Welcome to the Traders Laboratory.

Money Management Risk and money management related topics.

Like Tree10Likes
Reply
Old 10-23-2012, 04:47 PM   #9

MightyMouse's Avatar

Join Date: Jan 2008
Location: The Lumber Yard
Posts: 2,335
Ignore this user

Thanks: 82
Thanked 599 Times in 444 Posts

Re: Position Sizing or Diversification?

Quote:
Originally Posted by wrbtrader »
Hi,


Yet, if the trader decides to increase position size, do such only after about 1 - 2 years of consistent profitability via the prior position size. The 1 -2 years time span will allow the trader to have real trading experience in a few different types of market conditions to help prepare/determine if increasing position size is appropriate.
I look at it is a function of account size. If the account doesn't grow, I have no business adding contracts.
MightyMouse is offline  
Reply With Quote
Old 10-23-2012, 05:40 PM   #10

Join Date: Oct 2007
Location: Berlin
Posts: 5
Ignore this user

Thanks: 67
Thanked 1 Time in 1 Post

Re: Position Sizing or Diversification?

I would continue focus only on my one market which I trade well (otherwise I would not have doubled the account). Then I would analyse continously my trades, especially, win/loss ratio and largest looser etc etc. and would run a monte carlo analysis (supposing you have a larger number of trades). With that you can find out, which draw down you can expect when applying a certain method and a given account size. Then, if that is all OK and gives green light to upscaling, I would trade a second contract, and apply one of the methods for position sizing ie. fixed ratio or so, and strictly following that, meaning, when the account is falling back below the threshold, I would reduce the contract number back to one - and continue as usual. This inevitably leads you to increasing contract sizes, since you are continously profitable and controlling your risk adequately. Given that your method gives you a reasonable frequency of trades and the market has enough liquidity, no need to consider an additional market to trade at the same time.
Only my humble opinion.
Cheers.
dragon987 is offline  
Reply With Quote
Old 10-24-2012, 06:26 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: Position Sizing or Diversification?

Quote:
Originally Posted by 4EverMaAT »
If you can only pick one, why not continue with what you are already good at?
Because past results are not indicative of future performance? Whereas effective diversification could be indicative of reduced risk?

BlueHorseshoe
BlueHorseshoe is offline  
Reply With Quote
Old 10-24-2012, 06:31 PM   #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: Position Sizing or Diversification?

Quote:
Originally Posted by dragon987 »
no need to consider an additional market to trade at the same time.
What if your chosen market suddenly starts to behave differently? You won't "blow up", but you might lose profitability. It's quite likely that this change of behaviour will happen; the probability that all markets in a non-correlated portfolio would start to behave differently all at the same time should be much lower. Or not?

BlueHorseshoe
BlueHorseshoe is offline  
Reply With Quote
Old 10-24-2012, 06:34 PM   #13

BlueHorseshoe's Avatar

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

Thanks: 234
Thanked 287 Times in 223 Posts

Re: Position Sizing or Diversification?

Quote:
Originally Posted by addchild »
I would consider a few things,

1. Dance with the girl that brought you to the party.

2. If you decide to trade more markets, are the markets correlated? in other words, is the risk correlated?

If the markets are correlated I would forget it. With correlated risks, you will likely end up with similar outcomes while sacrificing attention.

Also you should consider volatility and contract value.
A totally valid point but . . . at the critical, high volatlity times, does intermarket correlation increase? Are volatility and correlation . . . positively correlated? Look at the last crash - pretty much everything did the same thing at the same time - instruments that now trade again as though they don't know one another exit.

Is strategy diversification rather than market diversification the answer?

BlueHorseshoe
BlueHorseshoe is offline  
Reply With Quote
Old 10-24-2012, 09:55 PM   #14

Join Date: Dec 2009
Location: Monmouth Junction, NJ
Posts: 2
Ignore this user

Thanks: 0
Thanked 0 Times in 0 Posts

Re: Position Sizing or Diversification?

Trading a second, relatively non-correlated market will smooth out your equity curve. In other words, your drawdowns (losing streaks) will become a smaller percentage of your net profit, thereby lowering risk.
DavidChazin is offline  
Reply With Quote
Old 10-25-2012, 01:16 AM   #15

4EverMaAT's Avatar

Join Date: Apr 2009
Posts: 176
Ignore this user

Thanks: 29
Thanked 63 Times in 42 Posts

Re: Position Sizing or Diversification?

Quote:
Originally Posted by BlueHorseshoe »
Because past results are not indicative of future performance? Whereas effective diversification could be indicative of reduced risk?

BlueHorseshoe
Diversification still leaves you at the same decision point: Past results are not indicative of future performance. But instead of worrying about 1 instrument, you now have 2 instruments in which to contemplate that question.

The suggestion on strategy diversification is perhaps more valid, although again: past performance is not indicative of future results. But by diversifying strategy, you may have a higher survival rate as if one strategy does not blow up, another one will. But if you are trading similar core strategies, but with different risk levels (position sizes), then statistically you can measure which strategy can survive certain market conditions better.

So are you using the same core strategy, but different position sizing/parameters on different instruments? Or the same strategy on two different instruments? Or the same core strategy, but different position sizing (and other parameter changes) on the SAME symbol?

It's a matter of preference. I say stick with what you are familiar with (either the core strategy on a different market, or the same market, but increase the position size). You are familiar with your strategy and the first market you are doing well with. No need to reinvent the wheel.
4EverMaAT is offline  
Reply With Quote
Old 10-25-2012, 02:49 AM   #16

Join Date: Jun 2012
Posts: 609
Ignore this user

Thanks: 9
Thanked 54 Times in 45 Posts

Re: Position Sizing or Diversification?

Quote:
Originally Posted by BlueHorseshoe »
Because past results are not indicative of future performance? Whereas effective diversification could be indicative of reduced risk?

BlueHorseshoe
Blue, I'm gonna pick on you here a bit, but don't take it personally. Frankly, you ask good questions, and often have a well developed understanding of how markets work as well as an awareness of risk, etc....

But I think your missing the forest for the trees a bit here... here's how.

Your essentially quoting investment industry cliche's, but your taking them out of the context in which they were intended for, as well as not considering WHY these cliche's exist in the first place. I'll take them one at a time...

"because past results are not indicative of future performance" Ok. Fine. This is technically true... but if we carry it to the nth degree.... your boss might as well fire you from your job now, because, well, no matter how good you are at your job, past performance is not indicative of future results ya know. And if your wife wants to have a 2nd child? well, call up the adoption agency. Because just because you had it where it counts the first time around, doesn't mean that you can still "deliver". Sterility is a real fact of nature for some anmials, and after all, past performance is not indicative of future results.... etc...etc..

I think you see my point (gosh I HOPE you do... or I'm just gonna come off sounding like an inappropriate, insensitive, pervert of sorts!)

Ok...so, what exactly is this statement all about then? Well, after the great crash of 29, many rules were implimented over future decades that existed for the purpose of preventing greedy, slimy pitchmen from showing a trading record, and then making promises that "I'm this good at trading. And if you invest with me, I guarantee I'll make twice as much for you as I did with my trading last year!"

In other words, it is a legally required disclaimer designed to protect the investing party by letting them know that in truth, this is an investment opportunity that they have no real control over, and therefore must understand that it may not be as good as they would like to believe it is.

Now, what investments do they NOT require this disclaimer to be attached to? How about raising capital for a public offering.... or, starting your 3rd pizzaria, or investing in your 7th real estate deal.

But...how come? The key issue here centers around "Control". When you give your money to someone else, you give away your control. Therefore, the disclaimer acts as a way to keep your expectations realistic, as well as protect you from giving up control to a would be confidence man who promises the moon but gives back something less....

HOWEVER, if YOU are your own investor, your own trader, your own entrepreneur.... you have an infinitely greater degree of control in this situation. So while there ARE still black swan events, outliers, etc.... you can have a specific plan (like stop loss orders, drawdown limits, and many other things) that will account and protect you from each individual "threat" that you may encounter as you run your trading business.

And if your strategy is based in something that is pretty much intrinsic to the nature of the liquid, auction market model that 99.9% of the capital markets in the world operate under... then you can be pretty sure you will be able to continue to perform at a respectable, profitable level for probably decades into the future (unless human nature itself changes...but then all bets are off)

The point here is that the cliche "past performance is not indicative of future results" is actually NOT an accurate description of a universal truth! It is a LEGAL DISCLAIMER to prevent hucksters from overpromising and under delivering to the relatively unsophisticated investor. It has very little, if any, application with regard to a persons own ability to trade profitably...or for that matter, invest in real estate profitably, or operate a McDonalds fanchise profitably, or even wake up in the morning successfully!

And this brings me to the 2nd cliche that you use...

"effective diversification could be indicative of reduced risk?"

"could be" being the operative phrase in that sentence. It COULD BE evidence of total retardation, and I suppose it COULD BE submitted as proof that aliens walk among us...

lets forget could be for a moment...and go back to the very beginning of the concept of "diversification is a way to reduce risk"

The REAL story is that cliche was born with a twin sister... something we now like to call a "mutual fund" Because the industry had to cook up some way to justify criminally high fees and charges to your retirement account all for underperforming what you could have usually made just investing in the broader U.S. equity markets...

And the way they sold that sack of shit was by saying "ahh... you see, if you take your retirement money, and buy a stock with it. That company could go bankrupt. ANd if they do, you've lost your entire investment!! But, if you invest with our (name brand here) mutual fund, we will spread your money across such a cacaphony of generalized corporate holdings that if one company goes under, it's represents less than 1% of your entire retirement, so a bankruptcy or problem for a publicly traded company won't hurt you hardly at all (you're also doomed to underperform the market from here till retirement, all the while paying us miillions of dollars every year to suck at our jobs...but hey! look at the bright side... if IBM has a slow quarter, you'll only lose a few hundered dollars, instead of a few hundered thousand!!)

So, all cynicism aside... what EXACTLY is the risk that "diversification" has reduced??? It really only reduces the risk for a passive investor who does not pay much attention to, nor does he understand, what he is invested in.

But, does this describe a type of risk that applies at all to the active and engaged day trader??? No! not even a little bit! We are so tuned in, over stimulated, focused beyond belief, and constantly looking for "what caused this move?!?? what caused that move?!?!?!!!!" that there is really NO WAY that we run the risk of putting our money into a stock, or futures contract, or whatever, and then watching our money get flusehd down the drain because we were too lazy or ignorant to follow the industry, or the company, and see the 137 signs that it was in trouble (like that obvious and gorgeous downtrend the stock has been locked into for the past 9 weeks...etc)

You diversify to protect against the risk of lazyness. Of financial apathy. It gives you the luxury of being able to NOT look at the market for 12 months at a time, and usually not worry to much that the bulk of your money will be there next year.

If your trading a futures contract.... lol. I'm laughing just thinking about it. Go ahead. Try to go long or short any contract...and then turn off the charts, and tell yourself not to worry, you'll come back in a year, and see how things are going! LOL!

As warren buffett so elequently put it "Diversification is just a hedge against stupidity"

You need to consider exactly HOW these cliches operate... because if I tell the guy who runs the gas station at the corner that his business model is fucked, because he has no diversification, in that all he sells is gasoline.... well, he may be a one product guy, but something tells me he doesn't have a whole lot of risk in his business, dispite being a 1 product guy.

Remember, the entire existance of the antitrust case law that we have in the U.S. was because the U.S. federal government thought that some companies were too powerful for the good of competition... but funny thing is... standard oil... microsoft, ticket master... these companies aren't known for their broad "diversification"!!!

"Diversitication" does NOT equal "Less Risk"

"Diversification" DOES equal "reduction of a very specific, somewhat rare and exotic type of risk"

but as a day trader, your exposure to said rare, exotic risk is almost nonexistent.

Don't accept cliche's at face value. Try to find circumstances and situations that they DON"T work.... because that will provide you insight as to how they apply, and this insight will help you be better prepared to know the right course of action for your own financial decisions.

Hope this helps a bit. It's rather long, I do apologize.

FTX
zdo likes this.
__________________
My Live Trading Track Record -
http://www.myfxbook.com/members/FTra...-sample/380038
ForexTraderX is offline  
Reply With Quote
The Following 2 Users Say Thank You to ForexTraderX For This Useful Post:
BlueHorseshoe (10-26-2012), dragon987 (10-25-2012)

Reply

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
Position Sizing ariel Money Management 11 01-05-2015 02:02 AM
Position Sizing carltonp Beginners Forum 22 04-28-2012 10:09 AM
Position Sizing Software The Pip Thief Money Management 41 04-18-2010 08:54 PM
Position Sizing Indicator waveslider Trading Indicators 0 02-05-2008 06:14 PM
Different Position Sizing Methods Soultrader Money Management 1 02-23-2007 08:22 PM

All times are GMT -4. The time now is 01:54 AM.
Copyright ©2000 - 2017, Jelsoft Enterprises Ltd.
CS to VB integration by DeskLancer
2006-2011 Traders Laboratory, All Rights Reserved.