Suggestion about Position Sizing

[tonis]

Hi Steve, I am a new-ish user of your software. I have a suggestion to make about the software.

I find it very frustrating when a valid TS signal appears, I then analise it only to find I cannot enter the trade because I do not have enough margin to buy the 15 lots it suggests I should buy...

Would it be too much to ask for a new filter to be incorporated, so that those trades whose margin requirement falls above my account size are not shown?

Thanks

[qitrader]

tonis,

You need to drop the risk per trade to meet the initial margin requirement. But curious, why do you want to trade with maximum leverage? 1 wrong move and you will be out of the game. For the eminis futures, you should have at least $10,000 for every contract you trade.

[tonis]

That is precisely my point, and the problem exists regardless of the account size. If I have ten times more capital, it will tell me to buy 150 contracts, which I still can't do because of margin requirements (or common sense, as you say).

I would like these "unrealistic" or "impossible" trades filtered out...

I await your comments.

[TAS]

Don't rush to trade, learn the MTP help file in details first.

TAS

[Steve Griffiths]

That is precisely my point, and the problem exists regardless of the account size. If I have ten times more capital, it will tell me to buy 150 contracts, which I still can't do because of margin requirements (or common sense, as you say).

I would like these "unrealistic" or "impossible" trades filtered out...

I await your comments.

Exactly as quitrader says - simply reduce the risk % per trade, this will reduce the total number suggested...

Easy really :)

Steve

[tonis]

I disagree.

If I do that, perfectly good "1 Lot" trades will disappear!

And furthermore, the initial margin for each E-mini contract is different, so I need something a little more sophisticated.

I find it hard to belive that nobody has encountered this problem. Until now, I was just ignoring trades above x lots for ES, y lots for YM, z lots for ER2, etc, and waiting to see if the bar extends to the point where the number of lots is below my affordable limit, before taking the trade seriously.

I still think this filter is necessary. Or if is too difficult to implement, something like "ignore all trades above 10 lots" would also be welcome.

Cheers

[Steve Griffiths]

What Broker are you using........ sounds like their "day-session" margins are far too high ?

As you say, you can always ignore numbers above your own margin requirements. That is easy to do, and just common sence really.

Thanks

Steve

[qitrader]

Sounds to me like you are using Interactive Brokers. They recently increase the initial margin requirements to all Emini futures contract.

[d-day]

Sounds to me like you are using Interactive Brokers. They recently increase the initial margin requirements to all Emini futures contract.


Interactive Brokers did increase daytrade margins to nearly the same as overnight margins due to the increased volatility associated with the Summer correction. However, margins are now back to normal, e.g. daytrade 2126 initial and about 1700 maintenance. I had actually stopped trading the ER2 for a few weeks because the daytrade inital was nearly $5000/contract.

[d-day]

I disagree.

If I do that, perfectly good "1 Lot" trades will disappear!

And furthermore, the initial margin for each E-mini contract is different, so I need something a little more sophisticated.

I find it hard to belive that nobody has encountered this problem. Until now, I was just ignoring trades above x lots for ES, y lots for YM, z lots for ER2, etc, and waiting to see if the bar extends to the point where the number of lots is below my affordable limit, before taking the trade seriously.

I still think this filter is necessary. Or if is too difficult to implement, something like "ignore all trades above 10 lots" would also be welcome.

Cheers


How is this a problem for you? If MTP R/R calculates 15 contracts, but your capital only allows you to do a max of 9, then just trade 9 contracts when ever the MTP R/R exceeds that number.

And I also agree with Qitrader - even if your broker allows daytrading on $500/contract margin, and you have a 10K contract, you should only trade 1 contract, not the 20 that your broker would allow.

[Matt Bowen]

Hi Tonis,

Ok, instead of playing the ultimate guessing game here... What size account are we talking about here?

If you are unsure of how position size effects the account then I suggest you watch this video... it's one of the main reason day traders risk too much money: Trading beyond their means or risking too much per trade and it's one of the fastest ways to drain an account.

The reason I created this video was to show people why small accounts are at a disadvantage. It does not mean you can't play, but you must have the discipline to NOT take trades that carry too much risk.

http://www.mtpredictor.com/SlideShows/RiskVideos/risk.wmv

I can't believe all of these nit-wit brokers and vendors out there who don't teach people this stuff. It's like giving people a loaded gun (with bullets) and saying: "have fun" :eek:

Unbelievable,

Matt

[tonis]

How is this a problem for you? If MTP R/R calculates 15 contracts, but your capital only allows you to do a max of 9, then just trade 9 contracts when ever the MTP R/R exceeds that number.

And I also agree with Qitrader - even if your broker allows daytrading on $500/contract margin, and you have a 10K contract, you should only trade 1 contract, not the 20 that your broker would allow.

For position sizing to work, the initial risk must be the same every time. If the program tells me to trade 15 contracts but I only trade 9, then I am changing the value of the initial risk and therefore that trade will be *different* to my other trades. If that trade happens to be the winner that ends a losing streak, I will be angry not to have taken it to its full potential.

Consistency in the maths is the key of position sizing.

And with regards to your other comment, I never trade more than the number of lots given by MTP, even if I can afford to. I keep my risks constant!

tonis

[tonis]

As I have said before, account size is irrelevant. I am only trying to eliminate false signals arising from short bars.

Imagine a really short gap between buy to open and stop loss prices in ER2. I am looking at one right now, but I don't want to paste too large a file, so I won't. With a 150,000 usd account and a 2% risk, it tells me to buy 100 lots at 784.9 with a stop loss at 784.6. As I said, a really small gap. Initial risk is 3,000 usd. Initial margin will be 100 * 2,125 (Well guessed, I am using IB) = 212,500 usd.

I cannot afford this trade.

And now you are probably thinking: but surely you would never enter such a trade, the likelihood of being stopped out is enormous! And you would be right, I wouldn't. Imagine the slippage associated with a 100 contract order! No, I wouldn't.

But my main objection is a different one. When this happens, my attention is drawn towards such a trade, especially in the early stages: when the bar is still being formed. An alarm sounds, colours appear on my market analyzer screen, only for me to say: nope, too early yet, let's see how the market unfolds.

I would like to see a filter that stops trade setups alarms sounding early when you are only, say, two or three ticks into the bar. This does happen VERY often. The bar then develops further, the trade setup disappears, and everything goes to standby mode. A good way of avoiding such false alarms would be the one I am suggesting, one that filters short bars by eliminating those trades that require margin over and above your account size.

I hope you see my point now. Thanks for reading this long post anyway.

tonis
Spain

[d-day]

nevermind - nevermind

[tombtrader]

That is precisely my point, and the problem exists regardless of the account size. If I have ten times more capital, it will tell me to buy 150 contracts, which I still can't do because of margin requirements (or common sense, as you say).

I would like these "unrealistic" or "impossible" trades filtered out...

I await your comments.

Tonis, there is nothing to filter out. The way you have setup your r/r is causing you these problems. Either reduce the % risk as has been suggested or reduce the account size you have input into the software. Keep doing this until the problem of nmot being able to afford the margin goes away. Agreed, consistency of risk is important. Don't try to filter out an otherwise good trade because the bar that the signal comes in on happens to provide a very small risk per contract. These trades often provide the best Rs

[scooper]

Hi All

I was burning the midnight oil last night doing an impromptu review of my trading performance.

At around 2am I was looking at my current drawdown which is around 8R now (down from -14R) having had some recent winners. I know some of you thought I was doing something wrong to get to -14R but believe me I have traded perfectly to get there. Bad R distribution is what its called and its a reality we all have to face. However, you could get a -50R all in a row but it would be unlikely off the bat. But over 10 million trades you would be much more likely to have such a bad R run so don't think its impossible. But I digress....

Now then you would think that on a 20K account the 8R drawdown would be 8 x $400 = $3200 on 2% risk. My account balance is down by more than that which is expected owing to commision, platform fee and slippage (which has been vitrually nil BTW). Taking that into account I am still missing an extra $552. So I set about trying to find it - are there any extra trades or wrong position sizes etc......and the answer is no but I had to check twice to be 100% sure.

At 3am my brain final kicked in and I realised where the extra dosh had gone. It's to do with the way MTP calculates your Risk and how many contracts to trade. Take note of this as it could quite severely affect your bottom line (either good or bad as I will explain)......

Say you do 2 trades and get a -1R loser and a 2R winner. We are conditioned not to think of cash right? So lets do the math in terms of R....I will ignore slippage / commission

Win 2 - 1 loss = 1R net. I have a profit of 1R:) So as you would think that hey I am winner but wait you may not be siiting on the 1R profit you think you are.

Lets look at the losing trade I took in detail.....
1 contract on the YM with a 1R risk that equated to an actual dollar risk of $390. This is because the bar length for entry may not give an exact division into equal lots allowing the full dollar value risk. Hence my loss was $390.

Lets look at winning trade in detail......
1 contract on the YM with a 2R win but dollar risk of $210 because the bar of entry was a big one. My win was 2R but in dollar terms it was only $420.

So I made $420 but lost $390 so I have a net win of $30 but I'm still up 1R. If my maths is right that is 0.075R up. Add in commision etc and you may be down. Now that's blown away my calculated metrics on expectancy of the system and it has been proven on my account as I have $552 less than I thought. Now don't jump in and kill me because I'm not slating MTP - I love it and it has and will be my saviour. And its not all bad news because the reverse could happen - ie, your winning trade is a full dollar risk and your loser it at a lesser dollar risk which would actually work out better in terms of dollars on the bottom line:D

However, when I proved the expectancy/expectunity of the MTP system as part of my Tharp course (with 6 months trades I hasten to add) I did not back test on bar replay and note dollar values as well as R values. I intially worked out that given the times I can most likely trade (ie, I ignored trades which I probably would not take as I would be out regularly) I ended up at about 5.2R a week. This fits my plan as I need to make about 10R a month to pay the mortgage etc. Now, as this is a business the bottom line needs scrutiny for obvious reasons I hope. Its what we are working for and what puts food on the table. Now I don't intend to go back over all those trades and bar replay for 7 days like I did before. But be aware that its possible to win but you may not have as much as you thought.

On that note, as I said I love MTP and I have confidence in it so listen to me when I say it works. I'm looking for suggestions/evidence on how this affects your achieved expectancy. If I can't get it I'm going to have spend another 7 hard days going back over it again which is a daunting prospect.

So, onto possible ways to overcome this issue.......Well range bars would obviously help as the R (dollar risk) would be constant and you would never be 1R up only to find your actually 0.075R up (ignoring slippage/commision). I see some people using them and need to investigate this as I am not sure of how the distribution of a non constant dollar risk will affect the realised expectancy of the system. It may work out about even but there again it may not.

Your advices will be much appreciated. BTW I'm using esignal 8 but also have an NT license. Can I do range bars on esignal 8 and are there any special things to watch out for?

[stylist]

The R has a big range between 51% to full 100%
The bigger the net dollar amount that you can risk on each trade the smaller the risk range will be
The smaller the amount the bigger the R range so the only thing we can do is let our profits run to make the account grow
;)

[scooper]

Yes you are right. The range is 51% to 100%. As we don't know which trades will win its hard to determine the affect it has on the bottom line without extensive back testing (again).

[Steve Griffiths]

Hi Scooper.

I think you have actually answered your own question in that you dont “know” which will be the less than the full 1R trade, the profit or the loss. So over time I think you will find that these will even out.

I am worried that you are trying to “over analyze” everything, this can happen after a few losses. Sometimes the answers you seek are just not there, and we all waste too much time and emotional energy going round in circles. At 3am you should, be asleep getting ready for the next day where you should be fresh and ready for the markets. Having no sleep and going over figures at 3am is not the best way to prepare for a day’s trading.

I am not being critical, just making a suggestion not to spend too much time “over analyzing” and worrying about something that we cannot change and will even out over time anyway.

Just my 2c’s worth

Steve

[tombtrader]

The answer to this "problem" is to ensure that you leyt your profits run to their potential and not cut them short prematurely to grab a profit because you have had past losses. By all means, take some off at 3R and go to break even but you need a number of big hits to make the maths of MTP work.

Your worst case scenario is to base your maths on the 51% and see if your expectancy is still there.

[scooper]

Hi Steve/Tombtrader

Re being up late. You are of course 100% correct on that. I was in some ways a little stressed and conducted the review immediately. That is because everyone was saying I had traded incorrectly. As I have been working so damn hard to make sure I trade correctly that was a big blow for me. In fact I have maintained a great record since I have started back after Tharps course.

I have had one screw up which was owing to NT not syching with broker correctly and firing off all sorts of wierd orders. That cost me a bundle but that was not me trading incorrectly.

So overall I had to make sure the decisions I had taken were sound and get my head straight and just go through it again - in fact it affected me so much I vowed I would not trade until I had a conclusion in my head. That meant going through it before the next trading day which is why I elected to do it later rather than earlier in the morning.

Anyway, tombtrader you are right about the expectancy figures. I will have to work on the worst case scenario 51% risk on the winners and 100% risk on the losers. This won't be too hard to work out as I have a spreadsheet of the trade R results. With a normal distribution I guess it may well even out over time anyway but it does mean that I may well have periods where I may not be able to take my needed amount of pay as such even if I'm in the +R target zone.

I'm not worried and will work it out on my 6 month sample at the weekend.

Range bars are of interest though so I'm still interested in any info on that as it removes any uncertainity from the bottom line (which is what I would really like :D).

Cheers

[qitrader]

scooter,

As John Piper says in his book, there is no right or wrong way to trade. You have to learn from those mistakes and move on. Sometimes, those trades that don't work out can become part of your setup routine if they keep showing up repeatedly. Again, you have to find your own niche and create a style that works for you. This will only come after lots of trial and error and screen time. I have been there before. I'm passing along the words of wisdoms of other successful traders I have met in my quest.

cheers

[d-day]

The answer to this "problem" is to ensure that you let your profits run to their potential and not cut them short prematurely to grab a profit because you have had past losses.

As the saying goes, "easier said than done." In an e-mail Matt sent out this week he identifies letting your profits run as the most difficult aspect of trading. I concur. Unfortunately, the time you need most do to this is also the time when it is most difficult - during a drawdown. I have noticed about myself that whenever I go down by 3R or more I have a tendency to start cutting my profits short. Often times this not only prolongs the drawdown, but actually causes a deeper drawdown as I take 1R or less profits on trades that ultimately ran for 3R or more, while still taking -1R hits on the inevitable losses.

I like tombtrader's formulation of the problem above:

"let your profits run to their potential and not cut them short prematurely to grab a profit because you have had past losses."

That thought has now made it onto my trading rules to be read everyday - "Be especially wary of cutting profits short during a drawdown.

[Matt Bowen]

Hi David,

Thanks for the heads up....Here is the reprint of that article:


http://www.mtptrader.com/MTPlogo.gif



Dear Trader,

Let me ask you a question: "What's the hardest thing to do in trading?"

Let me give you a hint, it's one of the 4 cardinal rules of trading:

1. Trade With the Trend

2. Cut Losses Short

3. Let Profits Run

4. Manage Risk

These are ALL extremely important, but which one is the hardest to do?

Here is the Answer: Letting Profits Run!!!

See, in the trading business you have to understand that without letting the profits run...you are basically screwed. I mean it, if you don't let the trade run then you're never going to see the equity curve in your portfolio go up, it's as simple as that.

Let me make this point crystal clear:

In trading, the minute you deprive yourself of the extended trade (the trade that runs), you have an extremely difficult time making any long term profits.

Over the long term, your survival depends on you being able to successfully manage the big trades...trades that are greater than 5 R-Multiples (or 5 to 1 risk to reward), these trades will make up about 20% of your portfolio, but they will generate 80% of the profits (and sometimes more).

In other words, let's say you had a $100,000 portfolio and you keep taking $1000. winners at some profit target, you will never see the $15,000. or $20,000. winners that make the portfolio grow. Here are a few trades right off the top of my head for the last 45 days (somebody usually ask me about them everyday, that's why they stick out).

Here are 3 Stocks that had a 25.2 combined R-Multiples

http://www.mtptrader.com/AAPL.gif (Apple Stock) 8.1 R-Multiple

http://www.mtptrader.com/BAIDU.gif (Baidu Stock) 6.1 R-Multiple

http://www.mtptrader.com/Goog.gif (Google Stock) 11 R-Multiple


Here are 3 Commodities that had 31.6 combined R-Multiples

*Note* (We had to use continuous contracts because some of the entries were on different contract months and both the Gold and the Crude Oil have been rolled over to front month contracts).

http://www.mtptrader.com/Gold.gif (Daily Gold) 8.5 R-Multiple winner

http://www.mtptrader.com/Soybeans.gif (Daily Soybeans) 5.4 R-Multiple winner

http://www.mtptrader.com/Crude.gif (Daily Crude Oil) 17.7 R-Multiple winner


Now, this is only 6 trades, but if you were to stack up 100 trades and look at what happens on a distribution run of 100 trades this what we find out: http://www.mtptrader.com/MoneyTool.gif


Here is my point:

Whether you trade Stocks or Commodities, letting your profits run is the most difficult thing to do in trading, this is by far the hardest part of the education of the trader. However, it is also the most important part for the trader to learn. Traders get good at taking losses or they end up broke, it's that simple.

Have you ever hear the phase: "You can never go broke taking a profit"? Well, that's got to be one of the stupiest things I've ever heard... and it usually comes from one of two people:

#1 Some Idiot who sells garbage trading software or systems to the public domain

#2 Some Moron who does not have a clue as to what he's talking about.

Think of it this way... If you can't let the trades run, you will never be able to pay for the small losses that occur everyday. This is what professional traders know and amature traders don't want to know.

And to answer your question, YES, you can and will go broke taking profits too early...you must let the winners run or you will never make it as a trader, this is why we look for high R-Multiple trades!!!

Still having trouble?

Read this over the weekend: http://www.mtptrader.com/TJMay.pdf

Keep learning and get ready for next week...


My very best to you,

Matt Bowen

[Matt Bowen]

Remember the Frantic Google Trader? If not you can click on the links below and refresh yourself when that guy called me up couldn't figure what he was doing... I called him the Frantic Google trader because he freaked out over the phone about Google's stock price (this is when it was below $500.)

You can read the Frantic Google Trader Story below

Bottom line: The Google trade was stopped out this morning for a 13 to 1 R-Multiple winning trade (see chart below).

There is a good lesson here and it's one I see too many people repeat too often, it's called: SELF-SABOTAGE I'll be talking about this tonight in my special report on how people sabotage their results.

I've hammered this home a thousand times to people: Getting into to a trade is not difficult, learning to get out makes all the difference in the world when it come to results.

All too often I see the average trader get into a trade and as soon as it becomes profitable they get out of the trade. It's like you just threw them a hot potato and they have no idea of how to handle it. You must have the patience to sit with a trade and manage it (that means move the stops accordingly).


Trade Update:

Out of the six positions that were posted here we are stopped out of all the stocks (including Google today at $709.45) we currently are still in Crude Oil and Gold, both from the long side. Notice, there is nothing to do in these trades but manage the stops..that's what successful trading is all about... it's not about jumping in and out of every symbol you can find.

Remember this: Trading does not mean ACTION! In fact, good trading should be pretty boring because there is nothing to do but move your stops. Trust me, a good system does not trade everyday.

[d-day]

Remember this: Trading does not mean ACTION! In fact, good trading should be pretty boring because there is nothing to do but move your stops. Trust me, a good system does not trade everyday.

And I would add that a good daytrading system does not trade every hour.

[untwed]

as a new user of MTP, i have a question about "letting profits run". When you guys are saying let profits run, are you saying you should always use ATR stops? Or are you simply saying it is difficult to follow the system during a downdraw. therefore, when the stf exceeds the strength band, amateur traders will ignore the system and sell at the profit target rather than follow with atr stop as the system dictates.

Thanks,
Ken

[Russell Stagg]

The R problem is because you can't trade the correct position size on small accounts. So a $160 risk with a futures contract that is $12.5 per tick(S&P Mini) is 12.8 contracts - the .8 is important as you have discovered. Do you go to 13 (where any loss would be 1.1R) or stay at 12 and only win .94R.

When you start out you just have to suffer this for a while or see below.

You effectively have to suffer an increased asymmetrical leverage until your account grows to sufficient size that this becomes less of a problem ( and at that size you have a whole new raft of problems I am assured!).

Divide 160 into a stock risk that is divisible by 1c - and you can see the problem reduces to something that is not really relevant.

2 ways to correct it:

1. Trade say the Dia instead of Ym futures or spy instead of es-not perfect but you can get much more granular
2. Use Fixed ratio money management rather than fixed fractional (mtp can't do this).
Fixed ratio has come in for a lot of criticism but it has it's place!
I would suggest reading Ryan Jones book but if you would like a little more explanation I would be happy to oblige.

[Russell Stagg]

The edit boxes seem to disappear the following day on this forum!
Anyway I just wanted to add not to take the example below too literally - I appreciate that a 20k account is unlikely to be able to trade 13 contracts of the ES because of margin constraints, etc - it was merely to demonstrate the maths of asymmetrical position sizing.
ie it's the bits after the decimal point that are actually important!

[tonis]

I am getting different signals from charts and from Market Analyzer.

I have read a help file from Steve precisely on this topic, but it only says that the most common reason for this is that either the session opening times or the account size and % risk is different in both windows.

I recall having to enter the account size and % risk in BOTH windows in earlier versions, but since a couple of versions back, I can only find this info in the "Indicators" tab of the charts. I cannot find this on the Market Analyzer columns or properties.

I have a gut feeling that this is the reason why I am getting different signals.

Can anybody comment?

Thanks

[Steve Griffiths]

Please email support@MTPredictor.com for help, not this Forum.

Thanks

Steve

[tonis]

OK. Thanks.