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Old 10-21-2012, 01:35 PM   #1

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Position Sizing or Diversification?

Suppose you have a limited amount of capital and trade one contract in one market. You're a good trader, and after a certain amount of time you have doubled the account. What's the best thing to do next . . .
  1. Increase your position size and trade two contracts?
  2. Diversify by trading a single contract in a second market and continuing to trade a single contract in the orignal market?
In other words, if you don't have the luxury of a portfolio sized account to begin with, how do you subsequently reconcile the allocation of capital to secondary markets with position sizing in the first?

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Old 10-21-2012, 01:52 PM   #2

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Re: Position Sizing or Diversification?

I would add contracts to the markets I trade and then only add contracts to the markets I trade well. So, if I did well trading ES, but not CL or 6E, then I would only add to ES.

I think of it as a cash poker game. If a new guy sits down to play and is not familiar with how any of the other players play, he will lose big most of the time unless he has an incredible string of lucky hands or sucks out a lot. It really doesn't matter how good he is at determining the odds if he doesn't know that Bobby won't call a raise or that Timmy won't fold no matter what or that if Mike calls preflop he likely has a minimum of A10s if he is in mid position, etc, etc. Even though the game is the same, the players are different at each table.
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Old 10-22-2012, 08:04 AM   #3

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Re: Position Sizing or Diversification?

Quote:
Originally Posted by BlueHorseshoe »
Suppose you have a limited amount of capital and trade one contract in one market. You're a good trader, and after a certain amount of time you have doubled the account. What's the best thing to do next . . .
  1. Increase your position size and trade two contracts?
  2. Diversify by trading a single contract in a second market and continuing to trade a single contract in the orignal market?
In other words, if you don't have the luxury of a portfolio sized account to begin with, how do you subsequently reconcile the allocation of capital to secondary markets with position sizing in the first?

BlueHorseshoe
I would continue to trade what I am good at
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Old 10-22-2012, 12:18 PM   #4

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Re: Position Sizing or Diversification?

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Originally Posted by Obsidian »
I would continue to trade what I am good at
Assuming you were equally good (ie had a workable strategy) for a dozen instruments though . . . Do you try and spread risk across multiple strategies and markets through diversification, or do you try and compound your way to vast riches but remain totally at the mercy of one market and strategy?

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Old 10-22-2012, 12:36 PM   #5

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Re: Position Sizing or Diversification?

Quote:
Originally Posted by BlueHorseshoe »
Suppose you have a limited amount of capital and trade one contract in one market. You're a good trader, and after a certain amount of time you have doubled the account. What's the best thing to do next . . .
  1. Increase your position size and trade two contracts?
  2. Diversify by trading a single contract in a second market and continuing to trade a single contract in the orignal market?
In other words, if you don't have the luxury of a portfolio sized account to begin with, how do you subsequently reconcile the allocation of capital to secondary markets with position sizing in the first?

BlueHorseshoe
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.
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Old 10-23-2012, 09:49 AM   #6

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Re: Position Sizing or Diversification?

If you can only pick one, why not continue with what you are already good at?
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Old 10-23-2012, 10:44 AM   #7

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Re: Position Sizing or Diversification?

Quote:
Originally Posted by BlueHorseshoe »
Suppose you have a limited amount of capital and trade one contract in one market. You're a good trader, and after a certain amount of time you have doubled the account. What's the best thing to do next . . .
  1. Increase your position size and trade two contracts?
  2. Diversify by trading a single contract in a second market and continuing to trade a single contract in the orignal market?
In other words, if you don't have the luxury of a portfolio sized account to begin with, how do you subsequently reconcile the allocation of capital to secondary markets with position sizing in the first?

BlueHorseshoe
Hi,

Assuming we aren't talking about a trader using an automated trading system...

Continue trading one contract considering the trader is a good trader and has the ability to double the account size while only trading one contract. If it ain't broke, don't fix it.

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.
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Last edited by wrbtrader; 10-23-2012 at 11:09 AM.
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Old 10-23-2012, 02:01 PM   #8

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Re: Position Sizing or Diversification?

Quote:
Originally Posted by BlueHorseshoe »
Assuming you were equally good (ie had a workable strategy) for a dozen instruments though . . . Do you try and spread risk across multiple strategies and markets through diversification, or do you try and compound your way to vast riches but remain totally at the mercy of one market and strategy?

BlueHorseshoe
we should be careful while spreading risk. sometimes we reduce the risks through diversification, but sometimes we make it double...
everybody has their limits (focus, research, analyze etc) and market conditions change
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