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[EquisMetaStock Group] Re: Position size based on volatility



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If this posts twice, apologies.  I think Yahoo! ate my first one.:)

If your goal is lower volatility and you don't mind lower 
performance, there's nothing wrong with that.  I just didn't want you 
to get the mistaken impression that there is a "best" money 
management method, without regard to the concept behind the 
entry/exit rules.  The mix can make a big difference in what you can 
expect.

Also, consider this simple test:  Over the past 10 years, the SP600 
Small Cap Value Index has had an average annual return of 19% (not 
including dividends).  It's worst correction lasted less than 6 
months and it fell -37% from its all-time high at the time.

During the same time-period, the SP500 had an average annual return 
of 12.53% (not counting dividends).  Its worst correction lasted 2 
years and it fell -47% from its all-time high at the time.

Counter to accepted wisdom, the "more-volatile" small cap index had a 
SMALLER maximum drawdown AND outperformed the "less-volatile" large-
cap index.  Why did that happen?  According to the theory behind 
volatility-based position-sizing it shouldn't have, but according to 
stock-valuation theory, it's a reasonable outcome.  In fact, in this 
example, stock-valuation theory alone would have achieved what a 
complex money-management algorithm layered on top of it could not.

First, understand the concept behind each part of your system.  Then 
move on to understand how the different parts compliment (or defeat) 
the other parts.

JMO and FWIW.



Luck,

Sebastian

  
--- In equismetastock@xxxxxxxxxxxxxxx, "metastkuser" 
<andysmith_999@xxxx> wrote:
> Sebastian,
> 
> You wrote: "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)."
> 
> 1) I believe that is the goal -- less money invested in riskier
> small-caps, and more money in stable large-caps.
> 
> 2) Your comment assuming the risk fraction does not vary with asset
> class or trade probablility. There are several dynamic money
> management techniques where the bet size is varied... I'm trying to
> test some of these now, marching through quicksand...
> 
> 
>  
> 
> 
> --- In equismetastock@xxxxxxxxxxxxxxx, sebastiandanconia
> <no_reply@xxxx> wrote:
> > 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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