advanced position sizing and risk management

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BigTrends ACE CoachingAdvanced Position Sizing & Money Management

Course Instructor:Price Headley, CFA, CMT

BigTrends Coaching

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BigTrends and its staff are not responsible for any trades you choose to

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BigTrends and its staff are not responsible for any trades you choose to

make. Not all Big Trends products or services are appropriate for all

investors. BigTrends does not provide personalized financial, tax or legal

advice. Please consult your tax consultant prior to making any investment

that may impact your tax situation.

What is “Position Sizing” ?

� Resource:Van TharpBook: Trade Your Way to Financial Freedom

Van Tharp tested 4 models, with the same system, starting at $1 million with 595 trades over 5+ years

Result # 1 - Worst … the “baseline model” which bought 100 shares of stock whenever a signal was given. That model returned $32,567 or 0.58%


whenever a signal was given. That model returned $32,567 or 0.58% annualized.



� “Fixed Amount” model: This method traded 100 shares per each $100,000 in equity. It returned $237,457 or 5.75% annualized.

� “Equal Leverage” model: Each position in this model was 3% of the account equity. To begin each position was $30,000. This method returned $231,121,


equity. To begin each position was $30,000. This method returned $231,121, just less than the Fixed Amount model.



� “Percent Risk” model: Positions were sized so that the initial risk exposure was 1% of the account equity. So with $1,000,000 equity the initial risk would be $10,000. If the initial stop on a trade was $2 the system would trade 5,000 shares (or 10,000 shares at $1 risk, 20,000 shares at 50 cents risk and so on). This model returned $1,840,493 or 20.92% annualized.


This model returned $1,840,493 or 20.92% annualized.



“Percent Volatility” model: Positions were sized based on each stock’s volatility — the more volatile the stock, the less shares traded. In this test, positions were set at 0.5% volatility (initially $5,000 per position) — so if a stock’s Average True Range was $1, the system would trade 5,000 shares. This model returned $2,109,266


returned $2,109,266 or 22.93% annualized.

What is “Average True Range” ?

� Welles Wilder’s book New Concepts in Technical Trading Systems (1978), defined the Average True Range (ATR) indicator to measure a security's volatility. The indicator does not provide an indication of price direction or duration, simply the degree of price movement or volatility.

� A volatility formula based on only the high-low range would fail to capture the actual volatility created by the gap or limit move.

� Wilder started with a concept called True Range (TR) which is defined as the greatest of the following:

� The current High less the current Low.


� The current High less the current Low.

� The absolute value of the current High less the previous Close.

� The absolute value of the current Low less the previous Close.

Dryships (DRYS) with ATR


Google (GOOG) with ATR


Progressive Money Management

Basic PrincipleMake the stock PROVE it to you that it is moving, and so start SMALL and ADD at each %R RETEST level

Example:Let’s look back at the GOOG Chart…Most Progressive strategies would say Add at each new ATR level (ie if GOOG’s ATR is 20 points, and you get a short at 650, then short more at 630, more at 610, etc. until you hit a stop point of 2 ATRs from the low…


I prefer %R for low risk entries as you may be chasing moves if based on ATRs

Reward-to-Risk

For me, it’s all about how much REWARD I can make for each increment of Risk

Van Tharp calls this the R MULTIPLE

For every 1 Point of R (capital risked) how much can you expect to make?

I like to see R Multiples of 3-to-1 or higher


PERCENT R RETESTS give me the lowest risk entries and the highest R Multiples

Do You Have Any Questions?


advanced position sizing and risk management

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