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Hi All,
I am using the following formula for position size:
Available_Equity = (0.1 * Usable_Margin);
Position_Size = Available_Equity/(Max_Drawdown_Percentage);
Typically, you can determine Max_Drawdown_Percentage using MCS (Monte
Carlo Simulations)
For e.g, if Usable_Margin is $5000, then
Available_Equity = 0.1 * 5000 = $500 and
if Max_Drawdown_Percentage = 20% = 0.20
Then, Position_Size = $500/0.20 = $2500
So if you have 5 underlying instruments you want to trade, you would
invest $500 per instrument getting instant diversification.
Regarding the use of volatility in position sizing, I find that it is
automatically taken care of depending on at what price you enter the
market relative to the current price, i.e, at MOO or at support or
resistance.
For e.g, if you have a long signal but the current price is below
MOO, then enter at support, else at MOO Limit Order(current price >
MOO) and similarly if you have a short signal but the current price
is above MOO, then enter at resistance, else enter at MOO Limit Order
(current price < MOO), with the assumption that MOO is often the best
price to enter and that the instrument opens at the same price where
it closed the previous session which is the case atleast for the
FOREX market.
Any comments/constructive criticisms appreciated.
rgds, Pal
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