Money Management : How do you like your Algo Trades Cooked ?

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Viewing 11 posts - 1 through 11 (of 11 total)
  • 04/29/2020 at 11:29 AM #128800
    zilliq

    Hi Algo Traders,

    Hope you’re fine,

    Today I thought it was a good idea to speak about Money management, because i think, we all know, strategy is perhaps only 20 % of the success and Money Management may be 50-70 % (And we speak may be at 70 % of strategy on all trading forum…)

    So, I wanted to discuss about your Money management, how do you manage your algo trades ? (Not your manual trades, but your algo trades)

    Stoploss constant, price constant, Stoploss dynamic (Donchian, ATR and so on..), no stop loss …and why do you prefer this style of money management ? and potentially what method to you hate

     

    I begin:

    For myself I generally manage my algo trade with price constant (Van tharp method)

    Why ? Because I feel more confortable when I know that every trade I take as the same risk (To win or to lose) and if you work on your strategy with a good ratio Win/Lose it gives very good results

    The method I hate is when there is a dynamic risk (stop loss dynamic for example), because in my experience you win faster and you lose faster too (As martingale)

     

    And now it’s up to you 😉

    1 user thanked author for this post.
    avatar bertrandpinoy
    04/29/2020 at 8:16 PM #128876
    nonetheless

    Probably just a matter of terminology, but when I think of stop losses I consider it more as ‘risk management’, whereas ‘money management’ in my book is more about position size in relation to strategy profit.

    But whatever we call it, I use % stop loss with approx 1:2 risk:reward ratio (ie SL = 1%, TP =2%), plus %trailing stop. I’ve experimented with MFE and ATR but never been able to get good results.

    What’s Van Tharp method?

    04/29/2020 at 8:32 PM #128881
    zilliq

    Thanks for your answer

    In fact position sizing depends (notably) of stop loss that’s why all is included in Money Management

    Today I did a lot of trials about Money management and notably the risk reward ratio and it appears that it depends on stop loss. With the same strategy sometimes you have better result with 0.25 ratio and sometimes 2 or 3

    Agree with you I did many trials with MAE/MFE but find nothing very interesting

    With the Van tharp method you can find on Internet you take a trade with always the same amount. For example you say you will put 100 USD on each trade and you just have to calculate the number of lots who depends on the Stop loss you want to. Every trade win or lose the same amount. So if you have a good system it works well.

    04/29/2020 at 8:40 PM #128885
    stefou102

    Hello Nonetheless,

    you are totally right about the importance of money management, although having a good entry helps also on the MM side 😉

    for my part I don’t really agree with you. Fixed SL should be at least in percentage, to accommodate with the change of value of your underlying.

    Also, markets don’t care about your entry level, so the level of your SL will never be adequate, unless it is very large.

    on my side I activate it if we close below the latest low ( so a bit below the new low).

    if you trade in the trend, you could calculate a level of invalidation, like below close of the previous day, or a fibo etc.

    Problem always with ATR is that often you calculate it on a mix of cash session and overnight session, so you don’t really capture the true volatility of the market. Now with arrays that could be solved…

    04/29/2020 at 9:51 PM #128891
    AutoStrategist

    Hi, I posted some code a couple of weeks ago based on a Van Tharp blog to calculate position size and stop loss based on the amount of risk you specify:

    https://www.prorealcode.com/topic/position-size-variable-to-calculate-per-point/

    I used it in my systems for a while but found it difficult to optimise a strategy when both the position size and stop loss can vary.  No doubt Van Tharp has other alternatives and this is just one approach but I went back to having fixed position sizes.  The targets and stop losses are determined by market conditions, bullish, bearish or neither and sometimes depending on the system also on the volatility using the indicator HistoricVolatility.

    04/29/2020 at 10:08 PM #128892
    Vonasi
    AutoStrategist wrote:

    but found it difficult to optimise a strategy when both the position size and stop loss can vary

    Always optimize your strategy first of all with a fixed position size. If you have variable position size then that is just another variable to optimize. If you have mathematical proof that confirms why you should have a different position size that is fine but you probably don’t so just fix it at 1. If stop loss can vary then that is also just another optimized variable in your strategy – you better have a good reason to do it. Once you are happy that you win more money than you lose money and are happy that you have not curve fitted anything including your stop loss and position size and are happy that your strategy is robust and you have not just lucked out on the winning trades while missing the losing trades due to the time you started the test then add money management….. but gentle, subtle money management. Unless you start with a huge bank then money management can make you poor as fast as it can make you rich.

    04/30/2020 at 8:43 AM #128935
    AutoStrategist

    @Vonasi

    You raise some good points. My strategies nearly all run on 5 minute intraday bars so some of what I am doing with money management may not be relevant to e.g. systems running on daily bars.

    Always optimize your strategy first of all with a fixed position size. Agreed.

    If you have mathematical proof that confirms why you should have a different position size that is fine but you probably don’t so just fix it at 1. The rationale for a different position size based on volatility (Van Tharp) is that risk adjusted returns will be better. I wasn’t able to prove that it was superior to a fixed position size but rather took it on trust that a man who spends his life devising optimum money management systems has done all that work for me. Partly for the reason you mention though I no longer use it.

    If stop loss can vary then that is also just another optimized variable in your strategy – you better have a good reason to do it. Yes it is another optimization variable that can be optimized for long, short, market conditions and volatility.  The very good reason for doing it would be the outcomes seen from backtesting and observed in live trading e.g. a long trade will require a tighter stop in a bearish market climate and a wider one in a bullish one.

     

    04/30/2020 at 9:28 AM #128948
    zilliq

    @vonasi

    I like your sentence : “If you can win faster, you can ose faster” 🙂

    A comment:

    Please precise always in your answers what do you mean when you speak about “Position size” because it can be a constant amount of price or a constant Stop loss, not the same thing of course.

    You can have a constant stop losss, and so a constant amount of price per trade (may be 100 USD/trade to lose if your stop is reached)

    A dynamic stop loss with a constant amount of price per trade = Van Tharp method (What a I personaly do)

    A dynamic stop loss with a non constant/dynamic price per trade : very dangerous !

    And so on …Thanks

     


    @vonasi

    When you say you use  “fixed position size” do you speak about SL dynamic (based on ATR or everything else) and constant price / per trade, or dynamic SL with constant price ?

    04/30/2020 at 10:22 AM #128967
    Vonasi

    Position size is simply the amount of contracts you buy.

    If you keep it level at 1 then you can directly compare the performance of each strategy and each change to each strategy. Keep changing it and you just throw in one more variable that muddies the waters of strategy performance analysis. Get a base line at level stakes and then later see if some sort of position size adjustment improves performance. I coded a little strategy add on that returned the average gain per position size of 1 even if position sizes varied.

    Average Gain Per 1 Code Snippet

    Stop loss is simply how much you are willing to risk at any moment in time. It could be fixed at a very extreme amount so it is just a fuse stop or it can be fixed close as part of a risk/reward calculation or it can be moved around either based on altering risk/reward calculations or as a trailing stop. Personally I like the fuse stop and then to use conditions to exit a position rather than exit at a stop loss price…. but every one has their own trading style and there is no right or wrong way with stop losses. A reason to hate stop losses is that during times of high volatility brokers change the minimum stop distance allowed and expand the spread and we just can’t code for this as our strategies can’t get that information. Trading without one or even with a very distant one is more expensive than trading always with one close to price so either way it is win win for the broker.

    1 user thanked author for this post.
    avatar Kovit
    04/30/2020 at 10:55 AM #128973
    nonetheless
    zilliq wrote:

    position sizing depends (notably) of stop loss

    I presume you mean position size x stoploss as a % of capital. I think one of the reasons this gets overlooked here is that algos are almost always developed on demo accounts where the actual cost of running any bot is ignored; just add more virtual funds.

    I have only recently started trading live and suddenly the costing of it all comes into high focus. My initial thinking was to base this on margin cost, ie what much it costs me to get into the game. But with a very high leverage available I can see that this is not the way to go. Has to be based on notional value and the cost of each max loss.

    Algos I’m working on at the moment all have an SL close to 1%. For that size loss to stay below 10% of capital, then you have to allocate funds to each bot of at least 10% of notional value. Unfortunately IG varies the min position entry point from one index to the next, so not immediately obvious where best to put one’s limited resources.

    In terms of indices, the CAC40 €1 and DJI €.2 offer the lowest entry points at the moment. On the above calculation they would require ~ €500 in capital to run each min position bot. €1 on the DAX costs more than double.

    (please excuse me if this is all bleedin’ obvious to more seasoned pros, I’m only just getting to grips with the nitty gritty here)

    Vonasi wrote:

    but gentle, subtle money management.

    I think you have to take the historical performance into account. I would feel more comfortable with aggressive MM if a bot had consistently produced +90% wins. For 50-70% I would certainly tone it down. We are, as always, hostage to probability.

     

     

    1 user thanked author for this post.
    avatar Kovit
    04/30/2020 at 5:52 PM #129100
    zilliq

     

    Hi nonetheless

    Yes % of Capital, 1  % on each trade for example

    Have a nice evening

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