POSITION SIZE CALCULATION & CAPITAL RISK
There seems to be a lot on formula generation but one thing I learnt
after a few years of trading is that your formulas and backtest work
can pretty much be thrown out the window if you don't take the time
to size up your risk especially if you are heavily margined.
Personally, with CFD's I can margin 100 times my intial equity, so
there is huge risk involved.
I'd like to share with you some results of research and in return
hope for other's research on position sizing or articles they have
read and can submit. It is worth taking the time to post this
information.
In the Equismetastock yahoo group 'Photos' you will find a folder
called 'Position Sizing' that this post refers to. This folder has
several graphs on position size calculations. I'd advise you visit
the photos section now and save the pictures to your computer.
My research involves using a % of your capital to trade in place of a
fixed position size. That means that as you take winners and your
capital grows, so does your position size and in effect gives you
exponential growth. The reverse of this is if you were to take some
losers first then your % of capital to trade size will be getting
smaller, but in the long run you should be able to pull yourself out
if your backtested plan shows larger number of winners than losers.
This backtested plan showed the largest number of consecutive losers
was given to be '4' with the average loss size shown on the left hand
side of the results chart depending on what % of capital you trade.
Now here is the trick!
Lets assume we hit the worst case scenario and took '4' consecutive
losers first before we had a regular pattern of winners and losers.
When graphing this information, if you look at the chart of 4
consecutive losers it shows you a sweet spot of what % of capital
would be best used before it starts to have a poorer efficiency i.e.
you ideally would like to keep on the left hand side of the curve
before the peak. So in this example 10% or maybe even 12.5% of
capital should be traded.
Now say you wanted to play it safe and use a fudge factor that we may
get 5 consecutive intitial losers or maybe even 6, then you just need
to look at the respective charts.
This is so far working great for my trading.
Lee.