Re: MMgmnt for short positions - how?

["Glen Wallace" <gcwallace@xxxxxxxx>]

I suppose you could add to your trade size as the open profit increases
and reduce your trade size as the open profit decreases.  Obviously,
your transaction costs would be much higher with this kind of fine-tuning.

Perhaps the better way to go would be to compute trade size based
on the maximum loss you are willing to take on each trade, rather than
based on the cost of the investment.  Let's say your system testing says
risking a maximum of $2,000 per option contract gives the optimum
return.  Let's also say that with a $100,000 account, you're prepared
to risk 6% on each trade.  Therefore, you would trade 3 contracts,
whether they trade at 6, 60 or 600 points, and whether trading long
or short.

Here's an Optimal f example.  Let's say your calculations show that
your system has an Optimal f of 0.25 and a maximum loss of $2,000
per option contract.  This means you require ($2,000 / 0.25) $8,000
account equity for each contract traded.  With a $100,000 account,
you would trade no more than ($100,000 / $8,000) 12 contracts
long or short, no matter at what price they trade.

Hope this helps.



----- Original Message ----- 
From: "rudolf stricker" <lists@xxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Thursday, September 06, 2001 10:20 AM
Subject: Re: MMgmnt for short positions - how?

> Glen,
> 
> On Tue, 4 Sep 2001 16:55:17 -0700, you wrote:
> 
> >Perhaps you could explain in a little more detail how you compute
> >your position size  --  maybe with an example.  Since Optimal f
> >bases position size on maximum loss, rather than "real investment"
> >(is that another term for cost?), I'm having difficulty envisioning
> >your problem.
> 
> My problem is not with Optimal f. (I'm quite familiar with probability
> distributions and how to use them for risk minimization, and even if I
> don't follow exactly the Optimal f procedure as discussed here several
> months ago, my re-investment rates work fine with _long_  positions.)
> 
> My problem is, how to apply this to _short_  positions. - To give an
> example from last month' trades:
> 
> My system opened a _long_  position in puts on Aug.06 at 59 /
> contract. For this , my mmgmnt calculated the number of contracts in
> accordance to my "working capital for trading" (not to be published
> here) based on an "investment" of 59 / contract.
> At Aug.08 this position was closed by the system at a "result" of
> 118.8 / contract, which makes about 100% win for the "investment".
> (Remark: Not all of my long trades end like this.)
> 
> At the same time on Aug.06, my system opened a  _short_  position in
> calls at 60 / contract. For this, my mmgmnt calculated the appropriate
> number of contracts, based on a "result" (!!!) of 60 / contract.
> At Aug.15 this position was closed by the system at an "investment"
> (!!) of 0.2 / contract, which makes about 29900% win for the
> "investment". (Again: Not all of my short trades end like this.)
> 
> Do you see the "dilemma"? 
> For  _long_  positions, the mmgmnt is done based on the _"investment"_
> (as it should be done), whereas for _short_  positions mmgmnt is done
> based on the _"result"_, which can (and should) be a big difference. 
> In case I could have done mmgmnt for the short position based on the
> "investment" (as it should be done), the calculated number of
> contracts would have been much higher. 
> 
> Making the long story short: For _short_  positions the number of
> contracts calculated by mmgmnt is too small ( for successful trades),
> because mmgmnt is based on the _"results"_ and not on the
> _"investment"_ (as it should be). 
> 
> Any way out of this "dilemma"? - Any hint? - Every short position
> trader imo is faced with this problem ...
> 
> mfg rudolf stricker
> | Disclaimer: The views of this user are strictly his own.