Max number of Open Positions

[Chorlton]

Hello All,

Can anyone offer any guidance as to how to decide on the Maximum Number of Open Positions when designing ones own System?

Through some very basic and quick backtesting, it seems the system that I am developing performs better the fewer Open Positions there are.

At the extreme case, with only 1 open trade at any one time, the results are ridiculously impressive!!!

Out of interest, as long as I use an Initial & Trailing Stop to control risk, then what other issues would there be with developing a strategy that relied on fewer Open Positions?

I would assume that using multiple Open Positions helps to diversify risk but if my strategy relies solely on price action then surely this wouldn't make any difference??

All opinions welcome.....

Thanks in advance,

Chorlton

 

[shadowninja]

Well, it's about money management. If you follow the rule about not risking more than 1% of your trading equity, then the total risk with all open positions should be no more than 1%.

 

[Silent.Trader]

Can anyone offer any guidance as to how to decide on the Maximum Number of Open Positions when designing ones own System?

It pretty much depends on the system, type of positions, the performance and of course the correlation of the positions. If the performance of the system indeed strongly decreases with the number of positions (sounds odd to me) also risk/return is important. There's nothing wrong with using only 1 open position. Keep however in mind that by using less positions (or more leverage) the importance of proper money management increases.

grtnx
Wilco

 

[Chorlton]

Well, it's about money management. If you follow the rule about not risking more than 1% of your trading equity, then the total risk with all open positions should be no more than 1%.

Hi Shadow,

Thanks for the your comments....

I intend to use correct Money Management rules so will only risk a certain percentage in open positions. This is clear to me.

What isn't clear is how I derive at the optimum number of open positions....

 

[Chorlton]

It pretty much depends on the system, type of positions, the performance and of course the correlation of the positions. If the performance of the system indeed strongly decreases with the number of positions (sounds odd to me) also risk/return is important. There's nothing wrong with using only 1 open position. Keep however in mind that by using less positions (or more leverage) the importance of proper money management increases.

grtnx
Wilco

Hi Wilco,

The system is a weekly break-out which holds positions for a relatively short period of time (4 - 6 weeks) although according to my initial backtesting some positions are open for much longer (6months plus).

I believe the reason why the system decreases with more open positions is due to the amount of capital I intend to trade with initially. I don't believe I am undercapitalised but probably am on the limits, as to what is probably acceptable.... All IMO though as I have no real experience on this....

If I may, I will post some results of the initial backtesting, as I would welcome your thoughts on it....

All the best.

Chorlton

 

[Silent.Trader]

I believe the reason why the system decreases with more open positions is due to the amount of capital I intend to trade with initially. I don't believe I am undercapitalised but probably am on the limits, as to what is probably acceptable.... All IMO though as I have no real experience on this....

Sorry, but I don't understand this. In my perception what you say in your first sentence is that transaction costs (commisions and slippage) is large compared to prospective profits if you take on more than one position. I think that is exactly what undercapitalisation is. You may solve this by saving more money or possibly by trading a different product. Anyway, when you trade break-outs and your performance decreases with the number of positions you take on I think there's something terribly wrong. Maybe the system is no good and with one position you were just lucky to pick the right trades or you're undercapitalised and transaction costs eat away your profits.

grtnx
Wilco

 

[Rhody Trader]

Hello All,

Can anyone offer any guidance as to how to decide on the Maximum Number of Open Positions when designing ones own System?

Can I ask what market(s) you are dealing with here?

 

[nine]

You need to answer the last question and also answer the question of how you assign capital to the positions? Is it x% total bet? Is it x% per position? etc etc.

Because the statement "with only 1 open trade at any one time, the results are ridiculously impressive!!!" doesn't make a lot of sense.

 

[RichieE]

Can anyone offer any guidance as to how to decide on the Maximum Number of Open Positions when designing ones own System?

Through some very basic and quick backtesting, it seems the system that I am developing performs better the fewer Open Positions there are.

Chorlton, that sounds interesting. Have you taken into account your 'risk of ruin' into the simulations?

At the extreme case, with only 1 open trade at any one time, the results are ridiculously impressive!!!

That sounds counterintuitive since the more open positions you have the more chance that you will 'stop out' (Yes - I'm making assumptions about the volatility of your combined trades here). Can you confirm that your definition of one open position means all your contracts on one trade idea?

I would assume that using multiple Open Positions helps to diversify risk but if my strategy relies solely on price action then surely this wouldn't make any difference??

I would have thought that multiple open positions would be more risk-adverse since you would have a mixture of longs and shorts (e.g. If that you're trading different months in a particular contract).