Suggestion about Position Sizing

[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/SlideShow...ideos/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"

Unbelievable,

Matt

[tonis]

Originally Posted by David Day

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]

Originally Posted by 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.

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

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.