Welcome to the Traders Laboratory.

Money Management Risk and money management related topics.

Like Tree6Likes
Reply
Old 08-31-2012, 08:23 AM   #9

TheNegotiator's Avatar

Join Date: Mar 2009
Location: London
Posts: 3,241
Ignore this user

Thanks: 351
Thanked 737 Times in 565 Posts

Re: Trading Account Management Discussion

Quote:
Originally Posted by kayaktri »
It is my opinion that ones education on the topic of MM should come first, prior to anything even closely associated with trading setups, etc. My path did not start this way, but I certainly wish that it had.
I think this is a big thing that new traders fail to address. It's not a big draw for them though. Lots of fancy lines seesawing back and forth on a chart however...

It's true that you must have some sort of defined method to trade. I would suggest a framework for describing market state is the best place to start though. But after that it's imperative to understand and employ MM.

Quote:
Originally Posted by 4EverMaAT »
Drawdown is just a natural part of trading. Just like an airplane must maintain lift regardless of the altitude height, or a ship must stay afloat regardless of how deep the water. When you get to your destination, the heights and depths that were used to get there are irrelevant. The risk returns to zero when no trades are open
True. This is why it's important to identify risk based on the market and then work out position R:R, size or even if it's worthwhile taking the trade at all. The market doesn't care about your account so you must!
__________________
Cheers,

TheNegotiator.

Sovereign Debt Yield Spreads

To contribute is to learn. Don't be that student who always sits at the back of the class.


Day Trading the E-mini Futures
- Discussing and trading the E-minis every day!

Bigger Picture in E-minis Discussion
- Tryin' to see the wood for the trees ;)
TheNegotiator is offline  
Reply With Quote
Old 08-31-2012, 10:29 AM   #10

BlueHorseshoe's Avatar

Join Date: Jan 2012
Location: UK
Posts: 1,371
Ignore this user

Thanks: 234
Thanked 287 Times in 223 Posts

Re: Trading Account Management Discussion

I think that possibly one of the reasons that this topic generates so little interest, even from those who do fully appreciate the role of MM in successful trading, is that there's relatively little scope for discussion or development, especially unless one is prepared to get involved in more complex mathematics.

This is a great shame - I'd really like to see this thread attract more contributions.

Here's my generic wording of something very simple and, I think, pretty well known - the formula for a fixed-fractional position-sizing:

Code:
TotalEquity=InitialCapital+ClosedOutP&L

(TotalEquity/100)*PcntRiskPerTrade=RiskEquity

Risk=USER DEFINED {usually based on some kind of volatility measure - eg it could be something like 2*ATR - this is essentially the 'stop-loss' size for a particular trade}

PositionSize=RiskEquity/Risk
A trader needs to specify the initial capital, the percent of the total equity to risk on any one trade, and the actual dollar risk for any given trade (this amounts to knowing where your stop would be).

Also, you'll need to round the PositionSize up or down to the nearest whole contract/tradeable unit. As I mentioned to someone yesterday, being able to vary this with a finer granularity than the minimum 1 contract for futures is one of the few concrete advantages of things like spreadbetting. It means that your position size can be increased or decreased to the equivalent of a fraction of a contract, which can be very good for small traders trying to build an account.

If anyone wants actual EL code to test the application of this within their strategy, just say and I'll post it.

BlueHorseshoe
BlueHorseshoe is offline  
Reply With Quote
The Following User Says Thank You to BlueHorseshoe For This Useful Post:
TheNegotiator (08-31-2012)
Old 08-31-2012, 02:41 PM   #11

BlueHorseshoe's Avatar

Join Date: Jan 2012
Location: UK
Posts: 1,371
Ignore this user

Thanks: 234
Thanked 287 Times in 223 Posts

Re: Trading Account Management Discussion

I've attached two pdfs. They each show the EC for a strategy in the ES over a ten year period. A non-optimal parameter was used for reasons I can't be bothered to explain, but that's unimportant.

The first pdf shows the results trading a single contract.

The second pdf shows the results with the fixed-fractional formula I gave above, with starting equity of 20k and a maximum risk per trade of 5%.

In the period to the right, immediately after the first very nasty single-trade drawdown, and including the second nasty single-trade drawdown, I was trading this strategy with a 20k account. My plan? Well the idea was to start out fixed-fractional, and then develop a formula that systematically reduced the percentage of equity risked per trade as the equity increased . . . If anyone wants to chat about this or other similar MM ideas then that would be great - position-sizing simply isn't discussed enough on here.

BlueHorseshoe
Attached Files
File Type: pdf SPR Graph.pdf (10.6 KB, 206 views)
File Type: pdf SPR Graph with Fixed-Fractional MM.pdf (9.5 KB, 202 views)
bobcollett likes this.
BlueHorseshoe is offline  
Reply With Quote
Old 09-03-2012, 09:12 AM   #12

BlueHorseshoe's Avatar

Join Date: Jan 2012
Location: UK
Posts: 1,371
Ignore this user

Thanks: 234
Thanked 287 Times in 223 Posts

Re: Trading Account Management Discussion

Does nobody want to talk about this!?!?

BlueHorseshoe
BlueHorseshoe is offline  
Reply With Quote
Old 09-03-2012, 09:46 AM   #13
Sky Blocks Champion

SIUYA's Avatar

Join Date: Apr 2010
Location: a city of canals
Posts: 2,222
Ignore this user

Thanks: 606
Thanked 926 Times in 638 Posts

Re: Trading Account Management Discussion

Blue---- holiday time in the US - plus my guess is most people find it easier to just rely on single contract sizes....as for a few random thoughts.

Re your two charts, everytime I have seen this sort of thing it tells me that when a system is working well you want to ramp it up, and when it does not you want to scale it down. Looking at trade 228 ? shows the problem with the fractional MM.
Have you looked at why that trade occurred - was there anything different about it.

Plus your idea of ramping it up from the start then reducing size would go against the best use of this - ie; you have a system that is winning and then you want to reduce its size.....what do you do when a system is loosing?
Mind you people do a variation on this by tracking their equity (though the trade at 228 would not help this)
For me - I try an change the amounts based on what I think is happening - too hard to program.
A lot of this boils down to an exercise in what is the ideal thing to do v what is most comfortable and that works.....of course if fully systemised then it makes sense to apply the best strategy of MM for the strategy...... I wonder if there is a major difference between applying different strategies to mean reverting v trend following?

''''''''''''''''''''''''
As an exercise for anyone who has a long list of trades, randomly - every 20 trades, throw in a series of outliers whereby you loose 2-3x what you would normally.
Then do the same whereby you gain 2-3x what you would normally rather than taking profits.
This will tell you more about the importance of making sure you dont have big losses, v trying to get a few bigger wins.....(not exactly MM (position sizing) as it does not tell you how much to buy/sell), but when you apply an aggressive MM section to this, the winners can get bigger once you learn to let things ride a little.
__________________
Context is king - and patience is more than a virtue, it is profitable.
SIUYA is offline  
Reply With Quote
Old 09-04-2012, 10:46 PM   #14

Join Date: May 2012
Posts: 9
Ignore this user

Thanks: 15
Thanked 6 Times in 4 Posts

Re: Trading Account Management Discussion

I was also gone for the long weekend.

I would be interest in more discussion of the ideas presented in your two pdf's and possibly gain more insight as to the details on the account losing 50% of the equity in one or two trades. Currently I am using a Fixed Fraction system of calculating my risk exposure and the amount of shares I can purchase for my transactions. I am very aware that I am not optimizing my CAR, but without long term statistical results on my system (I am still building my large sample size of trades to base my stats on), my goal is equity preservation rather than optimized gains.

Best Wishes ...
kayaktri is offline  
Reply With Quote
Old 09-09-2012, 06:01 AM   #15

BlueHorseshoe's Avatar

Join Date: Jan 2012
Location: UK
Posts: 1,371
Ignore this user

Thanks: 234
Thanked 287 Times in 223 Posts

Re: Trading Account Management Discussion

Quote:
Originally Posted by kayaktri »
I was also gone for the long weekend.

I would be interest in more discussion of the ideas presented in your two pdf's and possibly gain more insight as to the details on the account losing 50% of the equity in one or two trades. Currently I am using a Fixed Fraction system of calculating my risk exposure and the amount of shares I can purchase for my transactions. I am very aware that I am not optimizing my CAR, but without long term statistical results on my system (I am still building my large sample size of trades to base my stats on), my goal is equity preservation rather than optimized gains.

Best Wishes ...
Hi,

The 50% equity loss was from one single trade, not two.

The reason for this is that no stop loss was used in the backtest. Nor did I use a stop-loss in actual trading. A stop could easily have been used, and this would have resulted in a smoothing of the equity curve, and also a lower net return. Because I was trying to run a small account up (the entire balance of which I could afford to lose) into something worth compunding, I chose to trade without a stop and 'swing for the fences'. What I got in 10 months of trading was exactly what might be expected - a roller coaster ride but with a better net return at the end. I would not have gone on trading without a stop indefinitely, and towards the end of this period I began searching for a robust solution to this problem (I think it's pretty fair to say that I didn't succeed in finding a solution that I thought was acceptable). Obviously all of this is a very personal thing and may not be what most would want to do.

I'll repost the ECs above with some sort of stop-loss applied, and that could be useful for further discussion.

I'll also post ECs with SIUYA's suggestions applied.

BlueHorseshoe
BlueHorseshoe is offline  
Reply With Quote
Old 10-07-2012, 06:36 PM   #16

Join Date: Jan 2012
Posts: 1,037
Ignore this user

Thanks: 231
Thanked 217 Times in 155 Posts

Re: Trading Account Management Discussion

I know many of us focus on everything else but put MM last... In reality the goal should be to lay off risk and get to risk neutral asap...

Any trades specific outcome is random..now before you tell me you have 60 or 80% winners, can you tell me which one will be the next winner? Can you tell me whether you will have a sting of losers? Nobody knows...all we do know is that we have to manage the risk to stay in the game... So How?

I'm going to assume you have a non-random executable setup...

You must know what the probability is for that setup to hit a specific minimal MFE and what the typical MAE is.. (based on the market traded).

Ex.. If you know the ES has an average 1.5 point counter rotation..wouldn't you want to scale at or just past that rotation to lay off risk... ? If you trade a 2 lot (3 is better) then your goal is to get the first scale.. If you are trading a 2 lot with 1.5 pt risk = 3 pts, then if you scale 1.5 you have no risk going forward on the second contract... With 3 lot you would then have reduced your risk to 1.5pts on 2 lot...Then you would scale #2 at the next logical target subject to your plan and then manage the last runner per your plan...

Some will say the R/R ratio doesn't work..I say the probability of getting the scale is the primary initial objective...after that it is up to the market participants to either carry the trade to its objective or for it to fail... That outcome is not under our control... but execution, Risk management and trade management is...

I am a discretionary trader. To me it's all about the risk...the profits take care of themselves. Get risk neutral then you've protected your equity and then you can let the trade work... Emotionally it allows you to be more detached from the outcome...

Also, make sure you know when the trade fails...it should be something structural, not $ driven if possible...

TheNegotiator likes this.
__________________
Regards...Tom

"Nothing To It But To Do It"
roztom is offline  
Reply With Quote
The Following User Says Thank You to roztom For This Useful Post:
Colonel B (10-08-2012)

Reply

Tags
money management, position sizing, risk

Thread Tools
Display Modes Help Others By Rating This Thread
Help Others By Rating This Thread:

Similar Threads
Thread Thread Starter Forum Replies Last Post
Trading Psychology Discussion Session Soultrader General Discussion 16 01-08-2013 03:04 PM
Risk Management in Forex Trading. asiaforexmentor Forex Trading Laboratory 1 01-07-2012 04:28 AM
Best Money Management Book for Futures Trading? jeffgroove Money Management 12 01-25-2011 06:57 AM
Swing trading questions/discussion brownsfan019 Swing Trading and Position Trading 7 10-14-2007 03:56 PM

All times are GMT -4. The time now is 08:44 AM.
Copyright ©2000 - 2017, Jelsoft Enterprises Ltd.
CS to VB integration by DeskLancer
2006-2011 Traders Laboratory, All Rights Reserved.