Position size and corelation.

Hi All

I am looking for some advice on modifying my position size based on correlation.

I have, for example, four simple moving average cross strategies in cable, swiss, euro and yen. Im trading these on hourly charts. I work out my position size based on possible consecutive losses, the size of the stop loss and the % of my equity Im willing to lose if those consecutive losses come in.

However, at present, each position size is independent of the correlation. The currency pairs above are very correlated and so logic would suggest each position is divided by the number of correlated strategies. So in this case divide them by 4.

But if you take into account when the strategies enter the market they could become less correlated so an MA cross of 5 and 30 would be different than a 20/50. So are they now not correlated?

Sorry this is long winded but the question is has anyone integrated this type of thing into their position sizing and would they give me some pointers/advice.

Many Thanks

YachtFund

YachtFund said:

Hi All

I am looking for some advice on modifying my position size based on correlation.

I have, for example, four simple moving average cross strategies in cable, swiss, euro and yen. Im trading these on hourly charts. I work out my position size based on possible consecutive losses, the size of the stop loss and the % of my equity Im willing to lose if those consecutive losses come in.

However, at present, each position size is independent of the correlation. The currency pairs above are very correlated and so logic would suggest each position is divided by the number of correlated strategies. So in this case divide them by 4.

But if you take into account when the strategies enter the market they could become less correlated so an MA cross of 5 and 30 would be different than a 20/50. So are they now not correlated?

Sorry this is long winded but the question is has anyone integrated this type of thing into their position sizing and would they give me some pointers/advice.

Many Thanks

YachtFund

Click to expand...

YACHT


Risk and money management starts with position sizing. You need to know few basic rules that i have out lined in our technical Trader forum and people who use the BB are proficient in using various techniques.

Please go to the site's Home page / control panel and apply for the TECHNICAL TRADER BB and I will add your name to the list .

grey1

Grey1 said:

YACHT


Risk and money management starts with position sizing. You need to know few basic rules that i have out lined in our technical Trader forum and people who use the BB are proficient in using various techniques.

Please go to the site's Home page / control panel and apply for the TECHNICAL TRADER BB and I will add your name to the list .

grey1

Click to expand...

Hi grey1,

I go to the TECHNICAL TRADER BB, and I get a message that tells me I don't have permission to access the page. I am interested in position sizing and money management. How do I get access to the board?
Many thanks.

didn't you answer your own question? i.e. if you can determine the correlation of a pair of strategies, you get some guidance about position sizing if your objective is to keep your measure of risk relatively constant. (e.g. simultaneous highly correlated strategies should have less size each)

YachtFund said:

Hi All

I am looking for some advice on modifying my position size based on correlation.

I have, for example, four simple moving average cross strategies in cable, swiss, euro and yen. Im trading these on hourly charts. I work out my position size based on possible consecutive losses, the size of the stop loss and the % of my equity Im willing to lose if those consecutive losses come in.

However, at present, each position size is independent of the correlation. The currency pairs above are very correlated and so logic would suggest each position is divided by the number of correlated strategies. So in this case divide them by 4.

But if you take into account when the strategies enter the market they could become less correlated so an MA cross of 5 and 30 would be different than a 20/50. So are they now not correlated?

Sorry this is long winded but the question is has anyone integrated this type of thing into their position sizing and would they give me some pointers/advice.

Many Thanks

YachtFund

Click to expand...

You are better off keeping them uncorrelated in terms of position sizing and treating them quite independently.

Why?

1. Trying to assign weighting to highly correlated pairs adds to the complexity of your trading setups, entries, execution, management and exits. In short - keep it simple - complexity can kill in fast markets.

2. If you have instruments which are highly correlated - choose that ONE which most effectively suits your needs at any given time rather than attempting to arrange a composite. Costs of multiple commissions/spreads often outweigh the profits on marginal calls across multiples. Juggling the constituents costs time and focus and doesn't pay in the long run.

3. Each and every trade should be the VERY best opportunity you have at any given moment. If you have a 90% and and 85% you don't want to trade them both. You pick the best and wait for the next best. Composite trading is (a) an act of desperation in wanting it all (b) an admission of inability to pick the best and lastly (c) the last resort of hope & expectation.

Sure, measure and monitor your correlations as they alter their relationships over time. And especially note the factors which perturb those correlations - but don't try and trade them off against each other.

To be sure there's good stuff to be had on risk and position sizing over on TT forum and elsewhere on this site. But knowing you have only a certain percentage of your capital per trade (which you do) and a known risk based on stop (which you do) you really already have all you need.

In short.

Cut complexity until it's childishly simple. One instrument above all others in your highly correlated set should scream for your attention above all others - or none.