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The
issue is not with the direction of prices after your entry, but with the
level of your risk. With the same stop level, your loose twice as much if
your position size is twice as large. The mathematical expectency of your
position is the same whatever the position size, but the risk is not. On the
long run, your average exposition will be OK, but you must be aware that you
handle more risk in certain positions than with others. And with volatility
explosion, you will handle your biggest positions when the risk of your stop
being gaped down is also the highest. The best counsel I would give you is
to actually trade it with real money. You'll make your own experiences ...
as I did my painfull ones ;-).
Jerome: Take
another look at the example code I gave, repeated here:
PositionSize = -1 *
BuyPrice/(2*ATR(15));
I am risking 1% of
current equity. If my current equity is $100,000, my risk is $1000. I define
risk as the amount of money I'm willing to lose if I'm wrong on the trade,
not the amount of money I'm allocating for the trade. I set my max stoploss
at 2*ATR below the BuyPrice (using the ApplyStop function, code not shown).
So, you see, it doesn't matter what the ATR is or the price per share. I
lose $1000, period, if the price declines to the max stoploss. Example: if
the buyprice is $50 and the ATR is 1.5, my investment is 1000*50/3 or
$16,667, which is 333 shares at $50/share. If the price declines to 47, I'm
out with a $1000 loss (333*3), which is my pre-defined risk level. If the
ATR instead were 1 (lower volatility) while the price is 50, then my outlay
to make the trade is now 1000*50/2 or $25,000, which is 500 shares. However,
if the price declines to 48 (my 2ATR risk level), I still lose $1000
(2*500). I think perhaps you might be equating risk with amount invested (or
no. of shares bought). The ATR determines how much to buy. If the ATR is
high, you buy less (you don't want volatility to kill you) and your stop is
farther away. If the ATR is low, you buy more and set a closer stop. In
either case, your risk is still fixed at $1000. So, you see, my stop level
varies with ATR. The risk is always at $1000, but depending on the ATR, the
number of points decline in the stock varies with ATR. That's my point.
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size=2>
If
you are a mono-product trader, as I am, the concept is much less attractive.
I prefer a fixed percentage model in that case, with
the percentage amount chosen from equity simulations so that
my objectives in term of return and drawdowns are met.
I, too, am a monotrader
(stocks). What I described above is, indeed, a fixed percentage model. It's
just that my position size (i.e., amount of capital outlay for the trade) is
determined by volatility, which I think is essential for keeping you in the
game and maximizing your profit potential. Volatility determines how much to
buy, i.e., how much of your equity to allocate to the trade, keeping the
risk constant at whatever your tolerance is (1%, 2%, or whatever you find
from your equity simulations).
Thanks for the
interesting discussion.
AV
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