Reverse Martingale position sizing

[Gringotts Bank]

Limit, if for example I buy a $30,000 position in one hit, that's $30,000x.11% = $33 brokerage to enter. (Talking about ordinary shares here).

If I split it into 6 parts, it's 6x$15 = $90.

I guess if I had one of those brokers that allowed order splitting that would be different.

 

[LimitBid100]

If you are serious about your trading, you would find a broker that suits your needs. You wouldnt be lazy about your trading research, why be lazy about your broker.....they booth contribute to your P/L?

 

[Gringotts Bank]

Who do you use that allows order splitting?

 

[LimitBid100]

I dont trade shares, i trade futures....I use Man.

If you want by $20k worth at $10, another $20k at $10.50, and another $20k at $11.00......that is three seperate orders....not 1 order split into 3.

Surely the brokerage is the same as for $60k in one hit?

 

[AlterEgo]

Howard,

I find that more than half of my trade lose money (actually closer to 70% lose money). Most of these go bad straight away, createing a loss on the 1/6th position.

The trades that go well.....go really well, far outweighing the losses on my many bad trades.

Essentially, the scaling saves me a lot of money by reducing most of my losses to a trivial amount (about 0.12% of capital), while only reducing my winning trades (which are far less in number) by a smaller proportion.

There is no doubt that my winning trades would make more money if i didnt scale in. But my losing trade would cost me a lot more as well........much more than the extra gains in the winning trades.

LimitBid.

I doubt very much that this approach makes more money overall than buying the entire position upfront. If fact I'm sure I've read articles that prove this. The stock would need to move much further for you to break even, plus you'd be paying more in brokerage. Eg. comparing 1 purchase of 20,000 shares at $1, vs. buying 4 x 5,000 positions at $1.00, $1.05, $1.10 & $1.15 would result in a breakeven price of $1.005 (1 tick) for the single position vs. $1.08 (16 ticks) for the 4 positions.

I have often read of this approach, but have never used it myself, because I've never been able to work out a way of doing it that hasn't reduced the system's overall profitability. Have you done a computer backtest that shows this approach making more money??

 

[LimitBid100]

AlterEgo,

I have done numerous backtests over 15-20 years of data across 35 different futures.

It is obvious that adding to a position wont make as much money as doing the entire position up front......on a winning trade. But on a losing trade, the losses can be greatly reduced by starting with a small position.

The total amount of money made is the sum of the profits and losses. You can improve this result by either, increasing the size of the winners, or, reducing the size of the losses.

I try and do both. My backtesting suggests that adding to positions to ensure many small loses creates a smoother growth of capital than hitting every trade as hard as possible to maximize the upside.

LimitBid

 

[tech/a]

Any chance of emailing me the results
Ill send you my email by private message.
Ive not been able to model anything that mirrors your results.
Where do you get your futures data for 35 types?
Is it EOD?
What software are you using to test with?
Im interested in your code for this averaging in approach.
I know in theory it seems logical but in practice Ive not seen any positive correlation.
You may well be the first and if so will certainly alter many peoples thinking.

 

[LimitBid100]

Im not going to tell you exactly what I do......I will give you the vibe, which may or may not help you. If it gets you thinking about something new, that is a good result.....that is all I look for from these forums.

I got my data from a shop called pinnacle data, you can find them on the web. I did my backtesting using Excel. The data I use is end of day data (open, high, low, close).

If you have a high winning% in your trading, then adding to positions like this probably wont help. Where as, if you have a low winning% (but still positive expectation), this method should help reduce the damage on the many losing trades.

LimitBid

 

[tech/a]

As I expected.
thanks.

 

[AlterEgo]

My backtesting suggests that adding to positions to ensure many small loses creates a smoother growth of capital than hitting every trade as hard as possible to maximize the upside.

Ok, so if I read this sentence correctly, you're saying it produces a smoother equity curve, but less total profit?

 

[village idiot]

I doubt very much that this approach makes more money overall than buying the entire position upfront. If fact I'm sure I've read articles that prove this. The stock would need to move much further for you to break even, plus you'd be paying more in brokerage. Eg. comparing 1 purchase of 20,000 shares at $1, vs. buying 4 x 5,000 positions at $1.00, $1.05, $1.10 & $1.15 would result in a breakeven price of $1.005 (1 tick) for the single position vs. $1.08 (16 ticks) for the 4 positions.

yeah but at the point the breakeven level becomes 1.08 , the stock is already at $1.15, and if the stock never reaches 1.15 then the breakeven level never reaches 1.08......

spookily enough i am just in middle of rereading "Reminiscences of a stock operator" after some years. page 127 he describes how this exact scaling in model is the basis for his trading. plus ca change...

 

[skyQuake]

yeah but at the point the breakeven level becomes 1.08 , the stock is already at $1.15, and if the stock never reaches 1.15 then the breakeven level never reaches 1.08......

spookily enough i am just in middle of rereading "Reminiscences of a stock operator" after some years. page 127 he describes how this exact scaling in model is the basis for his trading. plus ca change...

Agree,

If you're trading seriously, brokerage on 5 trades should be similar to brokerage on a large order.

What also needs to be noted is that if you bought 20k shares at $1, it could be fairly very hard to get out at $0.95

Whereas an average entry of 1.08 is a lot easier to manage when the price is already 1.15

If intraday, also pays to look at daily range before averaging up (or down)

 

[lindsayf]

I have found that adjusting my position sizing relative to my confidence in the trade, to be optimal. Discretion in position sizing is an edge in itself, but is extreamly difficult to master and takes hundreds, if not thousands of hours to get right

"You got to know when to hold 'em, know when to fold 'em, / Know when to walk away and know when to run"

Hi Naked

Im curious to understand why you would enter a trade you had little confidence in? If you can make the distinction between low and high probability setups - why not just wait for the latter?

thanks

Lindsay

 

[tech/a]

Hi Naked

Im curious to understand why you would enter a trade you had little confidence in? If you can make the distinction between low and high probability setups - why not just wait for the latter?

thanks

Lindsay

Somtimes a trade may evolve into an above average
situation by say breaking decisively through an important resistance level

 

[lindsayf]

Hi techa
I understand that any 'marginal' setup could take off and there is no way to know in advance for sure. To know if entering these marginal/maybe trades with a small position and then scaling in has an edge over a series of trades you would have to backtest/forward test them. So this is a seperate trading method to the other one - the 'non marginal setup'. If this is right then Naked is saying she trades seperate methods - one with full position size and trade managment style 'A' and one with partial position sizing with scaling in and trade management 'B'. If this is the case then it makes sense to me.

I gather that you use or are interested in a scaling in approach - it is something I have not looked into - scares me a bit - which tells me I need to learn more about it.

 

[tech/a]

I gather that you use or are interested in a scaling in approach - it is something I have not looked into - scares me a bit - which tells me I need to learn more about it.

No I dont.

But I do trade full positions and if the market moves immediately and decisively in my direction I often double or more position size.
I' have scaled out! But again prefer to exit the whole position.
Im either in or out.

 

[LimitBid100]

Ok, so if I read this sentence correctly, you're saying it produces a smoother equity curve, but less total profit?

AlterEgo,

The sentence may have not been entirely clear. What I meant was, that by reducing the maximum profit available on an individual trade, (and equally, reducing the maximum loss on an individual trade), I can generate a smoother equity curve.

Once I have a smoother equity curve, this allowd me to increase the size of all trades until I reach a level of equity curve volatility I am happy with. (Actcually, I only care about the downside volatility of the equity curve.....but that is going into technicalities).

So, profit (and more importantly, loss) may be curtailed in indiviual trades.....however this leads to a smoother equity curve, allowing for the use of more leverage, and thus greater over profits (for a similar level of risk tolerance).

Essentially, while the profit is reduced by pyramiding into trades, the ratio of "average profit/average loss" for a set of trades is increased....this is done primarily by reducing the size of the average loss.

I hope this clears up any confusion.....

LimitBid.

 

[LimitBid100]

No I dont.

But I do trade full positions and if the market moves immediately and decisively in my direction I often double or more position size.
I' have scaled out! But again prefer to exit the whole position.
Im either in or out.

You say you are either "in or out"......surely this implies that you dont scale into positions.....as then you would be (at some stage) only partially in.

But then you say that if the markets moves your way, you double the position.....isnt this scaling in???

So do you scale into positions, or dont you? I am confused........

LimitBid.

 

[tech/a]

So do you scale into positions, or dont you? I am confused........

Sorry to hear that.

If I have a common position size of say 5 contracts and I trade 1 contract then add 2 then another 2 then thats scaling in to a full position size.

If However I have 5 contracts on a trade and I see an opportunity to add to that then thats (to me anyway) adding to a position.

Like if I feel like a Mars Bar and as Im eating it I just have to have another couple.
Different to buying a 1/3rd and adding to it.

So to help your confusion.
NO I DONT SCALE IN TO POSITIONS.

 

[Gringotts Bank]

Say I have a win rate of 80+% on a very basic system. Small profitstop of 1% and wide stoploss of 5%. Max consecutive losers is 2 on any bluechip tested. Max consecutive winners of around 10. The equity curve is basically flat for most securities, but can be optimized to slope upwards.

I wonder how this would go with a Martingale.

Recovering 5% each loss is going to make for a huge position size after 2 losers. I guess one could start small.

Any ideas?