Money Management: Scaling Strat

[trendie]

I risk about 30 pips per trade.
Targetting for 50-60 pips.
I get there about 40% of the time.

The above is a very broad-brush, as I also trade one higher TF.
I am not counting break-even trades.
Is that enough information?

(GU, EU, EJ) weekly target about 500-600 pips off the 3 charts (recent weekly target style thanks to wasp)

EDIT:
I may get 2-4 trades per session (ie, euro, 6am-2pm), and US session (2pm-9pm); ie, 2 sessions per day.
stop trading a particular chart for that session if 2 consec losers.

EDIT2: another thing. wont have more than 2 trades on at a time. although I am actively assessing adding to a winning trade; ie, on a trending move, I may get multiple pullbacks, and am thinking of adding if initial trade is a winner, and showing some profit. (number-crunching this at the moment)

 

[Hotch]

That's fine, doesn't have to be your actual system, could be completely theoretical.Keep it simple and say you make 55 pips 40% of the time and lose 30 60% of the time.

Just need to know what the suggested scaling strat is.

 

[trendie]

That's fine, doesn't have to be your actual system, could be completely theoretical.Keep it simple and say you make 55 pips 40% of the time and lose 30 60% of the time.

Just need to know what the suggested scaling strat is.

I am toying with the idea of starting with £X which is the core capital.
then, when the capital has increased by 600 pips (whatever that may be monetarily), I can use the excess to trade larger size, as the profit represents 10 consec losers; which I am willing to risk to grow the account. That is, I am now still risking 30 pips, but at twice the amount (from the profits), in addition to the core capital 0.5%.
Does that make sense?

 

[Hotch]

So trade at x%, after 600 pips profit, trade at 2x%, after another 600 pips go to 4x%?

If you get 750 pips profit and go down to 500 do you decrease risk?

 

[trendie]

So trade at x%, after 600 pips profit, trade at 2x%, after another 600 pips go to 4x%?

If you get 750 pips profit and go down to 500 do you decrease risk?

decrease risk, yes. because if I lose, I lose the profits that gave me the reason to scale up. Then I fall back to earlier size.
Its all about being aggressive with earned profits. If I lose them, I revert back to core capital until I build up profit bank again.

EDIT: I would need to lose 600 pips before falling back from 4x to 2x.
I trade normally the core capital at 0.5%.

My first 600 pips profits buys me 10 extra trades at 2x for the next set of trades.
My next 600 pips buys me 10 trades at 4x at the next level up.

(There must be some sort of margin req limit.)

 

[Hotch]

I think this is what you want.

Bit rushed, but I think it's right.

Hopefully it's self explanatory. Not sure what you'll make of it.

 

[trendie]

I think this is what you want.

Bit rushed, but I think it's right.

Hopefully it's self explanatory. Not sure what you'll make of it.

scary. the account is pretty much busted below 50% of core capital.

 

[Hotch]

Just realised there is at least 1 improvement I can make. Will get on it. Note you can change the curves by doing anything to change the random numbers.

If you were to do this tomorrow, how much risk would you start with, what after 600 pips, what after the next 600?

 

[trendie]

Just realised there is at least 1 improvement I can make. Will get on it. Note you can change the curves by doing anything to change the random numbers.

If you were to do this tomorrow, how much risk would you start with, what after 600 pips, what after the next 600?

I would carry on trading the core capital at 0.5%.

I would trade the 600 pips as 1%. so, I suppose, in total, 1.5%.
But, I would revert back to 0.5% as soon as I clocked up 10 consec losses; as 600 pips represents 10 losses of 30 pips at twice normal amounts.

 

[Hotch]

It's not perfect, giving up for now, will have another look later. Got stuff to do.

Theory about it tending to Kelly was right though, so might just want to use that instead (around 7%)

 

[trendie]

I think you're right, Hotch.

Typical me, trying to make something more complex than it needs to be.
The Kelly formula may well be the mechanism for optimal leveraging of an edge.
(must be good, as Ed Seykota refers to it on his site)

Will forward test this over, say, 100 trading cycles.

thanks for your sterling work, esp for the excel.

I still, however, want to split the account into "core" and "aggressive". it appeals to my emotions of "paying the bills" sturdiness and "take a chance" riskiness.

and having those components distinct and separate.
(there are those who say emotions are to be overcome. I believe its also possible to adapt a style to account for emotions)

 

[Hotch]

Think I'm right? Course I am

Kelly IS the optimal amount to increase account side, the maths is on wiki.

Perfectly fine to segregate account if it makes you feel more comfortable, if you're not comfy you're not going to trade as well.

Glad we sorted it out.

 

[zupcon]

If you want to take a more practical approach to fannying about with different money management idea's I can recommend taking a look at this product Money Management Trading Software :: Adaptrade Software

The company are nowt to do with me and the tight bstards dont even pay me an affiliate fee even though I reccommend them everyone I meet, there's a 30 day trial which should be more than enough to run some analysis on your historical results.

I found this presentation regarding position sizing the other day whilst reading a proper trading forum, he does a pretty good job of summarising the advantages and disadvantages of the most common techniques, and its well worth a listen

https://admin.acrobat.com/_a812722289/p73969334/

 

[Hotch]

looks like it could be worth a pop. Lots of the stuff advertised looks like it could well be a bunch of rubbish though.

As for position sizing, I think it's really a different ball game, as it depends very much on your strategy.

 

[Ingot54]

Where do we go from here?

If you want to take a more practical approach to fannying about with different money management idea's I can recommend taking a look at this product Money Management Trading Software :: Adaptrade Software

The company are nowt to do with me and the tight bstards dont even pay me an affiliate fee even though I reccommend them everyone I meet, there's a 30 day trial which should be more than enough to run some analysis on your historical results.

I found this presentation regarding position sizing the other day whilst reading a proper trading forum, he does a pretty good job of summarising the advantages and disadvantages of the most common techniques, and its well worth a listen

https://admin.acrobat.com/_a812722289/p73969334/

Thank you Zupcon.

I found the webinar at the second link very interesting - all 1H and 13 mins of it!

Of particular interest was his treatment of the Fixed Ratio and Fixed Fractional methods, and the Optimal F examples. From the 34 minutes mark forwards I think people would get a lot from this webinar. I gathered from it that the best approach would be to use a Fixed Fractional method, with Optimal F, and a conservative as oppoesed to an aggressive position sizing model, would reduce the drawdown, and reduce the time it takes to grow the a/c to a pre-determined amount.

I had read quite a bit of Fixed Fractional and Fixed Ratio Position Sizing through Ryan Jones' "The Trading Game" but to be candid most of it went over my head at the time. I did come away with the idea that a better position-sizing method could be found, compared to a flat 2% of a/c.

Unfortunately he was getting drawdown in the vicinity of 68% with a 5% Fixed Fraction and 86% with 10%. Not too many traders would have the cast-iron stomach required for that kind of trading!

Particualrly depressing was his comment that "If you trade long enough it is 100% certain that you will go broke."

Been there!

Think I'm right? Course I am

Kelly IS the optimal amount to increase account side, the maths is on wiki.

Well Hotch - I have to concede that you have actually come up with a better plan than I had hoped. But I guess we succeeded in getting the discussion out of the 2% flat area.

Can I claim a win-win here? If not, I will search for the humble pie recipe!

While I have heard of the Kelly Strategy (Kelly criterion - Wikipedia, the free encyclopedia) it too is a bit beyond my capability, though if I actually apply the odds of a Casino Roulette Wheel to the formula, it begins to make sense. However - I am not interested in Roulette!

Could you please enlarge a little on how the Kelly Strategy might be applied to our account? Is it as simple as substituting the odds and probabilities in the Kelly formula?

I think if I can get a stronger handle on some of this it would be something I would pursue and eventually attempt to use.

I found that by deleting and then re-entering the first "40%" in the XLS programme from your post at #26 in this thread, it re-drew an entirely different set of Equity Growth curves. The drawdowns that occurred plus the fact that the souped-up position-size did not always beat the flat 2% was very sobering for me.

Finally - I found this link: Fixed Ratio and Fixed Fractional Money Management - InformedTrades at which David Waring (haven't heard of him before) discusses this same issue.

I didn't read any of the links in that site yet - but I will, and expect to get further enlightenment there.

Best wishes

Ivan

 

[Hotch]

on the 2%, I thought everyone one the site knew I hated it


It is as simple as subbing values into the formula, but the maths is based on fixed odds betting, and so it is best to use it when you are very consistent. One of the things to remember is that this is for maximum growth (risking more won't normally grow your account any quicker, will just add more risk).

If you decide what draw down you are happy with, then you can work out the maximum you'd like the risk, and then take the minimum of that value and kelly.

 

[zupcon]

It is as simple as subbing values into the formula, but the maths is based on fixed odds betting, and so it is best to use it when you are very consistent. One of the things to remember is that this is for maximum growth (risking more won't normally grow your account any quicker, will just add more risk).

IIRC this technique was developed to optimise the voltage required to transmit voice data over analog telephone lines. As voltage increases, the cost of transmission increases and noise decreases. As voltage decreases, costs decrease, but noise increases. Kelly's objective was to determine the operating conditions that resulted in a reasonable line quality, at a reasonable cost.

Its a very good point you make about consistency. A lot of people claim you can stuff average win loss ratio's directly into the formula, but mathematicians and statisticians tend to get a bit upset claiming the approach only applies under particular very strict conditions. Off the top of my head, and I may be wrong I think for Kelly to apply, all losses must be the same size, and you also need a constant unchanging distribution of gains and losses (which tends not to happen either due to changes in market volatility, or as you go through winning or losing streaks, or as your psychology and disipline go a bit wonky, whereas the distribution of noise on a telephone line is pretty constant)

The other issue is Kelly probably had more statistically significant data than he could shake a stick at, but most trading system developers are fannying about with insufficient data, which is definately a bit iffy.

The key issue for me is that whatever result the kelly criteria spits out (even if applied under perfect conditions) is going to be based on historical results. You have to remember that the current and future values of kelly are pretty much unknown, and as you point out, you dont have to be too far out before you end up taking more risk for less return.

So as well as being sensitive to the statistics infered from historical data (and sensitive to real time changes in the distribution of those returns) as Ingot54 points out, Kelly's potentially going to lead to MASSIVE drawdowns, and HUGE varience in returns, but the upside is if done right you'll maximise the geometric rate of returns.

One of the interesting points made in the (rather long) video I posted is that although accounts suffered the most ridiculous drawdowns in the region of 85%, at no point was the balance of those accounts less than that obtained from the much less aggressive strategies (with the exception of the accounts where F>Optimal F )

If its practically possible to trade in this way (and it is), then Its probably got a place in the mix, even if you look at it as the equivelent of buying a lottery ticket.

 

[Hotch]

Wow, stellar post zupcon, far less lazy then me clearly!

 

[Chorlton]

OK. You have a system. It seems to work.
You have quantified your system. Its consistent.

Next step is scaling up.
I dont get this increasing each trade by a small fraction, ie, by a fraction of a £pound per pip. It looks great on a spreadsheet, but realistically, you may decide to only increase trade size by a full £pound per pip.

So, whats wrong with the following thought process?!

Starting account: £1,500. (arbitrary value)

You trade £1 a pip until you nett 600 pips overall. (that is, your account size has to grow to £2,100).
NB: You are risking 20-30 pips per trade. Lets say 30. You are risking 2% account size per trade.

If you achieve your 600 pips, you now increase your trade size to £2 a pip, and go for another 600 pips. (ie, to get a nett increase of 600 pips, £1,200).

If you are risking 30 pips per trade, and your account has grown by £600, you can tolerate 20 consecutive losses before you fall back to your initial £1 a pip.

So, in general terms, increase the amounts per traded per pip by £1 for every 600 pips netted.
This allows you the tolerance of around 15 consectuive losses before having to drop your trade size by £1 a pip.

(for example, if you were trading £5 a pip, you would have to make £3,000 (600 pips x £5) before you moved up to £6 a pip. If you are now trading £6 a pip, this allows you over 15 consecutive losses (30 pips risk x £6 x 15 = £,2700) before having to give up your gains from £5 a pip, and having to return to trading at £5 a pip.)

I believe this to be conservative, allowing you the room to trade well before building up to the next level, and then, allowing you time to build up the next level before having to fall back to previous level, so no yo-yo-ing between levels. This should allow you to ride through market cycles without getting spooked.

Whats wrong this thought process?

Tendie,

I haven't read all the posts on this thread so apologies if my question has already been asked but as I understand you , you want to scale-up as your equity grows?

Is this correct and if so, have you considered scaling-up on "individual positions" instead? ie Pyramiding.

I ask as scaling-up as your equity grows IMO potentially carries a higher level of risk as the only reason you are increasing your position size is because you have already achieved x number of pips. There are no other reasons such as TA confirmation, etc for doing so.

In contrast with pyramiding you would only be increasing your position size if a particular trade was moving in your favour and therefore you would have a "technical" reason for doing this. As you already know your strategy has a positive expectancy, you could add to a particular trade if another entry was signalled. This would offer less risk compared to scaling-up as your equity grows as the likelihood that the trade would be overall profitable should be in your favour.

Just my 2cents.

Chorlton

 

[trendie]

thanks to zupcons lastest post. thats excellent.

Chorlton: good point. I think may be addressing that with my new thread on optimal profit-taking.

But yes, I tend to be linear about my entries, in that once I take a signal, thats it, I ride it to the end.
Since I trade pullbacks, there can be several pullback entries on an extended trend, and I am toying with multiple entries. Something for this weekend to ponder over.