New Trading Strategy, thoughts on Money Management

#1
Hello, All,

I've posted elsewhere about creating an ETF trading strategy (https://www.trade2win.com/threads/s...erm-etf-trading-strategy.234833/#post-3092379). I also addressed which ETF's I'm considering starting with, and why here: https://www.trade2win.com/threads/c...universe-6-etfs-to-start.234835/#post-3092385

One of the questions that came up is, "How am I going to manage my money?" I just wanted to toss out some thoughts here, and get any comments that you may care to make.

Right now, I'm being pretty conservative about this project, so I'm only willing to dedicate $2000.00 to trading. For money management, I'm setting 2 rules for myself:

1) No more than 5% of my trading balance at risk on any single trade.
2) No trades larger than $1000.

This should give me the ability to withstand some bad trades (I suspect that I'll make one or 2). I'm going to illustrate how I will work this out with an imaginary trade in a reply to this post. I'll look forward to your thought, and any suggestions you may have!

Thanks!

Tom
 
#2
So, here is a pretend trade, to illustrate how I plan on using my 2 rules to determine my trade positions sizes. Here is the current chart for IVV (chart taken from Fidelity):

Chart-20190316-113816.png


Let's assume that I decided that I wanted to buy IVV on Monday morning, and place an initial stop loss at the swing-point low on 3/10 (I'm considering paper-trading this, if so, I'll post a thread about how it goes). I'm going to assume that my purchase took place at Friday's close, 284.28. The stop would be placed at the close from 3/10, which is 274.10. That would give me a risk per share on the trade of 10.18.

According to rule 1 above, I don't want to risk more that $100 for the entire trade, so that would give me a maximum position size of 9 shares.

However, 9 shares of IVV at 284.28 each would cost 2558.52. Because my current limit per trade is $1000, I'm going to limit myself 3 shares. This would put $30.54 at risk (assuming that everything trades at the limits which I've set). Even if there is slippage, I am will beneath my risk threshold for this trade.

This is the process I plan on using to choose my position sizes. Please let me know if it makes sense, and is logical. Do Rules 1 and 2 seem to be reasonable (they are simply the product of my thinking, so tweaking them is a possibility). I'd love to hear your thoughts!

Thanks!

Tom
 

0007

Senior member
2,116 489
#3
So, here is a pretend trade, to illustrate how I plan on using my 2 rules to determine my trade positions sizes. Here is the current chart for IVV (chart taken from Fidelity):

View attachment 261079

Let's assume that I decided that I wanted to buy IVV on Monday morning, and place an initial stop loss at the swing-point low on 3/10 (I'm considering paper-trading this, if so, I'll post a thread about how it goes). I'm going to assume that my purchase took place at Friday's close, 284.28. The stop would be placed at the close from 3/10, which is 274.10. That would give me a risk per share on the trade of 10.18.

According to rule 1 above, I don't want to risk more that $100 for the entire trade, so that would give me a maximum position size of 9 shares.

However, 9 shares of IVV at 284.28 each would cost 2558.52. Because my current limit per trade is $1000, I'm going to limit myself 3 shares. This would put $30.54 at risk (assuming that everything trades at the limits which I've set). Even if there is slippage, I am will beneath my risk threshold for this trade.

This is the process I plan on using to choose my position sizes. Please let me know if it makes sense, and is logical. Do Rules 1 and 2 seem to be reasonable (they are simply the product of my thinking, so tweaking them is a possibility). I'd love to hear your thoughts!

Thanks!

Tom
Again, very interesting! There are probably a million ways to do position sizing – and Van Tharpe seems to make quite a good living out of teaching them. I base my position sizing on risk (as all aspects of trading should be conducted IMHO) – having roughly the same risk for each trade but not necessarily done solely with respect to instrument price & stoploss: take volatility into account also (ATR is a good simple measure). Two instruments with the same calculated momentum score and possibly similar prices could have different volatilities and are therefore potentially different risks (within your overall risk parameters) and need to be position-sized accordingly. e.g. you want more shares of a low volatility instrument to get the same profit effect as a high volatility instrument – all else being equal. For very small trades with low risk amounts and a portfolio in low numbers, the volatility aspect is probably not quite so important – especially if your trading fund is quite small, because you won't have the capacity to greatly change the number of shares if they are of the very high-priced nature as some of the best SP500 momentum stocks tend to be.

Just my thoughts which may/may not be of much help but they do work for me. I definitely believe that the more interactivity there is on this site, the more likely we are to benefit by the mind possibly being prodded into a different direction.
 
#4
Again, very interesting! There are probably a million ways to do position sizing – and Van Tharpe seems to make quite a good living out of teaching them. I base my position sizing on risk (as all aspects of trading should be conducted IMHO) – having roughly the same risk for each trade but not necessarily done solely with respect to instrument price & stoploss: take volatility into account also (ATR is a good simple measure). Two instruments with the same calculated momentum score and possibly similar prices could have different volatilities and are therefore potentially different risks (within your overall risk parameters) and need to be position-sized accordingly. e.g. you want more shares of a low volatility instrument to get the same profit effect as a high volatility instrument – all else being equal. For very small trades with low risk amounts and a portfolio in low numbers, the volatility aspect is probably not quite so important – especially if your trading fund is quite small, because you won't have the capacity to greatly change the number of shares if they are of the very high-priced nature as some of the best SP500 momentum stocks tend to be.

Just my thoughts which may/may not be of much help but they do work for me. I definitely believe that the more interactivity there is on this site, the more likely we are to benefit by the mind possibly being prodded into a different direction.
Thank you again, 0007. Again, I think you are a couple of levels above me! For example, I'm on Fidelity, which doesn't even offer an ATR indicator, so I'm not sure how I would calculate that, or the probabilities. More study for me to do! I appreciate your, and all, insights into this project!

Thanks!
 
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