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I think you pretty well summed it up and one of the keys comes back to
Linda's earlier question regarding Average True Range (ATR), the only
indicator except OBV which I plot on my charts. I don't plot (14 day) ATR
because it gives me useful timing information but because it gives me useful
information for controlling risk. Whether trading units are futures
contracts or rounds lots (100 shares), an ATR plot gives one a very good
idea of the current and extremes of risk per trading unit and the risk per
trading unit must be related to the size of the account and the overall risk
limits utilized. If ATR jumps from 25 to 50, the risk per trading unit has
doubled and the number of units traded should be evaluated accordingly.
Further, ATR should be used in choosing which securities are to be traded
relative to the profit objective and stop loss (these should be calculated
before the order is placed). Given two securities with equal trading units,
equal price, and equal percentage profit objective and stop loss (not that
these should be defined on percentage basis), the security with the smaller
ATR offers the greatest risk-adjusted return.
Earl
-----Original Message-----
From: Gitanshu Buch <OnWingsofEagles@xxxxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Sunday, April 18, 1999 8:30 AM
Subject: Re: DAY - Position Sizing in day trading
>>My trouble right now is first defining position sizing clearly in a day
>>trading context, and then applying some sort of position sizing discipline
>to
>>my trading. My concept of it in the simplest terms is basically number of
>>contracts purchased: you want to have more contracts on winning trades and
>>less on losing trades in the end.
>
>Kent,
>
>If I may add to what Ira has said:
>
>It may help if you start thinking of position size in terms of dollars
>risked on a certain trade instead of contracts traded.
>
>For example, the dollar risk for a 1 lot on an Aussie Dollar contract is
>quite different from a one lot on a Swissie or BP or CD (within your
>specific market). This is because initial and maintenance margin
>requirements are different, dollars won/lost per tick are different, each
>has a different ATR and a different trending characteristic.
>
>You are trading money, individual contract sizes skew the amount you are
>committing to a trade disproportionately to your account equity.
>
>>So entering each trade with 2 contracts,
>>you could add to those when the trade trends in your direction, or just
>lose
>>the 2 if it goes against you in a short time frame.
>
>If you think in terms of money risked per trade and then set yourself a "I
>lose this much money I'm out" kind of stop, you will be better off
executing
>your strategies. Increased volatility (and your lack of understanding why
>that is happening) will therefore force you to trade smaller dollar amounts
>per trade, and reduced volatility will allow you to trade normally.
>
>Increased volatility are signs of trend change, of dislocation in the
>assumed psychology of the prevailing balance between demand and supply. If
>you are on the right side of what unfolds, you will make a larger than
>normal profit upon trade exit. On the flip side, you will also lose a
larger
>than normal amount which will in turn reduce your total account equity and
>your ability to play longer term will be impaired.
>
>>I am struggling with
>>whether to make it mechanical, like if the market moves 10 points to the
>good
>>from my entry and indicators still look good, then purchase 2 more
>contracts
>>and adjust a new 4 contract protection stop down close to the new entry
>point
>
>
>I don't know what Van Tharp teaches and I mean no disrespect to his school
>of thought. Greg recently posted another position size email to which I
have
>lingering questions - but bottomline is,
>
>- in the heat of the battle why confuse yourself with complex calculations?
>
>- why not have a simpler methodology in place before a trade and on
>auto-pilot active once in the trade? This then frees up your brain to look
>only for chart patterns and execute your plans once your chart patterns
give
>you the triggers.
>
>- if you add to a winning position, from that point on it is a new trade
and
>you are risking a larger-than-normal proportion of your account to a single
>bet. Either the odds are really skewed in your favor, or you are taking one
>heck of an "all eggs in one basket" risk. Is the latter justified?
>
>- Even if the odds are really skewed in your favor at the present moment,
>how much time will it take for the market to realize that the odds are one
>sided and those mis-aligned odds get neutralized?
>
>- Assuming the odds get leveled and you are still in your original position
>size, albeit with larger than normal profit, is there a plan in place that
>you execute at this point to defend those profits from eroding - while
still
>leaving you in the trade? Options are a good instrument to study, for they
>really do open up a whole new bag of tricks, the simplest of which starts
>with Ira's characterisation of "limited loss unlimited profits".
>
>>Does anybody have any thoughts on approaches to position sizing in a day
>trading
>>context?
>
>
>I do not "daytrade" in the conventional sense of the word in that my net
>take home every day has open positions and not just cash. However, I do
>believe the concepts of defending money would remain the same.
>
>I suppose if going home with no open positions is your objective, you would
>need to increase the amount you risk on a trade much more than people like
>me, since you have to extract from intraday noise without regard to the big
>picture trend.
>
>Since you make use of the word trend earlier in your emails, I wonder how
>many days in a month actually have intraday trends compared to the days
when
>there is more range-bound trading? My gutfeel is that trend days number
>about 35% of the total trading days in a month - if my experience in
>bonds/snp/energies is any indication.
>
>If 2 out of 3 days are non-trending in nature, you are really in no
position
>to add to your bet once in a trade, since you are betting against the odds
>of a non-trending day turning into a trend day - probably towards the end
of
>the shelf life of the existing trade.
>
>Once again, a dollar amount risk will help you here, since even your added
>position will still get you out of the trade once you lose x amount.
>
>Do this enough times and you will find that you are probably better off
just
>trading 1 capital unit out of 4 or 5 at a time, leaving the rest in cash or
>in other trades that have low correlations with your current trade - even
on
>a daytrader's horizon.
>
>Thoughts welcome.
>Gitanshu
>
>
>
>
>
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