Number of open positions - exposure, risk or margin?

What is the constraint for adding new positions to your portfolio?

  • 1. Naive risk

  • 2. Calculated Risk

  • 3. Notional exposure

  • 4. Margin/buying power


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Panic!

Member
68 11
Good morning,

I'm sure this has been discussed before, but I couldn't find it anywhere on the forum and would really appreciate your input.

I'm struggling with determining how many positions I should have open at any given time. Whenever I open a position, I put in a stoploss order (or limit risk by buying an option) to make sure my risk on any position is not greater than 2% of my netliq. So say that I'm willing to risk 50% netliq, I can have 25 positions open. However, in terms of notional exposure, this means that my leverage is already over 2.

Now of course it is very unlikely that all my positions go against me. I try to calculate the actual expected risk using the touch probabilities of the stoploss and correlation between positions. Say as an example that this means that I can now hold 50 positions. This means that in terms of notional my leverage is getting uncomfortably high.

Another way to look at this to not look at notional exposure, but at buying power/margin. For a defined risk strategy (using long options), margin is relatively low and also doesn't significantly change. So theoretically if I would limit myself to defined risk positions I could optimize my portfolio by just adding as many positions as my buying power allows, up till I reach say 90% (to allow for some fluctuation in margin).

TLDR:

What is the constraint for adding new positions to your portfolio?

1. Naive risk: Looking at the sum of risk per trade.
2. Calculated risk (expected shortfall/max ecpected drawdown): Calculating your loss in a realistic worst case scenario.
3. Notional exposure/leverage.
4. Margin/buying power.

Looking forward to the replies of some more experienced traders!
 

tomorton

Legendary member
7,230 962
In actual practice, almost everything is correlated with everything else if enough pressure is applied.

Of course, different companies have different business plans and managers, different market pressures and opportunities. different commodities are in different states of supply and demand. Each country has its own interest rate and its GDP is different to all others.

But when the markets as a whole decide to take a little less risk, everything which we can trade can go down in step. Risk is the common factor to the money behind the charts. There are no safe havens.
 

Panic!

Member
68 11
True, but looking at the sum of risk per trade will give you the upper boundary of portfolio risk, the actual number will always be below that. Especially in a long/short portfolio where the risk on one trade will offset risk on another trade.
 

tomorton

Legendary member
7,230 962
You're right of course, and I had overlooked the possibility that you might be able to construct a fully balanced long/short portfolio. But that's mainly because I can't see the point of it.

(Actually, I do at times go long and short in the equities field, but that's when I'm heavily committed long to the indices themselves. At such times I like to get short on consistently downtrending individual stocks, but this is different to what you;re suggesting.)
 

Panic!

Member
68 11
You're right of course, and I had overlooked the possibility that you might be able to construct a fully balanced long/short portfolio. But that's mainly because I can't see the point of it.

(Actually, I do at times go long and short in the equities field, but that's when I'm heavily committed long to the indices themselves. At such times I like to get short on consistently downtrending individual stocks, but this is different to what you;re suggesting.)
The point is obviously to make as much money as possible, in the most risk efficient way ;)

So in your trading, what do you use to manage risk/number of positions?
 

NVP

Legendary member
36,506 1,833
are you taking partial profits or trailing stops ?

some trades will be zero risk if you are trailed past entry or have taken a T1 to ensure b/e

then the 2% is meaningless in risk terms

N
 

Panic!

Member
68 11
are you taking partial profits or trailing stops ?

some trades will be zero risk if you are trailed past entry or have taken a T1 to ensure b/e

then the 2% is meaningless in risk terms

N
I don't see how this is relevant to my question, but yes I do close trades for partial profit/loss if my original thesis no longer holds.
 

NVP

Legendary member
36,506 1,833
I don't see how this is relevant to my question, but yes I do close trades for partial profit/loss if my original thesis no longer holds.
you dont see how being in (locked) profit on trades in your portfolio affects your risk exposure ?
 

Panic!

Member
68 11
you dont see how being in (locked) profit on trades in your portfolio affects your risk exposure ?
My question was how experienced traders determine the maximal number of open positions in their portfolio.
 

tomorton

Legendary member
7,230 962
I don't see how this is relevant to my question, but yes I do close trades for partial profit/loss if my original thesis no longer holds.

Let's say you risk 2% of your account capital per trade, underpinned by pre-set stop-loss. One of these trades makes a gain of +2%. If you move the SL to entry, this trade's risk (to account capital) is now 0. What do you do?
 

Panic!

Member
68 11
Let's say you risk 2% of your account capital per trade, underpinned by pre-set stop-loss. One of these trades makes a gain of +2%. If you move the SL to entry, this trade's risk (to account capital) is now 0. What do you do?
I don't move stop-losses based on gains.

But in your example the risk wouldn't be 0, it would only be 0 when compared to the moment I originally entered the trade. The 'new' risk would be the distance between price and new stop loss.

Why do you ask?
 

tomorton

Legendary member
7,230 962
I asked because I was hoping to learn but also suspecting you would give the answer you have given. I am keen to understand because maybe I can still learn something valuable about risk and money management.

From what your viewpoint, a trade with a 2% initial risk does not reduce its risk to 0 when it has made a +2% gain. The distance from current price to SL is now equivalent to 4% of your account capital. If you're not closing the initial trade or part of, and you're not moving the initial SL to entry, you have doubled your risk as profit accumulated. so presumably, whatever total number of 2% risk trades you were previously willing to run simultaneously, you will now have to halve them to control your aggregate risk level. Is this right and how do you do this?
 

Panic!

Member
68 11
I asked because I was hoping to learn but also suspecting you would give the answer you have given. I am keen to understand because maybe I can still learn something valuable about risk and money management.

From what your viewpoint, a trade with a 2% initial risk does not reduce its risk to 0 when it has made a +2% gain. The distance from current price to SL is now equivalent to 4% of your account capital. If you're not closing the initial trade or part of, and you're not moving the initial SL to entry, you have doubled your risk as profit accumulated. so presumably, whatever total number of 2% risk trades you were previously willing to run simultaneously, you will now have to halve them to control your aggregate risk level. Is this right and how do you do this?
Yes, what you describe is right. If a trade moves in my favour far enough that it would add 2% to my netliq, I would say the risk on that trade is now 4%. Being consistent, I would now have to act on this. In practice I don't do this as it doesn't seem feasible. Instead I ignore the unrealized gains when entering into new trades, so there is no compounding risk (or returns) on unrealized gains.

This might not be best practice. I'm really struggling with this, so I appreciate any feedback or criticism you can provide me.
 

barjon

Legendary member
10,236 1,539
FWIW I find it easier to think in terms of money rather than percentages and in terms of the effect on my account’s bottom line (which doesn’t move until trades are closed). I appreciate that reduced gains are a “loss” but I don’t see that potential as a risk to my bottom line in the same way. Rather, I come in from a different direction by thinking more about what I need to take from a trade to keep my account moving along satisfactorily.

I hasten to add that i’m not a professional (haven’t the balls when it comes to putting significant money down) but I do adopt a business approach.
 
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0007

Senior member
2,219 553
Yes, what you describe is right. If a trade moves in my favour far enough that it would add 2% to my netliq, I would say the risk on that trade is now 4%. Being consistent, I would now have to act on this. In practice I don't do this as it doesn't seem feasible. Instead I ignore the unrealized gains when entering into new trades, so there is no compounding risk (or returns) on unrealized gains.

This might not be best practice. I'm really struggling with this, so I appreciate any feedback or criticism you can provide me.
Quite right to do that - they aren't gains until cashed in. The way I manage risk, very conservatively, (short-term 0 - 4 weeks S&P 500 shares) is:
1. Decide/calculate max permissible overall account risk– never to be exceeded. (And there are many ways & outcomes to do that depending on your risk tolerance).
2. Decide/calculate maximum risk risk per trade as percentage of account overall risk at (1).
3. Position size each trade accordingly – (taking volatility into account you might not necessarily use all the risk available at (2) if you are looking for similar notional profitability for each trade – you can miss this step if you wish to but it will probably increase your overall risk because you will be trading less instruments and spreading your risk more narrowly). Alternatively, for a very small account you could just pick the (equally good) trades with the highest volatility and utilise max permissible risk.
4. Open new trades until risk (1) is reached. (if you can't find any good trades, sit tight– you don't have to utilise all your risk all the time).
5. rinse & repeat.

Might sound a bit more complicated than it really is – that's why I get the spreadsheet to do it!
 
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