Position sizing

What Does Position Sizing Mean? by Investopedia its:'The dollar value being invested into a particular security by an investor.' Behind this simple definition, there are zillion discussions, researches and theories, seeking and arguing the best position sizing method. The goal of position sizing, is risk management. Is being able to determine how much risk we set in a specific symbol trade, and what is our exposure to volatility, black swan and other undesired market conditions. In other words, how are we prepare for a stromy weather, something like what we see today, November 21, 2011 in the Asian, European and the US stock markets.

While I am writing this post, I am developing the position sizing system of www.strategyseeker.com. Within few days, it will be available as part of the service. What will it be?
User will be able to set the total capital available for trading (Cap). The maximum capital exposure (eMax), the position size per symbol (Poss), and the max positions per symbol (MaxP). Example:
Cap = $200,000.00 ; total capital level
eMax = 25% ; this means that 25% x $200,000 = $50,000 is set for maximum exposure. Once stock holdings will reach this value, the system will not issue new signals untill few Sell trades occur and the current holding is lower than $50,000.
Poss = 1% ; this means that a typical trade of stock will be at the sum of 1% x $200,000 = $2,000. The signals will issue a purchase of shares in a total value of $2000 per trade.
MaxP = 2 ; this means that the system will allow up to two trades of a specific symbol simultaneously (total of $4,000 per symbol).

So the example setting will stop trades if total exposure reaches $50,000 and at any time will not allow holding of more than $4,000 of a specific security.
How will the system determine priority between securities?
To better understand this issue, lets continue the example. Assuming today the system issue 10 different signals. Also, lets assume that the current holdings are equivalent to $45,000. This means that we can trade only $5,000 today and we have 10 different symbol signals each propose to trade a $2,000 (total $20,000). The question is, how the system will select the 2 signals (the 3rd signal will not be allowed as holdings may go over $50,000) from 10 proposed signals. Well, this is a critical part of the position sizing method and optimization that may dramatically affect the long terms profits.

Here is my plan for www.strategyseeker.com:
There will be few selection criteria that the user will be able to choose:

  • Based on past P&L track record of the specific symbol.
  • Based on FIFO: First In First out. This means no priority, first two signals in the above example will be is selected.
  • Volume: the signals of the symbols with highest volume will be selected. A variant of average volume may be implemented.

other methods may be implemented (still under review). If you want to propose, feel free to do so.

As for today's signals, you may see that based on last Friday market, many new Buy signals are issued in my home page demonstrated strategy. However, as I am managing my trading and risk in person (I also wait for the implementation position sizing here) i will not issue few of them based on my manual position sizing rules.

Have a great trading day,
Shlomo.

Comments

mark_m's picture

Can you implement the following priority-algorithm: a signal will be selected if the security performance > (greater) SPY performance during same period of time.
I am using this optimization in my trade (managed with excel) and would love to do the same in your web site.

Dominque Jolley's picture

This means that we can trade only $5,000 today.

http://innergold.com/

Cecila Hefnr's picture

The system will allow up to two trades of a specific symbol simultaneously.

http://www.garbetthomes.com

Cecila Hefnr's picture

The signals will issue a purchase of shares in a total value of $2000 per trade.

http://raspberryketonepro.com/

Cecila Hefnr's picture

The signals will issue a purchase of shares in a total value of $2000 per trade.

http://ampmsecuritytx-houstonlocksmith.com/

Cecila Hefnr's picture

This is a critical part of the position sizing method and optimization that may dramatically affect the long terms profits.

http://viewthevibe.com/

Pearlene Jacks's picture

The system will allow up to two trades of a specific symbol simultaneously.

http://www.unitedwindowcleaners.com/

Rosann's picture

This is a critical part of the position sizing method and optimization that may dramatically affect the long terms profits. http://www.rosesandblooms.com/
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