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Would you really want a position size algo within a strategy? I could see its use when examining the best mix for a portfolio of strategies with known Sharpe ratios, etc... but then you would be reinventing MPT, VaR, etc.
Also... when one's $100K account becomes a $200K account, would you trade double the size or park that $100K profit where you would get the risk-free rate instead?
Where does one cross the boundary between trade risk management (a single bet) and portfolio management (cumulative results of prior bets combined with risk-managing future bets)?
What i plan to do is divide my account up into sections...Futures, Stocks and Forex. Trade multiple Strats at the same time. So lets say I want to trade $50,000 in each of those 3 categories.
I want to start a strategy and tell it that I have $50,000 to start with. Then lets say i run 2 strats on two different instuments: Oil with 1% risk and ES with 1.5% risk.
I think the Volitility Position sizing would be very useful.
I will work on it and share what i come up with. If there is anyhing out there that already does this and I am reinventing the wheel, let me know.
Either way, I will work on it and share my code with the group
If you consider each strat to be an asset with a known standard deviation, Sharpe ratio, etc and what you are looking to do is work out an optimal position size for each asset in a basket of assets whose correllations are known or can be calculated, you are looking at Modern Portfolio Theory (MPT) by Markowitz. Your asset mix should land you on a point on the efficient frontier where you have the optimal risk/reward ratio. Google MPT&Markowitz and see if that is what you are looking for.
Excel might be a better application for building the model, with data on the strats coming from Ninja.
I haven't looked for it yet but if you can calculate correlation of a strat against, say, the SPX, that is handy for building an MPT-based basket. Metastock does that well.
Note MPT and several other theories have been hit over the past year because they rely on an assumed Guassian distribution of returns. Fat tail/black swan events are the enemy of Gaussian assumptions.
I've got a gazzilion books on this stuff so if you have a question fire away. If I don't know it I know where to look it up. Also, if anyone spots an error in my statements don't be shy and please do point it out.
I just struck gold with this thread!!!! Finally, some people that pay attention to the important things in trading! Hello friends!!
Laserdan, a big thanks for starting this fantastic thread! Are you or anyone else using Van Tharp's SQN or max expectancy in your ninja strategies? I posted the code I have here earlier today. I do find the SQN the most valuable but the max expectancy can provide insight but is much harder to generate useful results with if you do not have a large data set.
Mxasj, great spreadsheet my man! I actually found this thread because I was going to post a position sizing spreadsheet and thought I better search first. Your spreadsheet is far superior.
I'm not keenly familiar with Kelly but it's a risk model is it not? From a brief search on the internets it would seem the Kelly model is similar to max expectancy, what is your interpretation of it and how do you use it in your strategies?
Prtester, I am always interested in furthering money management capabilities inside of an ATS. I see you are also using Kelly ratio. Do you guys have a NT "Type" to optimize on Kelly? I'd like to compare it to Van Tharp's max expectancy. Prtester, I use scaling a great deal in my strategies and I'd like to know what your thoughts were for using the Kelly ratio. What was your overview of how it would work (nevermind the technical code to make it work).
So the principal is useful directly to position sizing much more so than expectancy. Now I just need to see about getting it inside of Ninja, am hoping someone has done this work already.
I took one of my systems with about 120 trades, a 65% win ratio and a w/l of 1.3 and the ratio came back as 0.38. So I am not sure what practical use this number is really telling me at this point because I do not risk more than 2% per trade.
Maybe you seasoned Kelly guys can help me understand it more. I am always looking for new methods of refining strategies to make them more efficient.
* Price either goes up or down.
* No one knows what will happen next.
* Keep losses small and let winners run. * POSITION SIZE = RISK / STOP LOSS
* The reason you entered has no bearing on the outcome of your trade.
* You can control the size of your loss (skill) but you can't control the size of your win (luck).
* You need to know when to pick up your chips and cash them in.
Do not make things complicated.
Account Balance = $1,000
Maximum Risk = 2% * Account Balance
Maximum Risk = 2% * $1,000 = $20
Example:
If you want to buy a stock and your risk is $20 with a stop loss of $0.20 per share, then you can trade 100 shares.
Also, if anyone spots an error in my statements don't be shy and please do point it out.
if yes please send it URL...