Account size when trading multiple instruments

January 2nd, 2011, 10:06 PM

Fat Tails

Also I am not sure that the problem is a mathematical one. If you follow the approach of the Kelly formula / optimal f as described by Ralph Vince, this may produce larger drawdowns than one could stand emotionally.

Big Mike

Thanks for saying this. It's worth repeating. Don't get so caught up in the perfect math model that you forget to consider what you will actually "allow" to unfold. So I'd say your math model, in that case, has to include a formula for your own personality so you can incorporate that into your trading

Mike

jstnbrg

...trading results are backward looking only. You can't get too married to your simulation results or your live record.

To kind of sum up the last few posts here:

1) a mathematical model for risk that optimizes expected growth may cause psychologically destabilizing losses

2) the edge we think we have may be an illusion anyway, just waiting for the next "Black Swan" event (sorry DutchBookmaker, I can't think of a more concise name for it) to shatter the illusion

3) therefore, it may not pay to be overly aggressive in the risk department. Whatever I do, I should be careful not to do anything that will mess up my mind or my account too much.

Check.

traderwerks · January 6th, 2011, 02:45 AM

jstnbrg

I've never before had a problem figuring out an appropriate level of risk to take relative to my account size. Growth in trading size has always been a function of how much I have earned trading and how much I was able to leave in my account. It was a simple problem when I was only trading one thing. But having possibly 3 or 4 things on at a time with varying degrees of correlation complicates the picture. My account can be as well funded as I need it to be to begin using this approach, but when is it appropriate to increase my size? If I feel I need $5,000 in my account to trade a single ZN, $10,000 to trade a single 6E, and $15,000 to trade a single CL, how much do I need to trade all three at once? The answer to that question is also the answer to the question of how much I have to earn before I can double my size.

I would note your trading style when you are calculating variance and covariance. Most of the time, these are used for continously traded assets. If you are in and out of the market, you need to take into account the chances that you will be in more than one trade at the same time. I don't do this , but if you do calculate variance & co-variance you should. I calculate a 4 sigma drawdown( based on live results if available ) and add that to required margin for the instrument and use that as a limit. I feel more comfortable this way.

You can look at Kelly but it is hard to trade if you have a system with a large Kelly number. Mathematically it makes sense, but trading risking so much of your account would freak me out. Half Kelly and Quarter Kelly are also popular.

January 6th, 2011, 05:53 AM

Hi Jstnbrg,

If you are looking for formulas on money management: Trading System Solutions - Publications - [AUTOLINK]Money Management[/AUTOLINK] - The Basics of [AUTOLINK]Money Management[/AUTOLINK] III

Personally I like Larry William's :

Num_Lots = % risk * Capital / (- Max_Drawdown) / 100

the key is in % risk which represents the aversion toward risk which is subjective, I suggest not higher than 20%, the more you risk the more you can win but this depends on your system and its Max Drawdown. If you use more than one instrument you should cumulate the formula or split the capital you want to dedicate for each instrument.

January 6th, 2011, 08:10 AM

jstnbrg

2) the edge we think we have may be an illusion anyway, just waiting for the next "Black Swan" event (sorry DutchBookmaker, I can't think of a more concise name for it) to shatter the illusion
.

If you don't have an edge, the optimal bet size using Kelly is 0. Don't place the trade, don't make the bet.
Everyone here I'm sure believes that risk management is just as important as what and when you trade but just going on 2% is equal to saying "I go long or short at 11:00am".

"There exists a plethora of market analysis, selection and timing techniques including charts and fundamental analysis, trading systems, Elliot waves and on and on-all sorts of models and methods, technical and otherwise to assist in timing and selection.
You wouldn't initiate a trade without using the analysis of you specialize in, but there is another world, a world of quantity, a world "out there someplace", which has either been dark and unknown or at best fraught with heuristics.
When I alluded to quantity as the "other, necessary half" of trading, I was being overly generous, even apologetic about it. I believe quantity is nearly 100% of the matter, not merely half."

Ralph Vince preface to The Leverage Space Trading Model

While being 100% of the matter is rather absurd he does have a point.

January 9th, 2011, 11:43 PM

I use my own logic for what number of contracts I should trade, though influenced a bit by all those books I have read, and plain common sense of not risking too much.

I test theories with $5K accounts, and I only do one contract, period. No sense on risking more, I also best $75 max per trade, and risk $150 per day on the testing accounts. Before I had no limits, but I came to find out that didnt really worked for testing. My theories are backtested, and as such I would be looking for confirmation in terms of execution to see how I would have been filled. I also test them on replay, tends to save some $$$ that way, but I trust more the live tests.

I trade live with a much larger account than $5K, and I use the ADR to determine how many contracts will fit within a fixed 3% per day, 1% per trade max risk. I also bank 25-50% of profits and reinvest the remainder for trading. The ADR is specific to the instrument, and it allows me to taylor the risk to each one. I also breakdown the account logically for each instrument, meaning if $100K I will dedicate 25% to Options, 25% to ES, 25% to 6E, and 25% cash reserve.

I only use full margin plus 10-20% buffer as well, I dont really use $500 margin and load up with contracts. I have two spreasheets that tell me when to add another contract or take away depending on ADR and size allocated, etc. That is what has evolved that works for me thus far.

January 9th, 2011, 11:51 PM

jstnbrg

What, 5% per day is unrealistic?!! Damn, there go all my hopes and dreams!

Concerning boredom trades, I'm with you 100%. My problem has not been so much making boredom trades as missing good trades because I am bored and stop paying attention. In the pit, it was easy to stay engaged in the market. Even when it was quiet, I often had something small on, or brokers would request quotes, or there was a good fight going on somewhere or some kid was eating a cockroach on a dare.

have you thought about joining cornerstone trading or advantage futures at their trading floors in CHI? one good way to be surrounded by other traders in real time I would think. sounds like you miss the interaction.

January 10th, 2011, 12:26 AM

sysot1t

...I only do one contract, period. No sense on risking more...

I'm with you on that. As a pit trader I did as many as 1000 at a crack (8 times in my career, but I put on 500 consistently for years). Screen trading is different, and until I know I can make money consistently trading 1 lots, there's no reason to do more.

sysot1t

I trade live with a much larger account than $5K, and I use the ADR to determine how many contracts will fit within a fixed 3% per day, 1% per trade max risk. I also bank 25-50% of profits and reinvest the remainder for trading. The ADR is specific to the instrument, and it allows me to taylor the risk to each one. I also breakdown the account logically for each instrument, meaning if $100K I will dedicate 25% to Options, 25% to ES, 25% to 6E, and 25% cash reserve.

I use the ADR for position sizing too. The trades I've been taking seem to have pretty similar risk/reward profiles relative to ADR across instruments. (If ADR is about $2000/contract, I can usually pull about $300 out of a trade, risking about $200. If ADR is ~$1000, I can get ~$150, so I trade 2 lots. My current position sizing is ZF-3, ZN-2, ZB-1, S-1, W-1, C-2, ES -2, 6e-1, 6j-1, QM-1 (Cl is a bit too big QM a bit too small) GC-1 (GC is big too but I'm finding I like the trade there).

January 10th, 2011, 12:43 AM

sysot1t

have you thought about joining cornerstone trading or advantage futures at their trading floors in CHI? one good way to be surrounded by other traders in real time I would think. sounds like you miss the interaction.

I traded in Advantage's office in Chicago for awhile but I was tired of commuting. I also traded in an arcade in their office in Downers Grove but found there were too many distractions (like the guy behind me who's kid had cancer and he talked about it all the time) and also the lack of privacy started to bother me. I also traded in the arcade of a prop group near my home but the distractions there absolutely drove me wild. I was trading substantial size at the time, and some of these kids were the biggest crybabies I had ever seen. There's nothing like being poised to hit a couple hundred NOBs and have some kid behind you scream and slam his desk and you jerk and hit the mouse when you didn't intend to

. And I was paying $1,500/month for the privilege.

I do miss the pits, but there's no stopping progress. Also, trading at home is a lot cheaper and I can get up later.

January 10th, 2011, 01:00 AM

dutchbookmaker

If you don't have an edge, the optimal bet size using Kelly is 0. Don't place the trade, don't make the bet.

Of course not. But there's an element of unpredictability in markets that doesn't exist in, say, Blackjack. The President getting shot doesn't affect the odds in the latter. Flash crashes don't happen in Blackjack and they didn't used to happen in the market either.

I hope we're not talking at cross purposes. You clearly know an awful lot more than I do about probability and statistics, and I'm not always sure that I understand you. That being said, trading has put a roof over my head since 1989 (I started in '86 but it didn't really start to pay until '89) and put all three of my kids through college and my ability to come back tomorrow has never been in serious jeopardy. Maybe just playing it by ear works OK for me.

January 10th, 2011, 01:52 PM

jstnbrg

Slightly off topic, my story and those of the pit traders like me is a cautionary tale to anyone who thinks he can make money forever doing what he is doing now. I knew a number of good traders in the T Bond pit who were satisfied with the $300,000/year they were making. They could live well on this income, so they stopped trading larger. When the government started having surpluses in the late '90s and stopped selling cash 30 year bonds, liquidity in that pit dried up and a lot of those guys left the business. Rather than go from being a 30 lot trader to a 50 lot trader to a 200 lot trader and accumulating real wealth when they had the chance, they wound up having to get jobs that didn't pay so well. I did push the envelope (in a disciplined way), so when technology forced me out of the pit I had a solid nest egg. I would never recommend getting comfortable at some level of size because you're making enough money. Things change, and then you can't do it any more. IMO the name of this game is capital acquisition. If you have the skill, USE IT! If you double that $10,000 account, double your size as well. Stop increasing your size when it gets too big for the liquidity of the market to handle it.

I too believe the whole point to trading is to acquire capital; I thought I was alone on that belief. Regardless of what one uses that capital for, one should not expect to be able to trade forever as circumstances will change. I had set myself a limit at 25 lines, following what I do with options, but I think I will reconsider and not play it so conservative all the time when it comes to trading either, no reason to not scale to whatever ones account, risk management, and instrument market will support...

Account size when trading multiple instruments

Discussion in Psychology and Money Management

Account size when trading multiple instruments