Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

BlueHorseshoe

Position Sizing and Predicted MAE

Recommended Posts

Hello,

 

Assuming that the best predictor of b at time t=-a is b * f, why isn't the following position sizing formula helping me to reduce the deviation of returns?

 

a = average trade length;

b = highest high ( a ) - lowest low ( a );

c = average b ( population size );

position size = ( equity / price ) * ( c / [ b * f ] );

 

Any help very much appreciated!

 

BlueHorseshoe

Share this post


Link to post
Share on other sites

R=HH-LL; // [avgTradeLen]

avgR=avg(R,totaltrades);

buyingPwr=acctSize/c;

size=bPwr * (avgR / [F*R] ); // square brackets = bug or something you intended that I didn't understand

 

You're probably sorting the net profit column of the optimization report. Export to excel, add a column that measures deviation of returns, sort that column, that's the optimal f that will satisfy your smoothing requirements, while forsaking net, unless your fitness function strikes a balance between net and smoothing.

 

Besides optimal F, ... R is the only other moving part. I was confident i had thought this through when I wrote the paragraph below here but after thinking for too long I'm unable to determine if increasing R increases trade size. If it does then it's backwards. Substituting hard numbers in place of the variablies on line 4 is too much for me at the moment but that should be easy to resolve. If R is wired wrong it will need to be fixed before F will work. If R is wired correctly then you will still need the custom excel function to optimize F.

 

As R increases it simultaneously increases trade size. R normalizes individual trades to a variable scale that causes fluctation in trade net and Equity Curve. Fixed size normally returns a smoother EC than variable size. Varying size is normally associated with increasing gain. Varying size can be used to smooth an ec but if you use range as the input it needs to work backwards from the way it's written. When anticipated range increases forgo the opportunity for increasing profit. Decreasing size will maintain the fixed net profit for that trade where the net per contract is increased for that trade.

Share this post


Link to post
Share on other sites

 

You're probably sorting the net profit column of the optimization report. Export to excel, add a column that measures deviation of returns, sort that column, that's the optimal f that will satisfy your smoothing requirements, while forsaking net, unless your fitness function strikes a balance between net and smoothing.

 

Besides optimal F, ... R is the only other moving part. I was confident i had thought this through when I wrote the paragraph below here but after thinking for too long I'm unable to determine if increasing R increases trade size. If it does then it's backwards. Substituting hard numbers in place of the variablies on line 4 is too much for me at the moment but that should be easy to resolve. If R is wired wrong it will need to be fixed before F will work. If R is wired correctly then you will still need the custom excel function to optimize F.

 

As R increases it simultaneously increases trade size. R normalizes individual trades to a variable scale that causes fluctation in trade net and Equity Curve. Fixed size normally returns a smoother EC than variable size. Varying size is normally associated with increasing gain. Varying size can be used to smooth an ec but if you use range as the input it needs to work backwards from the way it's written. When anticipated range increases forgo the opportunity for increasing profit. Decreasing size will maintain the fixed net profit for that trade where the net per contract is increased for that trade.

 

Hi Onesmith,

 

Good to see you around the forum again and thanks for your reply.

 

I can't be certain whether you've understood what I'm trying to do or not - this is not Ralph Vince's Optimal F, and I'm not trying to optimise anything. Here's an explanation of my thought process and goal:

 

  1. The base strategy uses zero leverage and whenever it is not flat it is fully invested. So the position size for that is simply Equity/Close.
  2. The problem is that two positions with identical equity available and the same entry price can have markedly different outcomes depending on "volatility" after entry.
  3. In my formula f is just a simple multiplicative function derived from past trade data (average-trade-length) and past price data (highest(h,average-trade-length) - lowest(l,average-trade-length)) that has on average been the best predictor of "volatility" average-trade-length periods into the future. In every case I have examined f has been close to 1 (ie the best predictor of future "volatility" is current "volatility"), so b*f is practically identical to b (my intention is that f could theoretically be replaced with some kind of higher order polynomial extrapolation)
  4. c is the average "volatility" for the entire data sample (because this takes a while to compute and the sample size quickly becomes too large for the max bars to reference in TS I have replaced it with a totally recursive LQE).
  5. Average "volatility" or c is then aligned with the base scenario (equity/close).
  6. Position sizing when b*f is higher than average should therefore be proportionally smaller, and when b*f is lower, proportionally larger, according to the following: positionsize = (equity/close) * (c/[ b*f ]);
  7. When "volatility" is higher than average, the formula calls for more units to be purchased than the equity allows with leverage; lower than average volatility is therefore simply ignored by capping position size at a maximum of equity/close.

 

I would expect all this to result in reduced net gains but also reduced deviation of returns and a smoother equity curve. Somehow, it isn't doing that . . .

 

Any suggestions as to where the issue may be?

 

Thanks,

 

BlueHorseshoe

Edited by BlueHorseshoe

Share this post


Link to post
Share on other sites

If ES volatility is at or slighlty below avgV and NQ v is above nq avgV then which one do you buy? Do you ever buy less than account size? If you intend to go all in and use your entire buying power everytime you take a postion then why is position size part of the equation?

Share this post


Link to post
Share on other sites
If ES volatility is at or slighlty below avgV and NQ v is above nq avgV then which one do you buy? Do you ever buy less than account size? If you intend to go all in and use your entire buying power everytime you take a postion then why is position size part of the equation?

 

Certainly, less than the entire account size can be bought.

 

The idea is to be fully invested for the typical trade. If a trade is deemed likely to be atypical - a likely outlier in terms of dollar excursion from the entry price (due to what I am calling "volatility"), then the idea is to decrease the position size.

 

"Fully invested" means only for the portion of total equity that is allocated to that class of instruments. So the "equity" in my pseudocode refers only to a portion of total equity (in the EL code I have sent, I have plugged in the figure of 5k to avoid the confusion of further variables).

 

Priority of allocation within a class of instruments (such as equity indices - the ES and the NQ in your example) is based on a different selection metric altogether, so their relative volatilities would not be considered by the strategy.

 

The purpose of the code, taking (equity/close) as a base scenario, is to try and make all trade outcomes as much like the average trade outcome as possible, by accounting for the predicted price behaviour (MAE/MFE) relative to average price behaviour. The typical trade provides the average outcome, and the average outcome is aligned with (equity/close), with everything else scaled around this.

 

BlueHorseshoe

Edited by BlueHorseshoe

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • XRP trading: Still Bearish, Ripple May Bounce Up After Testing a Close Support   Ripple (XRP) Price Analysis – April 16 Regardless of the current green market, XRPUSD bearish sentiment moves in a descending channel with a slow price action towards close support. XRPBTC, on the other hand, has further fallen in a new direction. Still, XRP market is falling.   XRP/USD Market Key Levels: Resistance levels: $0.35, $0.37, $0.39 Support levels: $0.30, $0.28, $0.26   Looking at the medium-term chart, Ripple appeared bearish as price trades within a descending channel in since early April. While sitting at the lower channel, XRPUSD market has been consolidating for the past five days as a swing high is expected at $0.35 resistance level. A further push above the mentioned resistance may resume XRP on a bullish trend.   Meanwhile, a possible swing low could plummet price to $0.3 support and beyond. Evidently, the trend lines are still a defensive line for the bulls and the bears.   Viewing the 4-hours RSI, a gradual buying momentum is compounding as it points upward. More importantly, the 4-hours Stochastic RSI pressure nears overbought territory. A slight drop is likely once the indicator reaches the overbought zone. Nevertheless, XRPUSD market is still respecting a descending channel pattern.   XRP/BTC Market Ripple, as a hedge, is on a downtrend trend. The massive sell-off in early April has led the sellers to more significant downward movement as price faces 6000 SAT low.The coin’s value is dramatically depreciating as a new low is yet to be established. The bearish scenario is now revealed to be strong; following a new purple line.   Since the drop, the 4-hours RSI has positioned trading below the 50 level; currently swinging on the oversold line. A clear breach above the purple trend line could fly price to 6600 SAT resistance and above.   The current 4-hours Stochastic RSI faces the oversold zone; showing an ongoing selling pressure. A long position may switch the Oscillator on an upside trend. At the moment, the sellers are gaining control of the market.     Please note: insidebitcoins.com is not a financial advisor. Do your own research before investing your funds in any financial asset or presented product or event. We are not responsible for your investing results.   How to trade Bitcoin successfully:  https://insidebitcoins.com/trading/bitcoin       Best cryptos exchanges:  https://insidebitcoins.com/cryptocurrency-exchanges  
    • Hello colleagues I found an automatic strategy that trades on Ichimoku. I got a trial, interesting work with Renko charts ,where only the closing prices of Renko are perceived. The results of my testing on the tick history for the entire period of downloading I apply, the settings were provided by the author of the strategy.  Has anyone else tried it?  What you think ? Their site amntrader.com 
    • Date : 18th April 2019. MACRO EVENTS & NEWS OF 18th April 2019.FX News Today 10-year Treasury yields corrected -2.7 bp to 2.567% and JGB yields are down -1.4 bp at -0.0033%. Asian bonds were generally supported, as stock markets sentiment turned sour again, with South Korean paper underperforming after the BoK left interest rates unchanged, but cut its growth and inflation forecast to 2.5% and 1.1% respectively. Record household debt was one of the factors holding the BoK back from cutting rates for now, and South Korea’s 10-year yield jumped 5.9 bp as the bank tried to calm recession fears. Stock markets generally corrected from the six months high seen yesterday with uninspiring corporate earnings and problems with a new Samsung phone preventing further gains for now. Topix and Nikkei lost -0.96% and -0.80% respectively, after Wall Street closed with slight losses. The Hang Seng is down -0.58%, CSI 300 and Shanghai Comp down -0.44% and -0.39% respectively. The ASX dropped -0.10% and US stock futures are also broadly lower, suggesting ongoing pressure on markets. The front end WTI future meanwhile is trading at USD 63.77 per barrel. Charts of the Day Technician’s Corner EURUSD is still trading around the 1.13 level, and in a channel with key Resistance at 1.1320 and Support at 1.1279. Both are still strong after having bounced yesterday. Indicators are issuing mixed signals. GBPUSD has been stable around the 1.30 level, still unable to break through, fluctuating between the 1.3067-1.3026 Resistance and Support levels. Indicators are giving positive signals. USDJPY started the day below 112.00 mark, as indicators are suggesting a downwards movement. Support remains at 111.80. XAUUSD is trading at year-to-date lows, after breaking through the 1275 Support level. 1270 is the next Support level, with indicators are showing signs of stabilization. Main Macro Events Today EU PMIs (EUR, GMT 08:00) – Manufacturing and Composite PMIs are expected to increase in April, to 47.9 and 51.8 respectively while the Services PMI is forecasted to have remained at 53.3. Retail Sales ex Fuel (GBP, GMT 08:30) – UK Retail Sales ex Fuel are expected to have increased to 4% y/y, compared to 3.8% y/y in March. Retail Sales ex Autos (USD, GMT 12:30) – Retail Sales are expected to have increased to 0.4% in March, up from the negative 0.2% surprise in February. Retail Sales (CAD, GMT 12:30) – Retail Sales are forecasted to have registered an increase in Canada as well, to 0.2% compared to 0.1% in January. Philly Fed Index (USD, GMT 12:30) – Philly Fed index is expected to have eased to 10.3 compared to 13.7 in March. Markit PMIs (USD, GMT 13:45) – Mixed signals are expected from the PMI release, as Manufacturing is expected to have increased to 52.8 from 52.4, while the Services PMI is expected to have declined to 55 from 55.3. Support and ResistanceAlways trade with strict risk management. Your capital is the single most important aspect of your trading business.Please note that times displayed based on local time zone and are from time of writing this report.Click HERE to access the full HotForex Economic calendar.Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE!Click HERE to READ more Market news. Dr Nektarios Michail Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
    • Hi all does anyone use forex signals here? i want to try some out but not sure if its worth paying for it or just use free ones. anyone got recommendation for signal providers?
    • Hello, Samuel. I am a new member to this forum. Great to be here.
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.