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Hi, Phsst:
I think we are both saying the same thing in essence. I've been suggesting
that one controls risk using position sizing whenever one buys (or shorts) a
stock. When you place your order, you have to know how many shares to buy or
go short. You do that using position sizing. All the other things you
mentioned (W/L ratio, days held per profitable trade vs. days held per
losing trade, % winners, etc.) have nothing to do with money management.
They define your system performance; they are characteristics of your
system, independent from the way you control risk. The no. of days held in a
profitable trade is not influenced by the no. of shares of stock you bought
or shorted. Your portfolio performance is based on how you control your risk
using position sizing algorithms. And, don't forget, I'm assuming you are
taking BOTH long AND short positions during the course of your trading year.
If you have a balance of longs and shorts, then that will take care of a lot
of the DDs you were referring to in times of overall market downturns.
AV
>On Wed, 24 Sep 2003 03:21:27 0000 Phsst <phsst@xxxxxxxxx> wrote.
><html><body>
>
>
><tt>
>Al,<BR>
><BR>
>Your ATR positionsize logic is appropriate assuming that your measure<BR>
>of risk as a f Equity is based upon "individual trades" as the<BR>
>benchmark. But does that approach translate into a predictable Equity<BR>
>drawdown measurement where "Portfolio trades" are measured?... ie.<BR>
>where major mkt downturns result in high numbers of sequential 1R>
>trade losses.<BR>
><BR>
>My own backtesting / trading experience is based upon measured<BR>
>Portfolio trading results which have turned my attention to other<BR>
>measurements.<BR>
><BR>
>What I have found to perform best in my own swing trading systems is<BR>
>a well balanced combination of the following:<BR>
><BR>
>Avg days held for profitable trades is more than twice that of avg<BR>
>days held for unprofitable trades. (This translates into risk<BR>
>management where losses are cut early.)<BR>
><BR>
>Avg profit per profitable trade is more than twice the value of avg<BR>
>loss per losing trade. (This translates into risk management where<BR>
>winners are allowed to 'run'.)<BR>
><BR>
>I do measure inners versus osers... and some systems need a 60R>
>winning percentage to 'shine'... while other great trading systems can<BR>
>do very well indeed with only a 40inning percentage because the<BR>
>profits of the winners overwhelm the losses from the 60hat lose.<BR>
><BR>
>The main focus is to control (and limit) losses.<BR>
><BR>
>The next major release of AB will have 'Portfolio trading<BR>
>measurements' which is the missing factor for most folks today.<BR>
>Hopefully, release 4.5 will be an 'eye opener' for AB Users.<BR>
><BR>
>In all fairness to your approach, I have not backtested ATR<BR>
>positionsizing (which I intend to do). But I have backtested limiting<BR>
>losses to a fixed percentage, and to date, fixed percentage stop loss<BR>
>strategies are inferior to other stop loss methodologies.<BR>
><BR>
>Regards,<BR>
><BR>
>Phsst<BR>
><BR>
>--- In amibroker@xxxxxxxxxxxxxxx, "Al Venosa" <advenosa@xxxx> wrote:<BR>
>> b,<BR>
>> <BR>
>> Thanks for the post. I have to chime in here because, although I<BR>
>agree with your overall treatise on money management, I believe you<BR>
>can achieve your desire to increase profits without sacrificing risk<BR>
>simply by setting your stops based on volatility (ATR). When you do<BR>
>this, you equalize all the stocks in your portfolio, at least in the<BR>
>beginning, so that your profit and loss potential are approximately<BR>
>equal across all stocks while your risk stays fixed at xer stock<BR>
>(set x to whatever you like or can tolerate). So, if Stock A has a<BR>
>high volatility and Stock B a low one, you simply buy less of Stock A<BR>
>and more of Stock B to compensate for the difference in volatility.<BR>
>Here's an example: assuming your equity were $100 K for ease of<BR>
>calculations and taking your $100 stock (call it Stock A) as one you<BR>
>want to buy, if its ATR is, say, $3, your risk tolerance is 1f<BR>
>equity, and your stop based on your system is, say, 2*ATR below the<BR>
>buyprice, then you would buy 1000/2*3 or 167 shares ($16,666<BR>
>commitment). Now, suppose you also want to buy Stock B, whose price is<BR>
>$50 and ATR is 1. You would buy 1000/2*1 or 500 shares, commiting<BR>
>$25,000 of equity. Notice that you commit more equity to the lower<BR>
>volatility stock (its ATR is 2f the price vs. the higher volatility<BR>
>stock whose ATR is 3f the price). Now you have 2 stocks in your<BR>
>portfolio that will have approximately the same profit and loss<BR>
>potential based on price movement because you have equalized your<BR>
>trades based on their volatility. This, to me, makes a lot more sense<BR>
>than basing your max stoploss on a fixed dollar amount based on a<BR>
>trend line or something like that. <BR>
>> <BR>
>> Now, I have a question for you. What do you mean when you say you<BR>
>buy a basket of stocks rather than individual stocks? Do you mean<BR>
>indices or industry groups like biotech, semiconductors, etc.? If so,<BR>
>then you can treat those indices just like stocks and use position<BR>
>sizing as above, based on ATR. If you mean mutual funds, you cannot<BR>
>calculate ATR since you need OHLC data. But you can calculate standard<BR>
>deviation of NAV over the last x days to give you an estimate of<BR>
>volatility, which could serve very well as a substitute for ATR. If by<BR>
>basket you mean something else, please help me understand what you<BR>
>mean. I ask because I cannot envision why you cannot use position<BR>
>sizing for any type of trading system. <BR>
>> <BR>
>> Thanks for the interesting discussion.<BR>
>> <BR>
>> Al Venosa<BR>
>> ----- Original Message ----- <BR>
>> From: b519b <BR>
>> To: amibroker@xxxxxxxxxxxxxxx <BR>
>> Sent: Tuesday, September 23, 2003 12:03 PM<BR>
>> Subject: [amibroker] Position Sizing, math, and profits<BR>
>> <BR>
>> <BR>
>> Herman,<BR>
>> <BR>
>> To understand what various authors mean by position sizing you need
<BR>
>> to distinguish between the amount of money invested in a trade and <BR>
>> the amount of money "at risk" in that trade. The amount of money at
<BR>
>> risk may only be 105r even just 2f the money used to buy a <BR>
>> stock. <BR>
>> <BR>
>> Below is a copy of a post I made about this on another discussion <BR>
>> board.<BR>
>> <BR>
>> b<BR>
>> <BR>
>> -------copy-------<BR>
>> <BR>
>> Subject: Managing Risk & Increasing Profit (was How to Test VV <BR>
>> strategies)<BR>
>> <a
href="http://groups.yahoo.com/group/vectorvestonlineusersgroup/message/2932";>http://groups.yahoo.com/group/vectorvestonlineusersgroup/message/2932</a><BR>
>> 8<BR>
>> <BR>
>> --- "Dennis Fluegel" <dfluegel@xxxx> wrote:<BR>
>> > "Absoluely brilliant!. You've nailed it!<BR>
>> > ... your post ... should be required reading."<BR>
>> <BR>
>> Thanks for the kind words. That post addressed risk management for <BR>
>> just one of several investing approaches. Those principles would not
<BR>
>> be appropriate to all types of investing. Thus the disclaimer <BR>
>> stating "You are also responsible to ensure that your education is <BR>
>> sufficient for the type trading you plan to do."<BR>
>> <BR>
>> You mention that many of the books on risk management seem to <BR>
>> contradict each other. In addition to differences of personal risk <BR>
>> tolerances of the authors, the apparent contradictions may arise <BR>
>> because the books focus on very different trading approaches.<BR>
>> <BR>
>> Risk management formulas for trading in the "futures" market will be
<BR>
>> very different than those that focus on trading Options, which will
<BR>
>> differ from those trading stocks. Even among those trading stocks, <BR>
>> there are key differences between trading stocks as "individual" <BR>
>> entities and trading stocks as groups or "baskets". My personal <BR>
>> trading approach is along the lines of the "basket" approach, and <BR>
>> thus my prior post related to managing risk (and increasing profit)
<BR>
>> for stock baskets using market trend signals to time entries and <BR>
>> exits.<BR>
>> <BR>
>> Books on risk for futures trading have to take into account the <BR>
>> massive leverage (much more leverage than buying stocks on margin).
<BR>
>> So the formulas they suggest will have very low thresholds.<BR>
>> <BR>
>> Many books on risk management for stocks do not address risk <BR>
>> management approaches for baskets of stocks. Instead they focus on <BR>
>> managing risk (and thus maximizing profit) when stocks are not <BR>
>> bought and sold as a group, but individually with different entry <BR>
>> dates (usually based on a timing signal based solely on a stock's <BR>
>> chart). In such approaches there is a lot to be said for a "position
<BR>
>> sizing" approach to risk management.<BR>
>> <BR>
>> Position Sizing is a fascinating study in how mathematics can <BR>
>> influence strategy, execution, and profits. The results can be <BR>
>> surprising. For reasons to be explained, I personally only use it <BR>
>> occasionally, but I find it fascinating.<BR>
>> <BR>
>> Generally position sizing assumes one can find a "logical" place to
<BR>
>> set a stop loss exit. Finding a logical stop loss point can be done
<BR>
>> if entries are timed, not by the market trend, but by an individual
<BR>
>> stock's price chart. The timing decision to enter is based on <BR>
>> recognition of a chart pattern. (A great book on how to recognize <BR>
>> and trade chart patterns - and which not to play! - is Thomas <BR>
>> Bulkowski's Encyclopedia or Chart Patterns). Typically a "logical" <BR>
>> place to set a stop loss would be the price point when one would <BR>
>> know that the chart pattern has broken down. Without a pattern in <BR>
>> place, a chart reading trader has no idea where the stock price may
<BR>
>> go and thus no reason to expect it is more likely to go up than <BR>
>> down -- certainly if one has no clue about a stock's direction it is
<BR>
>> time to exit that trade! One can use trend lines, "neck lines", and
<BR>
>> support and resistance lines to set stop exits. Generally one sets <BR>
>> the stop exit order a bit below the price signal (to avoid being <BR>
>> food for market makers who may try to trigger obvious stop levels).<BR>
>> <BR>
>> Once one has decided upon a Stop Price, then the math is fairly <BR>
>> simple. Take the distance in dollars from one's Entry Price to the <BR>
>> Stop Price (add a bit more for "slippage" and commissions). That <BR>
>> amount is the risk per share (RPS). One also selects a maximum <BR>
>> single loss percentage of one's total trading capital. Common <BR>
>> percentages suggested are 11.5nd 2Some authors say 2.5r <BR>
>> 3ingle stock loss risks are for "gunslingers". These numbers are <BR>
>> combined to tell a person what "position size" to use for an <BR>
>> individual stock entry (ie, how many shares to buy).<BR>
>> <BR>
>> So if one plans to buy a $100 stock and sets a "logical" stop loss <BR>
>> exit at $98, the distance is $2 a share. Add perhaps 50 cents for <BR>
>> slippage and commissions and the RPS is $2.50. If one has a trading
<BR>
>> account of $20,000, then a 2aximum single loss (MSL) would be <BR>
>> $400. What is the position size formula? MSL/RPS = $400/$2.50 = 160
<BR>
>> shares of the $100 stock. That is a $16,000 commitment to a single <BR>
>> stock!!! So, a 2aximum single risk is not necessarily a limiting <BR>
>> factor.<BR>
>> <BR>
>> By the way, those who trade this way usually have couple additional
<BR>
>> rules. One additional rule will limit the a maximum percentage to be
<BR>
>> put into a single stock (perhaps 25r 20r less), so they would <BR>
>> not put over half their funds into a single stock. In addition some
<BR>
>> will have a 6ggregate exposure rule. So they have 3 trades in <BR>
>> play each with a 2utstanding RSP, they will not enter any new <BR>
>> trades (even if they have cash sitting in their account). However, <BR>
>> if a stock goes up as hoped, one can replace the stop loss exit <BR>
>> order with a trailing stop order set above the entry price -- and <BR>
>> thus, according to this line of reasoning, that trade's RSP is now 0
<BR>
>> (zero). That reduces the aggregate outstanding risk to less than 6<BR>
>> so new trades can be entered until the aggregate risk gets back to <BR>
>> 6That gives the basic idea of one particular approach to risk <BR>
>> management when stocks are traded individually.<BR>
>> <BR>
>> What if that $100 stock has moved from the time you decide to buy it
<BR>
>> to 102.50 by the type you have typed in your buy order? Well, one <BR>
>> should reduce the number of shares to compensate for the fact the <BR>
>> RPS is now 102.50 - 98.00 = 4.50 plus the 50 cent slippage = $5.00.
<BR>
>> Thus the order should be for $400/$5 or 80 shares. What if the <BR>
>> stocks dips to 98.50? Well, that would be a RPS of 1.00 (remember <BR>
>> the 50 cents slippage) so the math is 400/1 = 400 shares or $39,400.
<BR>
>> Of course the secondary rule of only 25n a single stock would cap <BR>
>> this at a lower level.<BR>
>> <BR>
>> What if the stock dips to 97.50? Walk away. The stock has broken its
<BR>
>> chart pattern and is "misbehaving".<BR>
>> <BR>
>> If one can set a logical "price target" based on the chart pattern <BR>
>> (Bulkowski's book has some insights on this), there is some <BR>
>> additional math that can be used to rank which trades are the most <BR>
>> profitable to take. In general terms, it is Possible Realistic <BR>
>> Gain / RPS. One could call this a "Risk Return Ratio" (RRR) but I <BR>
>> like to reorder the words to be "Reward/Risk Ratio" - just the way <BR>
>> my mind likes to name things - the concept has not changed.<BR>
>> <BR>
>> If you only had enough aggregate risk space left to take 1 new <BR>
>> trade, would you take trade A with a potential gain of $8 or trade B
<BR>
>> with a potential of $12? It would all depend on what the RSP is for
<BR>
>> each trade. If the stop exit is very close to the entry price for <BR>
>> trade A but far away for trade B, then trade A would have the higher
<BR>
>> RRR. Taking trade A would give a smaller percent gain on the trade <BR>
>> but the dollar gain would be higher (because the closer stop would <BR>
>> allow a larger position size). Thus trade A would bring in more <BR>
>> profit than trade B. Math is amazing!<BR>
>> <BR>
>> The math and strategizing is neat stuff. But it is almost totally <BR>
>> irrelevant to my trading - because my general approach is to trade <BR>
>> stocks as basket based on market timing rather than individually. <BR>
>> Occasionally (and just for "fun") I will do some chart reading and <BR>
>> calculate some RPS and RRR numbers. Very occasionally I might place
<BR>
>> a trade based on this. <BR>
>> <BR>
>> As for my preferred approach, position sizing does not appear to be
<BR>
>> applicable due to the lag of my market timing signal. As a result <BR>
>> the stocks that my strategies pick are generally so far away from <BR>
>> any "logical" stop when the market timing signal goes off, that I <BR>
>> (currently) do not see an advantage to using RSP to position size <BR>
>> and RRR to rank. However, I am keeping an open mind about this. <BR>
>> Because if one could find a way set individual exit stops (not <BR>
>> percentage based, but dollar based or perhaps ATR based), then one <BR>
>> might be able to increase profits without increasing risk.<BR>
>> <BR>
>> b<BR>
>> <BR>
>> <BR>
>> <BR>
>> <BR>
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