[The Pip Thief]

DUGDUG,

I see what you mean. Your are 100% Right about the psychology side side. All to often traders lose in not on the losing side but on the winning side. Had a friend do this actually. These ups in trading can be deadly.

Sorry, you wording did throw me off and I guess I was quick to shoot without proper examination of your remarks as I was just thinking of the math and not the psychology of the equation. If you head is not right then none of these strategies work. That is for sure so I am right on with you there. Thanks for the clarification. I guess I am the one who was letting something fly over my head, which happens quite often if I am honest.

The Pip Thief

[DugDug]

also the original writer of the quoted link can be found..... I think he has a very good website/blog providing some good info. Particularly in this case the info about the sequence of trade wins v losses and how it can relate to position sizing.

Breakout Bulletin - July 2003

[The Pip Thief]

Originally Posted by DugDug »

also the original writer of the quoted link can be found..... I think he has a very good website/blog providing some good info. Particularly in this case the info about the sequence of trade wins v losses and how it can relate to position sizing.

Breakout Bulletin - July 2003

Very Interesting indeed. Did you see how when you change the trade sequence that Fixed Ratio is better in first example and then in the second example Fixed Fractional is much better? In reality the best strategy would be to start a small account with Fixed Ratio and then go to Fixed Fractional as it grows. Again this does depend on distribution and the only way to find out how to trade your system best is to do 10,000 simulations of 100 or 1000 trades and to see what would have been best.

I must admit that I am too addicted to % risk and prefer my model for the stage that I am presently. Good article though and just goes to show you how Numbers can play games on results depending on all the variables. I would not say I am a believer but I definitely give merit to the Fixed Ratio at this point which is something I would not have done previously.

So thank you to all who reasoned me through this mental process.

The Pip Thief

[Kiwi]

Dugdug,

I didn't and wouldn't advocate excessive risk for newbies who don't want to blow out quickly (on the other hand ...)

My personal recommendation is that you change X based on both the expected return pattern of the trading system and also experience.

So the typical recommendation for a long term trending system is <=2%.

In which case a new player should start at 1% or less and work their way up to the full X based on success and the lack of unexpected surprises.

Similarly though, given that a long term trending system has a win rate around 40% to 50%, if you had a win rate of 70% to 80% the probability of risk of ruin declines considerably. In this case the base X might be 3% rather than 2% (but again, adjusted for user and system newness).

I may be overly cautious but when I start a new strategy I trade it light simply because I'm a newbie to the strategy.

FWIW.

[HighStakes]

Earn the right to increase your position size.

Personally, I will allocate $4000 for every contract (ES). Thus, if my account increases by $4000, I add one contract. Conversely, if my account decreases by $4000, I reduce my size with one contract.

I will keep risk at a constant maximum of 2% per trade, ideally less.

It is not that hard to make basic Monte Carlo simulations in Excel. It can be very useful to do when learning to think about these concepts. Experiment with different input and observe the results of the simulations.

What kind of win%, average winner, average loser and number of trades do I need in order to meet my objectives? What will happen if I allocate less capital per contract or more? How much drawdown can I expect?

If you have an idea about your trading statistics or just want to experiment, you can simulate a week, month, year or more of trading, 10 000 times or whatever you like, to see what can be expected from that trading profile.

[leobust]

Every trading day is different, (market does a series of daily contraction and expansion), so only I allocate the no. of contracts according to the type of setup triggered and signal strength. My trade risk limit is from 1% to 5% of my account.
When I exceed my maximum risk limit, I stop trading and take a rest. I go back to my notes and review my setups.

[SIUYA]

LeoBust - I agree with you - while fully systemised strategies and very disciplined traders generally push for the idea that every trade is kept the same risk percentage. Over the years, I find that not every trade is the same..... particularly in terms of time frame. This is largely as I am not really much of a day trader so possibly the divergence in ideas.
A good example maybe whereby shorts are taken as a larger percentage in a clear downtrend, while longs are limited in size.
However, this might also mean that too many setups and trades are being taken out of context? Just food for thought.

[Ed Goldstein]

I've found that % risk per time period has made a difference for me and as the account grows I add to the contracts traded and the % of equity I risk.

because...

Early on I sat through many losing trades waiting for the % stop to get hit as I ostensibly "let the trade work."

It didn't help that in 2002, I didn't have a real methodology and only a vague understanding of supply and demand in the micro time frame, but I bought hook line and sinker into Van Tharp's psychology coaching and position sizing concept and ended up "paper-cut" bleeding my account 1% at a time.

Having a market view and understanding how to gauge supply and demand allowed me to then gauge my risk dynamically per day so I wasn't married to the hard stop on each trade...I would find that I was often correct in my understanding of turns in the market but needed flexibility in entering the trade so I scaled into with a max of three levels with a %per day risk.

'Scaling in' is also known as "working the trade" and it's not a magic bullet for bad trading. It can also be known as losing your a$$ or blowing out an account by adding to a loser.

However this approach reined in by a % per day forced me to watch my criteria as opposed to hyper-focusing on nailing the perfect setup and slapping on a two point stop or % per trade stop and then feeling a false sense of security as though I were following good practices.

When I had a useful marketview (like worldview) based on data driven supply and demand (i.e. a positive expectancy) that led next to tweaking on how to best risk in the market and then those together greatly reduced my anxiety and discomfort around trading thus buoying my psychology.

Psychology and position sizing without a real methodology is akin hyping yourself up at an Amway rally. All the NLP, hypnosis, law of attraction rah rah psychology leads to grief with no payout for time and money spent.

BTW It's not a slam of Van Tharp. I own his course and position sizing videos and it's not that position sizing and Pyschology aren't important. It's that they're useful in supporting a solid methodology.