Position Sizing - Various Methods


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In the course of their career, many traders realize that their success at the market is less governed by entry signals, filter techniques or analysis routines. Money management, i.e. controlling the risks and the investment of capital are the crucial factors for successful trading. One of the most important aspects of the money management is the position sizing, i.e. the number of shares/contracts per position.

In the following chapter, various methods are given for position sizing.

Adding the Position Sizing Strategies

  1. In the Trading Systems area of the toolbar, click on the Add Strategies button.
  2. Click on the tab Position Sizing.
Here you can select up to six strategies for position sizing to be added to your chart or portfolio.

Methods

Fixed Fractional


Example for Fixed Fractional
This position sizing model uses fixed fractions of capital the to specify position size. There are four methods to specify the fraction multiplier.

FixedFracModel - Here you can choose between four models for the calculation of the fixed fractions:
  • Units - Here you can enter a fixed amount of capital; for instance, use 5000 to trade 1 contract for every 5000 euro (%Toinvest = 1 / X).
  • MaxRisk - Here you can specify the expected biggest loss in points to use this model.
  • Capital - This is used for future trading only, you can take the margin into account.
  • FixRisk
FractionofCapital - Enter what fraction of capital (according to the calculation above) is to be used per trade.

BiggestLoss - For the MaxRisk model, enter the biggest loss in points here.

X - For the Units model, enter the "X" value here.

FixedRisk - When using the model Fixed Risk, enter the value for the fixed risk in points here.

InitialMargin - Here you can enter the initial margin. It determines how much you can invest in order to ensure your account has sufficient reserves to cover a potential margin call

MaxLeverage - Here you can enter the maximum leverage as multiplier that you have available. If you use 2x leverage, you get a loan from the broker equivalent to 100% of your investment.

Reduce - Some of the options may lead to overstepping the originally calculated investment capital or risk parameters. For such cases, you can activate this option to ensure that the position sizes are reduced to meet the criteria of the main method.

Instrument Count - Here you can enter the number of instruments in the chart. This way, a portfolio can be simulated in a single chart. It allows you to distribute your available funds across multiple instruments in one chart.

Fixed Fractional - Percent


Example for Fixed Fractional - Percent
This position sizing model uses fixed fractions in percent of capital to specify position size. There are four methods to specify the fraction multiplier.

FixedFracModel - Here you can choose between four models for the calculation of the fixed fractions:
  • Units - Here you can enter a fixed amount of capital; for instance, use 5000 to trade 1 contract for every 5000 euro (%Toinvest = 1 / X).
  • MaxRisk - Here you can specify the expected biggest loss in points to use this model.
  • Capital - This is used for future trading only, you can take the margin into account.
  • FixRisk -
FractionofCapital - Enter what fraction of capital (according to the calculation above) is to be used per trade.

BiggestLossPercent - For the MaxRisk model, enter the biggest loss in percent here.

X - For the Units model, ener the "X" value here.

FixedRisk - When using the model Fixed Risk, enter the value for the fixed risk in points here.

InitialMargin - Here you can enter the initial margin. It determines how much you can invest in order to ensure you account has sufficient reserves to cover a potential margin call.

MaxLeverage - Here you can enter the maximum leverage as multiplier that you have available. If you use 2x leverage, you get a load for the broker equivalent to 100% of your investment.

Reduce - Some of the options may lead to overstepping the originally calculated investment capital or risk parameters. For such cases, you can activate this option to ensure that the position sizes are reduced to meet the criteria of the main method.

Instrument Count - Here you can enter the number of instruments in the chart. This way, a portfolio can be simulated in a single chart. It allows you to distribute your available funds across multiple instruments in one chart.

Fixed Percent


Example for Fixed Percent
This method is one of the simplest. It invests a fixed percentage of the available capital and equity in the next trade. Neither the current market situation nor any information about past trades are considered.

The example chart shows the strategy Stochastic Momentum - Entry (delivered with Tradesignal). The position sizing strategy invests a fixed 5% of the initial capital of 10000 USD into the first trade. The broker offers a leverage of 1:20, so that with a capital of 10000 EUR, 7784 shares at a quote of 1.2846 USD can be traded.

Options

PercentToInvest - Percent of initial capital to invest in the next trade.

FixedMargin - Here you can enter a fixed margin, e.g. when trading currencies.

MaxShares - Here you can set a maximum share per position.

Reset - Here you can specify after which time you take your profits from the market and the invested capital is reset to the original initial capital. You can choose between yearly, monthly, Never (all capital is reinvested continuously) or No Position Sizing.

Instrument Count - Here you can enter the number of instruments in the chart. This way, a portfolio can be simulated in a single chart. It allows you to distribute your available funds across multiple instruments in one chart.

Fixed Risk


Example for Fixed Risk
This position sizing model tries to determine what the risk of the next trade will be. A fixed percentage of the initial capital is risked with the next trade.

This method is especially useful when you define a stop loss for each trade. The method calculates the volatility of the base value and multiplies it with a factor set by you. This way, the position size can optimally be linked to the market conditions.

The method assumes that you are using a stop loss. It is recommended that you use a volatility-driven stop. The position size is calculated so that the maximum loss per trade set by you is not exceeded.

The example chart shows the strategy Stochastic Momentum - Entry (delivered with Tradesignal). Once the program has measured the volatility, the risked capital is divided by the volatility. If a leverage is used, it is included in the calculation. If you have set a fixed margin, the risked capital is divided by the fixed margin. In all other cases, the calculated risked amount is divided by the current close price of the base value.

Options

PercentToInvest - Percent of initial capital to invest in the next trade.

FixedMargin - Here you can enter a fixed margin, e.g. when trading currencies.

MarketRiskMeasure - To measure the volatility of the base value, you can either use the standard deviation or the Average True Range.

RiskTiming - Set the calculation period for the volatility measurement.

Reset - Here you can specify after which time you take your profits from the market and the invested capital is reset to the original initial capital. You can choose between yearly, monthly, Never (all capital is reinvested continuously) or No Position Sizing.

Instrument Count - Here you can enter the number of instruments in the chart. This way, a portfolio can be simulated in a single chart. It allows you to distribute your available funds across multiple instruments in one chart.

Percent Volatility


Example for Percent Volatility
This method works similar to the "Fixed Risk" method. It measures the volatility of the base value and scales the position sizing accordingly. As additional parameter, you have to enter a multiplier for the maximum expected loss. The result of the multiplication of this factor and the measured volatility is used as basis for the calculation of the position sizing.

OptionsFractionofCapital - Enter how much fraction of capital is to be used for each trade.

VolatilityModel - To measure the volatility of the base value, you can use the Average True Range or the momentum. The momentum is given as absolute value from one bar to the next one. With the result, a moving average over the "volatility period" is calculated for smoothing.

VolatilityPeriod - Enter the period over which the volatility is calculated.

BiggestVolaLoss - - Enter a multiplier for the measured volatility. This value gives the highest maximum loss possible as multiple of the volatility.

Profit (Factor Profit) - With this multiplier, the amount of accumulated gain is included in the calculation of position sizes.

MaxLeverage - Enter the maximal leverage.

Reduce - Some of the options may lead to overstepping the originally calculated investment capital or risk parameters. For such cases, you can activate this option to ensure that the position sizes are reduced to meet the criteria of the main method.

Instrument Count - Here you can enter the number of instruments in the chart. This way, a portfolio can be simulated in a single chart. It allows you to distribute your available funds across multiple instruments in one chart.

Market's Money


Example for Market's Money
This method works similar to the Percent Volatility method method. In addition to it, it reinvests profits with leverage. If your capital has decreased, the position size will be reduced.

If FactorProfit is set to the same value as BiggestVolaLoss, the method reacts identical to the "Percent Volatility" method.

Options

FractionofCapital - Enter how much fraction of capital is to be used for each trade.

VolatilityModel - To measure the volatility of the base value, you can use the Average True Range or the momentum. The momentum is given as absolute value from one bar to the next one. With the result, a moving average over the "volatility period" is calculated for smoothing.

VolatilityPeriod - Enter the period over which the volatility is calculated.

BiggestVolaLoss - - Enter a multiplier for the measured volatility. This value gives the highest maximum loss possible as multiple of the volatility.

Profit (Factor Profit) - With this multiplier, the amount of accumulated gain is included in the calculation of position sizes.

MaxLeverage - Enter the maximal leverage.

Reduce - Some of the options may lead to overstepping the originally calculated investment capital or risk parameters. For such cases, you can activate this option to ensure that the position sizes are reduced to meet the criteria of the main method.

Instrument Count - Here you can enter the number of instruments in the chart. This way, a portfolio can be simulated in a single chart. It allows you to distribute your available funds across multiple instruments in one chart.