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After reading much about MM and position sizing, I was about to
implement something like you described below to my trading system.
Before I did that, however, I thought I'd actually see if the ATR of
my losses were greater than the ATR of my winners... and they're NOT!
So before anyone runs off and assumes that your trade risk is in
direct proportion to the volatilty of the stock you're trading, keep
records and compare the average ATR of your losers with your winners,
and then go from there.
So it turns out my system is opposite this prevailing theory,
therefore I should actually INCREASE my positions the more volatile
the stock. That's what the numbers show anyway, so I think I'll step
back and wait a couple more months before altering my system.
This reminds me of a saying I made up years ago to describe my
abstract computer art...
"The King's Golden Rule is that there are no rules.
A world with no rules... no absolute definition."
Brian
> I'd REALLY like to see the MM discussions continue, so I wanted to
> provide my 2 cents (& hopefully keep Herman & others
> interested…). Maybe this is too simplistic, but I think of MM in
> terms of 2 separate components, position sizing & trailing stop-
> based exits.
>
> Position sizing:
> - # of shares= the minimum of [available $equity/$price OR
> $risk/$volatility]
> - $volatility is stock specific (ie. exponential moving average
> of triple the 15-day ATR… related to trailing stops below)
> - $risk is a function of two parameters: %risk per trade (2%)
> and total risk of current equity (10%)
> - so, the $risk for the current trade is the minimum of [2% OR
> (10%-total current risk on open trades)]
> - total current risk on open trades = the minimum of [zero, or
> ENTRY PRICE – CURRENT STOP across all open trades]… in other
> words, if the trailing stop is above the entry price on any given
> open trade (for long trades), the risk is zero. Short trades work
> the same way in the other direction.
>
> <SNIP>
>
> In practice a system with these parameters will usually result
> in an average of 5 open trades (10/2) assuming you have enough
> equity to take the trades as they come. Also, the more volatile
> the stocks you track, the smaller the position sizes will be so
> the more open trades you might have at one time.
>
> <SNIP>
>
>
> Cheers!
> Chris.
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