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[EquisMetaStock Group] Re: Position size based on volatility



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Another useful post from Superfragalist.


Below are some basic code modifications I would consider for my 
personal use:

---8<------------------------------------

{Increased max trading account to $100 mill to take into account 
successful MSTT subscribers}
CapitalAccount:=Input("Size of Capital 
Account",5000,100000000,100000);

{% amount of your account balance you're willing to lose per trade}
RiskPercent:=Input("Account Risk Tolerance in %",0.1,100,1)/100;

{Ignore VT: ATR periods and ATR smoothing are the same process}
{VT:=Input("ATR Periods for Calculating Volatility.",1,100,10);}

Bars:=Input("Number of Bars for Smoothing ATR",1,260,10);

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(1),Bars,S);

RiskPercent*CapitalAccount/(x*WhimpFactor)

---8<------------------------------------


>From personal experience, the ATR smoothing periodicity is not as 
critical as the ATR multiplier (WhimpFactor in this case).

I would also consider including a slippage factor (possible 
additional losses), as trade stops are often exceeded by anything 
from one pip to a few % points depending on the traded instrument's 
liquidity, thus increasing trade risk.


If the trader has an initial stop in place - highly recommended as an 
additional safety device to the trader's exit(s) - then the actual 
trade risk can be determined.  This would be the distance from the 
entry price to the stop, plus a small margin for trade exit 
slippage.  Once the maximum trade risk is known, then it can be 
thrown into the position sizing equation.


MACDH Divergence kit users have an inbuilt position sizing indicator 
at their disposal.
>From the MACDH kit's documentation at
http://metastocktools.com/MACDH/MACDHdiverg.htm
(available from Sept 2005):


---8<-------------------------------------


Variable position sizing
------------------------

The variable position sizing indicator displays a suggested position 
size value to normalize trade risk to specified % limit.
It takes the risk based on the SmartStop initial stop, and calculates 
an appropriate trade position size.

Variable position sizing involves decreasing trade size on riskier 
(higher volatility) trades, and increasing it on safer (lower 
volatility) trades.  The result is that trade risk should 
theoretically (severe price slippage may alter risk) remain the same 
for all trades.

Should variable position sizing theoretically result in a similar 
total profit when compared to a fixed-position size strategy?  After 
all, what we lose on those big (now smaller) spectacular wins, we can 
gain from smaller (spectacular) losses and (now bigger) wins on the 
larger, safer trades.

In reality, the final result between these two strategies can be 
quite different.

By normalizing the total risk with risk-based variable position 
sizing, the result is a *smoother equity curve*.
This results in less overall capital risk, and thus increases the 
trader's confidence and ability to place a larger proportion of his 
working capital into his trading strategy.
And larger trades in turn equates to larger profits for the same (or 
lower) amount of original risk.


Below is an example of how variable position sizing can be applied to 
non-leveraged trades:

StdEq$ (standard trade size): total capital / maximum number
                              of open trades / 2;

AvgLoss%:                     Average Acceptable Loss %;

Risk%:                       (Entry Price - (Volatility based Stoploss
                              + Slippage)) / Entry Price x 100;

Variable Position Size:       StdEq$ x AvgLoss% / Risk%.


Example for a safer (less-volatile) trade:

StdEq$ = $100,000 / 10 trades; ($10,000)
AvgLoss% = 8; (8%)
EntryPrice = $10.00;
Stop = $9.50;
Expected exit price slippage = $0.05;
Risk% = ($10.00 - ($9.50 - $0.05)) / $10.00 x 100; (5.5%)
Variable Position Size = $10,000 x 8 / 5.5. ($14,545)


Example for a riskier (volatile) trade:

StdEq$ = $100,000 / 10 trades; ($10,000)
AvgLoss% = 8; (8%)
EntryPrice = $2.00;
Stop = $1.70;
Expected exit price slippage = $0.02;
Risk% = ($2.00 - ($1.70 - $0.02)) / $2.00 x 100; (16%)
Variable Position Size = $10,000 x 8 / 16. ($5,000)


By normalizing maximum trade risk (to 8% in both examples above),
a trader can manage overall capital risk in a more predictable manner.

---8<-------------------------------------



jose '-)
http://metastocktools.com






--- 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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