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Broker: Advantage Futures, Ninja/TT and InvestorRT/IQFeed.
Trading: Treasury futures
Posts: 312 since Nov 2010
Thanks Given: 194
Thanks Received: 912
To kind of sum up the last few posts here:
1) a mathematical model for risk that optimizes expected growth may cause psychologically destabilizing losses
2) the edge we think we have may be an illusion anyway, just waiting for the next "Black Swan" event (sorry DutchBookmaker, I can't think of a more concise name for it) to shatter the illusion
3) therefore, it may not pay to be overly aggressive in the risk department. Whatever I do, I should be careful not to do anything that will mess up my mind or my account too much.
Check.
"You don't need a weatherman to know which way the wind blows..."
Can you help answer these questions from other members on NexusFi?
I would note your trading style when you are calculating variance and covariance. Most of the time, these are used for continously traded assets. If you are in and out of the market, you need to take into account the chances that you will be in more than one trade at the same time. I don't do this , but if you do calculate variance & co-variance you should. I calculate a 4 sigma drawdown( based on live results if available ) and add that to required margin for the instrument and use that as a limit. I feel more comfortable this way.
You can look at Kelly but it is hard to trade if you have a system with a large Kelly number. Mathematically it makes sense, but trading risking so much of your account would freak me out. Half Kelly and Quarter Kelly are also popular.
the key is in % risk which represents the aversion toward risk which is subjective, I suggest not higher than 20%, the more you risk the more you can win but this depends on your system and its Max Drawdown. If you use more than one instrument you should cumulate the formula or split the capital you want to dedicate for each instrument.
If you don't have an edge, the optimal bet size using Kelly is 0. Don't place the trade, don't make the bet.
Everyone here I'm sure believes that risk management is just as important as what and when you trade but just going on 2% is equal to saying "I go long or short at 11:00am".
"There exists a plethora of market analysis, selection and timing techniques including charts and fundamental analysis, trading systems, Elliot waves and on and on-all sorts of models and methods, technical and otherwise to assist in timing and selection.
You wouldn't initiate a trade without using the analysis of you specialize in, but there is another world, a world of quantity, a world "out there someplace", which has either been dark and unknown or at best fraught with heuristics.
When I alluded to quantity as the "other, necessary half" of trading, I was being overly generous, even apologetic about it. I believe quantity is nearly 100% of the matter, not merely half."
Ralph Vince preface to The Leverage Space Trading Model
While being 100% of the matter is rather absurd he does have a point.
I use my own logic for what number of contracts I should trade, though influenced a bit by all those books I have read, and plain common sense of not risking too much.
I test theories with $5K accounts, and I only do one contract, period. No sense on risking more, I also best $75 max per trade, and risk $150 per day on the testing accounts. Before I had no limits, but I came to find out that didnt really worked for testing. My theories are backtested, and as such I would be looking for confirmation in terms of execution to see how I would have been filled. I also test them on replay, tends to save some $$$ that way, but I trust more the live tests.
I trade live with a much larger account than $5K, and I use the ADR to determine how many contracts will fit within a fixed 3% per day, 1% per trade max risk. I also bank 25-50% of profits and reinvest the remainder for trading. The ADR is specific to the instrument, and it allows me to taylor the risk to each one. I also breakdown the account logically for each instrument, meaning if $100K I will dedicate 25% to Options, 25% to ES, 25% to 6E, and 25% cash reserve.
I only use full margin plus 10-20% buffer as well, I dont really use $500 margin and load up with contracts. I have two spreasheets that tell me when to add another contract or take away depending on ADR and size allocated, etc. That is what has evolved that works for me thus far.
have you thought about joining cornerstone trading or advantage futures at their trading floors in CHI? one good way to be surrounded by other traders in real time I would think. sounds like you miss the interaction.
Broker: Advantage Futures, Ninja/TT and InvestorRT/IQFeed.
Trading: Treasury futures
Posts: 312 since Nov 2010
Thanks Given: 194
Thanks Received: 912
I'm with you on that. As a pit trader I did as many as 1000 at a crack (8 times in my career, but I put on 500 consistently for years). Screen trading is different, and until I know I can make money consistently trading 1 lots, there's no reason to do more.
I use the ADR for position sizing too. The trades I've been taking seem to have pretty similar risk/reward profiles relative to ADR across instruments. (If ADR is about $2000/contract, I can usually pull about $300 out of a trade, risking about $200. If ADR is ~$1000, I can get ~$150, so I trade 2 lots. My current position sizing is ZF-3, ZN-2, ZB-1, S-1, W-1, C-2, ES -2, 6e-1, 6j-1, QM-1 (Cl is a bit too big QM a bit too small) GC-1 (GC is big too but I'm finding I like the trade there).
"You don't need a weatherman to know which way the wind blows..."
Broker: Advantage Futures, Ninja/TT and InvestorRT/IQFeed.
Trading: Treasury futures
Posts: 312 since Nov 2010
Thanks Given: 194
Thanks Received: 912
I traded in Advantage's office in Chicago for awhile but I was tired of commuting. I also traded in an arcade in their office in Downers Grove but found there were too many distractions (like the guy behind me who's kid had cancer and he talked about it all the time) and also the lack of privacy started to bother me. I also traded in the arcade of a prop group near my home but the distractions there absolutely drove me wild. I was trading substantial size at the time, and some of these kids were the biggest crybabies I had ever seen. There's nothing like being poised to hit a couple hundred NOBs and have some kid behind you scream and slam his desk and you jerk and hit the mouse when you didn't intend to. And I was paying $1,500/month for the privilege.
I do miss the pits, but there's no stopping progress. Also, trading at home is a lot cheaper and I can get up later.
"You don't need a weatherman to know which way the wind blows..."
Broker: Advantage Futures, Ninja/TT and InvestorRT/IQFeed.
Trading: Treasury futures
Posts: 312 since Nov 2010
Thanks Given: 194
Thanks Received: 912
Of course not. But there's an element of unpredictability in markets that doesn't exist in, say, Blackjack. The President getting shot doesn't affect the odds in the latter. Flash crashes don't happen in Blackjack and they didn't used to happen in the market either.
I hope we're not talking at cross purposes. You clearly know an awful lot more than I do about probability and statistics, and I'm not always sure that I understand you. That being said, trading has put a roof over my head since 1989 (I started in '86 but it didn't really start to pay until '89) and put all three of my kids through college and my ability to come back tomorrow has never been in serious jeopardy. Maybe just playing it by ear works OK for me.
"You don't need a weatherman to know which way the wind blows..."
I too believe the whole point to trading is to acquire capital; I thought I was alone on that belief. Regardless of what one uses that capital for, one should not expect to be able to trade forever as circumstances will change. I had set myself a limit at 25 lines, following what I do with options, but I think I will reconsider and not play it so conservative all the time when it comes to trading either, no reason to not scale to whatever ones account, risk management, and instrument market will support...