Advanced Position Sizing and Risk Management

BigTrends ACE Coaching Advanced Position Sizing & Money Management

Course Instructor: Price Headley, CFA, CMT BigTrends.com BigTrends.com

BigTrends Coaching

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What is “Position Sizing” ? 

Resource:Van Tharp Book: Trade Your Way to Financial Freedom Van Tharp tested 4 models, with the same system, starting at $1 million with 595 trades over 5+ years Resu Result lt # 1 - Worst … the “baseline model” which bought 100 shares of stock

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annualized.

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Resource:Van Tharp Book: Trade Your Way to Financial Freedom

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“Fixed Amount” model: This method traded 100 shares per each $100,000 in equity. It returned $237,457 or 5.75% annualized. “Equal Leverage” model: Each position in this model was 3% of the account equity. To begin each position was $30,000. This method returned $231,121, just less than the Fixed Amount model.

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“Percent Risk” model: Positions were sized so that the initial risk exposure was 1% of the account equity. So with $1,000,000 equity the initial risk would be $10,000. If the initial stop on a trade was $2 the system would trade 5,000 shares (or 10,000 shares at $1 risk, 20,000 shares at 50 cents risk and so on). , , . .

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ba sed on each stock’s volatility “Percent Volatility” model: Positions were sized based — the more volatile volatile the stock, the the less shares traded. traded. In this test, positions positions were set at 0.5% 0.5% volatility volatility (initiall (initially y $5,000 per position) position) — so if a stock’s Average True Range was $1, the system would trade 5,000 shares. This model re urne , , or 22.93% annualized.

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What is “Average True Range” ? 

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Welles Wilder’s book New Concepts in Technical Trading Systems (1978), defined the Average True Range (ATR) indicator to measure a security's volatility. The indicator does not provide an indication of price direction or duration, simply the degree of price movement or volatility. A volatility formula based on only the high-low range would fail to capture the actual volatility created by the gap or limit l imit move. Wilder started with a concept called True Range (TR) which is defined as the greatest of the following: e curren

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ess

e curren

ow.

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The absolute value of the current High less the previous Close.

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The absolute value of the current Low less the previous Close.

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Dryships (DRYS) with ATR

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Google (GOOG) with ATR

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Progressive Money Management Basic Principle Make the stock PROVE it to you that it is moving, and so start SMALL and ADD at each %R RETEST level Example: Let’s look back at the GOOG Chart…Most Progressive strategies would say Add at each new ATR level (ie if GOOG’s ATR is 20 points, and you get a short at 650, then short more at 630, more at 610, etc. until you hit a stop point of 2 ATRs from the low… I prefer %R for low risk entries as you may be chasing moves if based on ATRs

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Reward-to-Risk For me, it’s all about how much REWARD I can make for each increment of Risk Van Tharp calls this the R MULTIPLE For every 1 Point of R (capital risked) how much can you expect to make? I like to see R Multiples of 3-to-1 or higher

PERCENT R RETESTS give me the lowest risk r isk entries and the highest R Multiples

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Do You Have Any Questions?

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Advanced Position Sizing and Risk Management

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