based on cash reserves + value of open positions? Or another method?

One major benefit of FFP is that it increases position size when you win and reduces position size as you lose. How quickly/frequently you want to do that is up to you.

If you want to aggressively compound your account, you can may be use starting account size + open profit and calculate your 1% from that.

If you want to be more conservative then use starting account size less open losses.

Or somewhere in between like account size + open profit to stop price.

Or you can do so periodically... like me I adjust my position size each month based on the starting account size on all open positions.

At the end of the day the difference should not be huge, unless you have 2 or 3 big wins in a row and you could have increased the position size for that 2nd and 3rd win.

 

[Boggo]

One major benefit of FFP is that it increases position size when you win and reduces position size as you lose. How quickly/frequently you want to do that is up to you.

A very good point there skc.

The figures in my chart (below) are not representative of my account, I use them to do the calcs based on an approx average $1000 risk per trade including brokerage.

By increasing my account size over the years I have the benefit of being able to both increase the amount that I can risk and still keep the risk amount to below 0.5% of the account.

Sticking to the principle is important bit until it gets easier.

(click to expand)

 

[howardbandy]

Greetings all --

Before putting on a position of any size, do some analysis of the health of the system. If it is not healthy, then the correct position size is zero. If it is healthy, then analyze the distribution of profits and distribution of drawdowns given a range of fractional amounts. Choose the fractional amount that gives the best result for the time horizon you are planning to remain active in trading.

The terminal wealth, TW, (relative to initial balance) after a series of trades is determined by exactly two terms -- the geometric mean of trades, GM, and the number of trades, N.

TW = GM ^ N where ^ is exponentiation.

While TW is the same for a given pair of GM and N, drawdown varies considerably. Drawdown depends on the number and size of the losing trades. The key to safely increasing the fraction used in position sizing is limiting the losses on losing trades.

Thanks,
Howard