Posted by mwelch22 on 17th of Nov 2008 at 09:14 pm
I am using the mechanical systems and am wondering if anyone has
some advice on Money Management. I have read about the fixed
fractional and fixed ratio methods to calculate position
size. Any comments or info would be appreciated.
Thanks
The solution to this problem is really simple and it involves
smart decisions on position size and stops.
Of course SKF is volatile, it's 100% leveraged so at the very
least, your position size should be half and your stops double what
you would use for, say, XLF.
I've laid out this approach before, and it is based on the
Turtle Rules, but here it is again.
Start with the amount of money you want to risk (i.e. how
much you will lose if your opening stop gets hit). Then determine
your stop using a multiple of average true range (i.e. scale your
stop to the volatility of the issue). Then divide your risk amount
by the stop to figure out how many shares to buy (i.e. to size your
position).
e.g SKF ATR(35) is $10. Let's say you want 2 times ATR as a
stop = $20. Let's say you want to risk losing $1,000 on this trade.
Buy 50sh with a stop $20 below your breakeven, for a $5,500
position.
In this case you have no more chance of being stopped out and
no greater risk than buying, say, 550 shares or $52,250 of TLT.
After a while doing this you will get to the point where you
don't even think to calculate the $ value of your position sizes.
You will only think of capital at risk.
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Money Management
Posted by mwelch22 on 17th of Nov 2008 at 09:14 pm
I am using the mechanical systems and am wondering if anyone has some advice on Money Management. I have read about the fixed fractional and fixed ratio methods to calculate position size. Any comments or info would be appreciated. Thanks
Money management
Posted by junkmaylbox on 18th of Nov 2008 at 08:31 am
Submitted by Ian Rayner on Sat, 2008-09-06 14:15.
Yankee,
The solution to this problem is really simple and it involves smart decisions on position size and stops.
Of course SKF is volatile, it's 100% leveraged so at the very least, your position size should be half and your stops double what you would use for, say, XLF.
I've laid out this approach before, and it is based on the Turtle Rules, but here it is again.
Start with the amount of money you want to risk (i.e. how much you will lose if your opening stop gets hit). Then determine your stop using a multiple of average true range (i.e. scale your stop to the volatility of the issue). Then divide your risk amount by the stop to figure out how many shares to buy (i.e. to size your position).
e.g SKF ATR(35) is $10. Let's say you want 2 times ATR as a stop = $20. Let's say you want to risk losing $1,000 on this trade. Buy 50sh with a stop $20 below your breakeven, for a $5,500 position.
In this case you have no more chance of being stopped out and no greater risk than buying, say, 550 shares or $52,250 of TLT.
After a while doing this you will get to the point where you don't even think to calculate the $ value of your position sizes. You will only think of capital at risk.