Re: Advanced Money Management and Position Sizing Discussion

According to your assumption of a systematic trading model, maybe ~45% of
your trades will be stopped out at a hard (money management) stop or a small
loss due to a trailing stop.  Another ~45% will be breakeven or marginally
profitable and will effectively pay for the losers.  The remaining 5-10%
will be your "big winners" and how these are handled can have a big
difference on the profitability of the system.  Of course nobody knows which
stock is going to be the big winner until it is closed out.  So you have to
treat them all with the same rules.  The position that ends up 500% must
first pass through +5%, +10%,+ 25%, +50%, +100%-- all "good" numbers.  But
the vast majority of trades stall out and correct long before they get that
far, so in order to allow for the possibility of such a big winner, we have
to accept a certain level of downside risk on all trades that will keep us
from getting out of a good trade too quickly.  The only thing worse than a
loser is to get out of a winner too early!

The ones that immediately go against you or flat line are easy.  But what
about one that goes up a little bit then stalls.  Do you tighted stops to
lock in the profit for sake of not letting it turn into a loss, or do you
keep a wider trailing stop, accepting the possibility that this trade may
turn into a loss out of respect for the overall portfolio and trading model.
If a position is up 100%, perhaps it has already outperformed the average
trade by several times, but its likelihood of becoming a 200% or 500% trade
is also much higher.

There is no upside potential without accepting risk.  The more downside
potential accepted, the bigger upside possiblity.  We can use
diversification and system optimization to maximize our ROR vs drawdown
equation, but clearly there is a positive correlation between the two.
Unfortunately this means trading a larger position size relative to
volatility and/or acct equity or putting trailing stops farther away from
current prices, thus accepting more downside risk in return for assurance of
not being stopped out due to "noise" that momentarily corrects a larger
trend.  Risk-- I define risk as "probability of an undesirable outcome"-- is
subjective and up to the individual.  Trader A may not want a drawdown on
total equity of more than 20% while Trader B may accept a drawdown of 50%.
This will permit Trader B to take larger "risks" in terms of more aggressive
trading of profitable positiosn (even pyramiding up) while Trader A may be
content to take some money off the table in this context and protect even
small profits more aggressively.

Psychologically, I don't know if "wanting to win" is more important than
"not wanting to lose".  In the case of the stock market recently, from
1998-2000 everybody was more concerned with how much they could win.  From
2000-2002 the concern shifted to survival--- not wanting to lose.  Perhaps
in the dotcom mega market the perception of risk in these stocks went away,
causing many to make huge bets-- many successful-- many more not.

So while you are playing with the "markets money" in a winning trade, from
the perspective of your portfolio you have to realize that the winning
trades are the cream of the trading system, as the small winners do little
more than pay for the losers in a 50/50 trading system.  If you "throw the
dice" on these trades you certainly have a good chance of having a stellar
year, but if your bet goes against you it may end up being a mediocre year.
Psychologically, you feel bad if you get greedy and the stock corrects and
you miss the top.  You also feed bad if you take profits too soon and the
market keeps moving in your favor.  So to take some off the table and let
the rest ride satisfies both of these concerns.  The only questions
remaining are how much to take off the table and how soon-- or similarly, if
pyramiding, after how much profit do you start adding to the trade, and if
it continues in your favor at what point do you start taking positions off?
That is up to the comfort level of the trader I suppose.

"consuming" <[EMAIL PROTECTED]> wrote in message
news:[EMAIL PROTECTED]
> Ladies and Gents: I would like to propose a few discussion topics on:
>
> 1) Advanced Money Management and,
> 2) Position Sizing Methods
>
> Since profits come from mainly expectation and risk and since the best
> position sizing equation is the "Market's Money" model(Frank Galucci,
> Van Tharp, Ed Seykota, et al, 1980-2001)I would to ask the following:
>
> 1)The psychological element of trading to be accounted for implicitly
> and explicitly in 1) the trading methodology employed, 2) the
> frequency of trading, 3) the condition of the user, then "profits"
> represent what? That is, if profits are sacred then why risk them? Are
> profits sacred? How much profits can we risk in the "Market's Money"
> model? Only 10%? Why not 50%?
>
> I'm assuming a semi-automatic trading system (90% mechanical/10%
> discretionary)with 50/50 W/L and average expectancy.
>
>
> 2) Embebbed in 1) is the defenition and context of "rsik". Is risk
> expendable? Or is risk an accessory of trading? If so, then can we not
> articulate risk to our advantage? That is: if risk isn't expendale and
> instead helps to construct a superb trading methodology can we go
> beyond the traditional discussions around risk?
>
> 3) As embebbed in 2) risk is 100% psychological. Since risk
> articulates trading then, isn't trading 100% psychological. As such:
> what are the real issues of trading from a psychological perspective?
> "Afraid to loose" or simply "Wanting to win"?
>
> a) "Afraid to loose" - therefore I will reduce "loss" to a minimum.
> What is at stake? Anything having to do with me? Isn't this the
> superficial understanding of risk? Since risk is an important
> accessory of trading then doesn't it belong elsewhere? In a
> non-psychological context?
>
> b) "Wanting to Win" - the reverse of the above. Why? What is at stake?
> Self-valuation? Desire of expression, of affirmation? If profit is the
> reverse of risk, then is it not the product of trading, pure and
> simple? Likewise, does it not exist in a non-psychological context?
>
> There are some of the issues with which I find myself thinking out
> loud. Fortunately I tend to keep good company. Any comments?
>
> Regards,
>
> Tony,Windy City