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<FONT face=Arial color=#0000ff
size=2>Al,
<FONT face=Arial color=#0000ff
size=2>
I
thought you used a fixed stop. With an ATR based stop, your position size
is OK, as the risk is constant.
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Arial color=#0000ff
size=2>Regarding volatility based stops, have you compared
through backtesting ATR based stops with fixed stops ? I did for the CAC40
future contract I'm trading dayly, and found that the fixed stop was more
efficient. Typically, in periods of very low volatility, the ATR stop gets to
small and noise hurts you. I backtested this strategy with ATR(10) and
ATR(20) on 1mn quotes. But that may well be a particular feature of this
contract, and I would be interested to learn if that feature is also relevant
when tested with large group of stocks on EOD basis.
<FONT face=Arial color=#0000ff
size=2>
Best
regards, Jérôme ULRICH
<FONT face=Arial color=#0000ff
size=2>
<FONT face=Tahoma
size=2>-----Message d'origine-----De : Avcinci
[mailto:avcinci@xxxxxxxxxxx]Envoyé : jeudi 6 février 2003
01:47À : amibroker@xxxxxxxxxxxxxxxObjet : Re:
[amibroker] ATR-Based Position Size (was NDX/QQQ)
<BLOCKQUOTE
>
<FONT face=Arial color=#0000ff
size=2>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.
<FONT face=Arial color=#0000ff
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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