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[EquisMetaStock Group] Re: Position size based on volatility



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Superfragalist and I agree on something, and that is that you should 
test this and see how it works.

Volatility-based fixed-fractional position sizing can be a useful 
tool, but like any trading tool it has its strengths and weaknesses.

Its strength is that it reduces equity swings by diversifying 
according to the volatility of the securities in the portfolio.  More 
volatile stocks have less money committed to them and less volatile 
stocks get more money, giving you better diversification and a 
smoother equity curve.  

However, there's no free lunch and smaller equity swings come at the 
cost of lower performance.  Small-cap stocks, for example, are more 
volatile than large-cap stocks, but small-caps outperform large-caps 
over time.  Allocating money by using volatility-based money 
management rules, you'd have less money invested in the better-
performing asset class (small-caps) and more money invested in the 
lesser-performing asset class (large caps).  That would happen even 
if you were using EXACTLY the same entry/exit rules for them all.

This may not be the best forum for discussions of "how" or "why" 
different techniques work as they do (and how they interact), but in 
good conscience I couldn't just let this slide.  However much it 
takes, you really need to put yourself in a position where you can 
test ideas independently and test them hard.  

JMO, FWIW, and I yield my soap-box to the next person.:)


Luck,

Sebastian
 

--- In equismetastock@xxxxxxxxxxxxxxx, "metastkuser" 
<andysmith_999@xxxx> wrote:
> Super,
> 
> I understand the volatility-based sizing, but have a question about
> the fixed fractional risk number itself. 
> 
> Say you choose your risk per trade to be 2% of account equity. Do 
you
> ever modulate that 2% (say to 1% or 3%) based on how your portfolio
> equity curve is doing, or based on if you are in a winning streak or
> losing streak? If so, can you share your experience?
> 
> I find it odd that there is much published work about money 
mangement
> when it comes to futures/comodities, but little related to 
stocks....
> 
> As always, thanks much for your guidance.  
> 
> 
> 
> --- In equismetastock@xxxxxxxxxxxxxxx, superfragalist 
<no_reply@xxxx>
> wrote:
> > I have been accused of promoting Roy's newsletter. That 
accusation is
> > alleged and the merit as yet undetermined. Without admitting or
> > denying anything, if it sounds like I promote the newsletter, it's
> > because it's such a good MS tool that I think every MS user 
should use
> > it. 
> > 
> > In fact, Equis should give everyone who purchases MS a free one 
year
> > subscription. (I'm sorry, I lost my head for a minute. I know 
that's
> > just being too rational.)
> > 
> > However, unlike Equis I don't ignore the users and what they need 
to
> > be successful. So as a gift to everyone who subscribes to Roy's
> > newsletter this month, I'm going to give you a terrific position
> > sizing indicator that calculates the number of shares of a 
particular
> > stock that you should buy based on your personal risk profile and 
the
> > volatility of the stock. 
> > 
> > This is a powerful tool for position sizing, so don't ignore it. 
Test
> > it out and see if it improves your returns. It's based on sound 
theory
> > of money management. 
> > 
> > CapitalAccount:=Input("Size of Capital 
Account",5000,10000000,100000);
> > RiskPercent:=Input("Account Risk Tolerance in
> Decimals.",0.001,100,0.01);
> > {This is the amount of your account balance you're willing to 
lose per
> > trade-- 0.01 equals 1%.}
> > VT:=Input("ATR Periods for Calculating Volatility.",1,100,10);
> > Bars:=Input("Number of Bars for Smoothing ATR.",2,100,10);
> > WhimpFactor:=Input("Personal Risk Profile-1 Cowboy to 7 
Whimp",1,7,3);
> > {1 means you ride bulls and live hard, 7 means you're Mister
> > Rogers--most people fall in between.}
> > x:=Mov(ATR(VT),Bars,S);
> > RiskPercent*CapitalAccount/(x*WhimpFactor)
> > 
> > Plot this on the chart and read the shares to include in your
> > portfolio at the current price. 
> > 
> > Yes, I know I'm giving it to you before you subscribe. I work off 
of
> > the honor system, so I know that everyone who reads this will 
honor
> > the deal and sign up. This one indicator alone is worth the 
price. 
> > 
> > www.metastocktips.co.nz
> > 
> > I know who's being naughty and nice, I'm making a list and 
counting it
> > twice. So look out, Christmas is coming. It's not a good time to 
be
> > breaking the honor code. Okay!




 
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